Going green in volatile times 

More than just a badge of honour – the time to put your money where your mouth is has come, and companies who can’t do so will eventually be left behind. 

Increasing scrutiny means organisations who have outlined an environmental and social investment framework in their governance documents will have to take those out of the drawer, dust them off, and start seriously thinking on how to move forward. 

This is as true for financial institutions as it is other companies. Last year New Zealand made headlines by becoming the first country in the world to pass a law forcing financial institutions to disclose and act on climate-related matters. While not a silver bullet solution, this should in theory make it easier to judge the authenticity of ethical, sustainable and governance (ESG) claims by financial institutions. 

We should see the formal exposure draft of the entire climate-related disclosure framework in July with the reporting commencing in December. Watch this space. 

Although environmental concerns don’t hold the same sway in the polls while people are facing a cost of living crisis, New Zealanders have generally seemed happy to move the needle towards greener objectives when feasible. For example, the number of EVs has increased from just 1,220 registered in 2016 to 38,117 registered as at March 2022. 

We can see similar trends with ethical and sustainable investment. Some of this will be a slow drift as younger generations raised alongside the increasing consequences of global warming become a larger part of the work force and investor pool. A 2022 report from Consumer NZ places Gen Z participants as the most likely to expect their money to be invested responsibly or ethically with 78% in agreement, and Baby Boomers as the least at 69%. 

For your everyday punter, investing ‘green’ might not feel like such a great decision when money they feel control over is at stake – what’s actually visible in their take home pay, rather than KiwiSaver getting put away for a distant day. Especially now, when the dollar amount in the kitty for discretionary spending might be smaller than in the recent past. 

It can feel counter-intuitive to ignore lists of top stocks and instead invest for your personal values, goals and timeframe. It may also feel like you’re giving up control over your money by doing this – that you’re going to be better off picking previously big winners like Meta (Facebook) or Alphabet (Google). 

Evidence shows us that crowd-sourced thinking like this is not your friend. 

Take FAANG stocks for example (referring to giants Facebook, Apple, Amazon, Netflix, Google). Four of the five stocks lagged the broad US market throughout the start of 2022 with Amazon, Facebook (now known as Meta), and Netflix suffering big-time losses. The group collectively underperformed the Russell 3000 Index by nine percentage points. 

This came on the heels of a stellar decade—the FAANGs returned 28.02% per year from 2012 to 2021. 

This year’s reversal is a reminder that investors should be cautious when assuming past returns will continue in the future. Of the five FAANG stocks, three have given up all their Covid returns and now languish back where they were in 2019. For Netflix in particular it’s a case of Back to the Future – prior to this year, the streaming giant hadn’t seen lowclosing values like this since late 2017 after years of exceeding performance expectations. As of publishing, the closing price was US $195.19, which is a far cry from the giddy height of $691.69 at November 2021. 

So why might ESG funds not get as much press as these trendy investments? 

Well, firstly, most of the big companies don’t tend to make ESG-esque changes unless they must … and many if them aren’t at that point yet. In 2020 it was revealed that Apple knowingly used a supplier reliant on child labour, taking three years to cut ties after learning of the practice. Similarly, they refused to cut ties with Biel Crystal (one of two suppliers who make their glass screens) after it became known the company was deliberately disregarding workplace safety for profit – because it would leave Apple with less leverage over the other supplier. 

Of course, other companies are doing the same. Shell made headlines just recently when a senior consultant sent a resignation company-wide, citing discrepancies in Shell’s stated environmental commitments and their plans for future new oil extractions. Placing profit over people is, unfortunately, not a new phenomenon. 

I’m not saying don’t buy gas or don’t use an iPhone, but if you’re trying to be a more conscientious investor, you won’t see many ESG options among the kinds of lists FAANG or other popular stocks will grace. 

Secondly – headlines don’t get made by things going to plan. The reason we hear about FAANG, cryptocurrency and the like so often is because of their volatility. They’re relatively new. They’re exciting. They feel like something that might break the mold. 

ESG investments historically perform the same or better than their old school counterparts. So, while Bitcoin is typically in the news for soaring or crashing (more the latter as of late), a balanced and diverse ESG portfolio can be putting in quiet mahi for your long-term goals. 

There’s a great quote from Paul Samuelson, Nobel prize-winning economist, that I’ve always found quite apt: “Investing should be like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” 

Because the legislation around climate-related disclosure is young and not universal by any means, here are some things to watch out for if considering a values-based shift: 

1. Disclosure – Disclosure and transparency are key parts to all of this. You want to be able to see what kinds of things your investment is funding, and crucially what it will not fund. If you can’t get a clear answer either way… that’s an answer in itself. 

2. Research & Analysis – While past performance shouldn’t be relied upon for future success, there should be metrics available to indicate whether the assets have been stress-tested and the rationale behind expectations for the future. 

3. Diversity – As always, a diverse portfolio is your friend. Investing is a tool to help future-proof your finances, and as such your portfolio should hold a variety of assets to help weather future volatility. Choosing ethical and sustainable investment options should not change this. 

All this to say… if you’re looking to align your investment values with your personal values and move towards more ethical funds, there’s little evidence to suggest you would be worse off for doing so. Even in times where volatility is more apparent, like now. 

The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz