Responsible investing – have your cake and eat it too
By Ainsley McLaren (Executive Director) & Shannon Murphy (Investment Specialist) – Harbour Asset Management
Increasingly, we have found that people are asking us about responsible or ethical investing. This interest comes from two different generations of investors. The baby boomers tend to be retired (or approaching retirement) and they remember the hippie era; their focus is on leaving a better world for their children and grandchildren. Millennials are in their late 20s and early 30s and are really starting to hit their economic stride; they are demanding a focus on ethics across the board. The combined interest from these two groups is really driving the responsible investing and ethics conversation in our industry.
From an investment perspective, responsible investing covers a wide range of practices that broadly comprise a company’s environmental, social and governance footprint. When looking at companies through a responsible investing lens, you might include company behaviours like carbon emissions, waste, Board diversity, slavery and labour practices, executive remuneration and anti-competitive practices. You can also look at entire industries, such as tobacco.
Some investment managers will specifically screen out certain stocks in categories they have chosen to avoid (such as tobacco); this is often referred to as negative screening. Others, like Harbour, go further and integrate ESG (environmental, social and governance) research into investment processes so that investment portfolios can hold a larger portion of companies that exhibit good behaviours, and less of companies that don’t. One of the advantages of being a relatively large shareholder (as many fund managers are) is that you are more often in a position to lobby companies, to influence improvements in their ethical practices.
When we speak to investors, we often hear that people think there must be a trade-off between investment performance and ‘doing the right thing’.
Harbour was one of the first fund managers in New Zealand to focus on this area, having become a signatory to the UNPRI in 2010, meaning our team has been able to compile a lot of long-term research about the impact of responsible investing on fund performance. Each year we conduct our own Corporate Behaviour Survey, carefully rating how companies stack up in terms of ESG policy and behaviour. We have found that investing with a responsible focus actually helps, rather than hinders, investment returns.
- It helps you avoid companies with excessive risks – avoiding companies who behave badly help you to avoid the risks those companies may face in the future. Bad ethical behaviour and poor governance by companies can be a red flag to signal future issues, which might negatively impact the company’s share value.
- Our research has shown that companies with good solid ESG strategies deliver positive returns for investors over time. Focusing on companies who behave well can actually boost your investment returns in the long term, especially as millennial consumers are increasingly rewarding brands that are seen to be ethical (meaning those companies have potentially better growth prospects than others).
It isn’t often that you come across a ‘have your cake and eat it too’ situation, but we strongly believe that responsible investing can be one of those. A true focus on the ethical behaviours of companies gives a far stronger picture of the long-term outcomes you might expect from a company and may both protect and boost your investment returns. And all of this on top of the feel-good factor you get from knowing you are investing in something you believe in.
This column does not constitute advice to any person. www.harbourasset.co.nz/disclaimer