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As people look to align their investment choices to their values, our advisers are increasingly being asked about about Environmental, Social and Governance (ESG) investing – what it means, and the criteria fund mangers use when considering these investment opportunities.

ESG is also known as responsible, ethical, green, socially responsible (SRI) or sustainable investing.  It involves thinking not just about financial returns but the social and environmental impact of investment decisions.

Fund managers take ESG issues into account in the investment process of research, analysis, selection and monitoring of investments. And as each fund manager uses a different criteria for this process, there are slight nuances between each of the investments available.

AdviceFirst advisers can explain these differences to you, but first, let’s take a closer look at what ESG means.

E is for environmental

Such as climate change, greenhouse gas emissions, water usage, carbon footprint, recycling, renewable energy, and a companies’ relationship with environmental agencies.

S is for social

This consists of people-related elements like issues that impact employees, customers, consumers, local community and society.  Examples include workplace health and safety, product safety, employee diversity and animal welfare.

G is for governance

This relates to the strength of the board of directors, company oversight, relationships with shareholders, executive compensation, transparency of communications with stakeholders, and so on.

So how do fund managers meet ESG criteria?

Firstly, they will exclude companies that harm our society i.e., avoid the bad.  Secondly, they seek out companies that make a positive impact within the ESG space i.e., embrace the good. And thirdly, they look for companies that promote change by using their voting rights as shareholders to hold companies accountable and to represent the views of the clients.

Typically, that means seeking to invest in companies making positive contributions in areas such as human rights, animal welfare, treatment of workforce, gender diversity, environment, governance, pollution and renewable energy.  Industries to be avoided include tobacco, armaments, nuclear power, gambling, pornography, and fossil fuels.

The Responsible Investment Association of Australia (RIAA) has developed a continuum of responsible and ethical investing, with different types of investing.

  1. Traditional investing – limited or no regard for ESG factors
  2. ESG integration – consideration of ESG factors as part of investment decision making
  3. Negative screening – excluded investments to avoid risk
  4. Positive screening – targeted companies or industries with better ESG performance
  5. Sustainability themed – e.g., clean energy, green property
  6. Impact investing – targeted ESG investing for returns

Also of note, according to the New Zealand 2020 Responsible Benchmark Report published by the RIAA, there is still a gap between fund managers that claim to be practising responsible investing, labelled greenwashing, and those that have embedded these practices through formal policies and the disclosure of their full portfolio holdings.

FMA Director of Investment Management, Paul Gregory, recently told providers of these types of funds that they need to back these claims up with hard evidence – asking fund managers to truly consider the ethical thinking behind their funds, and whether they can prove it.

The ESG fund managers we invest with

At AdviceFirst, we work with several fund managers providing ESG investment opportunities. If you are interested in investing in these types of funds, reach out to your AdviceFirst adviser on 0800 438 238 or email letstalk@advicefirst.co.nz and they will be able to talk you through the options that align best with your values, and help you understand how the fund providers are substantiating their claims.

AdviceFirst is a Financial Advice Provider (FSP23242).