Public interest in environmental, social and governance (ESG) issues and the ensuing demand for these to be incorporated into investments has been noticeably increasing over time. In the eight years since Harbour Asset Management became a signatory to the UN Principles of Responsible Investing, a sea change has occurred as more fund managers seek to incorporate responsible investment approaches. Increasingly, the expectation from institutional clients and consultants is that their fund managers are already integrating ESG in their portfolios.
According to the New Zealand Responsible Benchmark Report, published by the Responsible Investment Association Australasia (RIAA) in August 2018, responsible investment in New Zealand grew 40% over the last year to over $180 billion in assets under management.
ESG in practice
At Harbour, we believe the best strategy for incorporating responsible investing into our portfolios is through integration and active engagement. As large shareholders, we have the access and responsibility to constructively engage and apply pressure for real change within companies. We continue to do this as we always have. Our engagement provides a more active style of investment management compared to exclusion or negative screening and involves multiple elements including research, discussion and proxy voting.
Harbour’s proprietary Corporate Behaviour Survey forms a core part of our ESG research in the New Zealand market. Our analysts talk to boards and senior management of New Zealand listed companies that we might invest in and rate them on such things as carbon emissions, health and safety, diversity, modern slavery, stakeholder relations, governance ethics, executive remuneration and anti-competitive practices. These scores are annually aggregated to create an overall company ESG score which is then used as a fundamental part of the analysis we apply to all companies that are in our investment universe.
Over half of the score is weighted to governance criteria, with environmental and social making up the balance. This is because governance issues are more readily identifiable and research (both academic and Harbour’s internal research) has found that governance scores are a reliable indicator of how companies will perform in other areas. If a company gets their governance right, other positive outcomes often follow in social and environmental areas. A rigorous governance platform means there is more oversight of the E and S outcomes.
Harbour includes external research providers’ ESG scores for Australian companies to ensure a depth and breadth of coverage across the whole Australasian market.
Why do we measure ESG?
ESG issues are forms of non-financial risk, which are important to consider when gauging the likely medium and long-term performance of a company. We believe that investing with an ESG bias has enhanced performance outcomes for our clients, as companies that deal with these issues well are more likely to create sustainable shareholder value. This can also protect against future risks. A company that ranks highly in ESG is likely to be more resilient through times of technological disruption, and changing consumer demands.
Impact on performance
Years of incorporating ESG into our investment processes has given us confidence that responsible investing makes a real difference to performance over the medium to long term. Some investors still worry that they may have to sacrifice returns if they invest with an ESG bias. Encouragingly, according to an RIAA survey, more investment professionals now believe that a responsible approach to investment has a positive impact on performance and thereby contributes to returns.
However, the greatest barrier that RIAA found to the uptake of responsible investment is the lack of demand from retail investors. Whilst investment professionals are increasingly seeing the value in incorporating ESG into portfolios, this education has not yet fed through to the wider public. This represents an opportunity for financial advice and education, to help investors understand the positives of responsible investing (both in terms of their personal values and performance).
We have seen that investing with an ESG bias lends itself best to active investing. By being selective and weeding out poor ESG performers, active investors outperform over time versus benchmarks. Why is that? Because we see a more consistent return on capital from higher ESG ranked companies.
As more investors join this trend, the increasing flow of capital directed at high ESG performers may support stock prices – importantly, taking capital away from lower-ranking ESG performers.
Take the core Harbour Australasian Equity fund as an example. When you compare the track record over time of the Fund comparing monthly its overall ESG score and performance against the Fund’s benchmark ESG score and performance, you see that the integration of ESG research into the investment process has had a long-term positive effect. Long term successful growth stocks such as CSL, Mainfreight, a2 Milk, Xero and Summerset have also shown high or improving ESG scores over time.
Harbour is delighted to have been named for the third consecutive year in the latest RIAA NZ benchmark report as having a leading approach to ESG in New Zealand.
Further commendation for our approach came from the PRI, who maintained their A+ rating for our overall ESG strategy and governance performance in their most recent assessment.
Our ESG approach comes at no added cost to investors, as it is already integrated as part of Harbour’s core due diligence on all investments. Whilst we see an increasing demand for truly responsible investment from the industry in New Zealand, there is still some work to be done in public education about the potential benefits of active responsible investing.
IMPORTANT NOTICE AND DISCLAIMER
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 www.harbourasset.co.nz. We are required to publish quarterly Fund updates showing returns and total fees during the previous year, also available at www.harbourasset.co.nz. 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.