Imported Layers Created using Figma Group Created using Figma Shape Created using Figma Shape Created using Figma Imported Layers Created using Figma Shape Created using Figma Shape Created using Figma Imported Layers Created using Figma Path Created using Figma logo Created using Figma “ Created using Figma Group Created using Figma

Responsible investing and equity returns

JW web 17
Jorge Waayman | Posted on Jun 20, 2019

There is a growing awareness that stock returns are influenced by Environmental, Social and Governance (ESG) considerations.  As a long-term proponent of incorporating ESG factors into our assessment of companies, Harbour is delighted to have been involved in Armillary Private Capital’s annual review of returns of the NZ listed sector for 2018 that was released last week.

This is Armillary Capital’s ninth annual Return on Capital Employed (ROCE) report. ROCE is a measure of efficiency, calculated by comparing a company’s net operating profit to its capital employed. Their research looks at the overall market ROCE, top performing stocks for 2018, and a look at some of the differences between sectors of the economy. Key highlights of the report include:

  • A comparison of Return on Capital Employed (ROCE) and ESG factors display a positive relationship
  • The median 2018 ROCE performance across all listed and Crown Entities surveyed dropped to 6.98% in 2018, from 7.61% in 2017, which is below common estimates for the market average weighted average cost of capital (WACC) of 8%.
  • Lower ROCE for New Zealand companies may be explained by the sector composition of our market, especially given more exposure to regulated utilities here
  • The best performer in the 2018 survey was the a2 Milk Company with ROCE of 166.8%.
Click here to view the full report.

Return on Capital Employed breaks down the performance of a company by its profitability and activity which are represented by financial metrics. Conversely, ESG factors are traditionally considered as non-financial metrics which may represent underlying risk or opportunities that materialise in company performance over the long term. They include measures such as carbon footprint, human capital management, governance, ethics, diversity, stakeholder relations and board composition which can be subjective and more difficult to quantify.

We conducted our own analysis comparing ROCE with Harbour’s Corporate Behaviour Survey ESG scores from the NZX50 over the past few years. The results from our statistical analysis revealed a moderate, positive relationship between a high ROCE and a high ranking ESG score. This reinforces the idea that company performance can be explained by multiple factors, both financial and non-financial.

Harbour has long assessed companies’ management of ESG risks and opportunities, and our scores have shown efficacy when compared to stock returns over the long term as can be seen in the following chart.


Source: Harbour.  Company names have been hidden for confidentiality reasons.

To find out more information about Harbour’s ESG approach, please click here to view our ESG policy.

As the evidence and awareness grows of the linkage between companies’ management of both financial and non-financial risks and their performance over time, ESG is increasingly a “must have” rather than a “nice to have” feature of in-depth investment research.

Harbour Asset Management Limited is the issuer and manager of the Harbour Investment Funds. Investors must receive and should read carefully the Product Disclosure Statement, available at We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at Harbour Asset Management Limited also manages wholesale unit trusts. To invest as a Wholesale Investor, investors must fit the criteria as set out in the Financial Markets Conduct Act 2013. This publication is provided in good faith for general information purposes only. Information has been prepared from sources believed to be reliable and accurate at the time of publication, but this is not guaranteed. Information, analysis or views contained herein reflect a judgement at the date of publication and are subject to change without notice. This is not intended to constitute advice to any person. To the extent that any such information, analysis, opinions or views constitutes advice, it does not consider any person’s particular financial situation or goals and, accordingly, does not constitute personalised advice under the Financial Advisers Act 2008. This does not constitute advice of a legal, accounting, tax or other nature to any persons. You should consult your tax adviser in order to understand the impact of investment decisions on your tax position. The price, value and income derived from investments may fluctuate and investors may get back less than originally invested. Where an investment is denominated in a foreign currency, changes in rates of exchange may have an adverse effect on the value, price or income of the investment. Actual performance will be affected by fund charges as well as the timing of an investor’s cash flows into or out of the Fund. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance. Neither Harbour Asset Management Limited nor any other person guarantees repayment of any capital or any returns on capital invested in the investments. To the maximum extent permitted by law, no liability or responsibility is accepted for any loss or damage, direct or consequential, arising from or in connection with this or its contents.