The long-held belief that you cannot align your personal values with your financial portfolio in order to succeed is no longer true.
In a time where we are seeing increasingly serious impact from human influence on the environment, investing ethically and sustainably is fast becoming an extremely appealing option… and where there’s demand for ethical investing, there will be supply.
Aligning your ethical values with your investment strategy can seem daunting. First there’s the ambiguity of what ethical investing should be called. This ambiguity creates questions for investors – what is actually on offer? What is their purpose and performance? How do we make sure the strategy a fund or manager is using aligns with our values?
What’s in a name?
In a nutshell, ESG investing strategies include consideration of Environmental, Social and Governance factors.
From there it can get a little murky. Fund sponsors may use terms like ESG and SRI (socially responsible investing) interchangeably, or call the whole field ‘impact investing’. Others use terms such as values-based investing, mission-driven investing, ethical investing, or even just responsible investing.
And of course there are considerations regarding whether the companies themselves genuinely uphold these values, or if they’re greenwashing (over-representing their sustainability commitments) to make themselves more appealing to sustainable-minded investors.
New Zealand doesn’t have a government-mandated ESG reporting framework. We have a series of voluntary and mandated corporate reporting measures, which only a small proportion of companies use to report. These tend to be larger firms, like those on the NZX Top 100. So, in companies that even report sustainability-related information, the standard and type of information can vary greatly.
The real merit in these third-party assessments isn’t in the reliable ranking of companies across the board, but rather in the transparency they encourage. So while a company identifying as ESG isn’t going to be inherently ‘green’, it will be harder for a non-ESG to prove themselves so.
We could see some movement on this reporting soon. The United Nations Climate Conference in Glasgow will produce the long-awaited update to the 2015 Paris Agreement, asking countries to come forward with more ambitious and verifiable emissions plans to reach net zero by mid century. If a new Agreement is finalised and implemented it will set higher standards for both government and industry to meet.
Back here at home we have the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill in its second reading – this bill aims to broaden the reporting requirements of financial entities. While this only seeks to identify large players in the financial sector as climate reporting entities, it may if passed set a precedent for climate-related disclosure by other businesses.
Red flags for greenwashing
There can be a world of difference between companies identifying themselves as ESG and those actually making and keeping sustainability commitments.
When investing, you may see funds labelling themselves as “sustainable” or “ethical” or “impact”. One way you can identify for yourself whether these align with your values is to look at the philosophy of the fund. Does it have a track record of addressing global sustainability, and can they demonstrate this? If not, why?
As long as self-reporting is the status quo, investors must be careful and do some homework. If a company is saying they are ESG they should have visible evidence to back their claim. Keep in mind the distinction between virtue signalling and actual social impact. For example, a phone case made from recyclable materials may seem like an environmentally friendly choice… but if it’s been made in a sweatshop, it’s not a sustainable product.
The most appealing part of investing sustainably, personal preference aside, is that you can view this kind of investment as risk management. Companies with high sustainability scores tend to have stronger controls and better compliance, which leads to fewer extreme events like environmental distasters, fraud, corruption or litigation (and the consequent fallout from these events).
Translation: Companies who voluntarily put themselves under the microscope are more likely to behave well, which means less potential for disaster and scandal.
By favouring companies with a high sustainability rating, you will inherently be diverting investment from those with low sustainability ratings – making it more desirable for companies to ‘go green’. In this way, investor behaviour can have a real impact on business behaviour.
Where do I start?
You need to determine what your values are before you look for investments to match. If you know what you want (or what you absolutely do not want), you can form a strategy around it.
That said, be wary of putting all your eggs in one basket. Having a diverse portfolio is important for long-term success, and the list of sustainable options doesn’t stop at choosing wind farms over coal mines.
As an investor, you have the option to pursue a sound investment experience that’s reflective of your sustainability values. There is no longer an either/or situation. Much like at the supermarket, where you no longer need to choose between a weak paper bag or single-use plastic when resuable ones are available, there is a third option which can effectively accomplish what you need to achieve financially, while demonstrating your commitment to sustainability.
Ultimately, the purpose of socially responsible investing is to create a virtuous cycle by allocating capital to those companies that create the greatest societal returns — not just in ‘normal’ business terms but in improving the welfare of customers, employees, suppliers, and communities as well. This can be achieved with a financial adviser who can design an approach to preserve performance while accounting for positive social and environmental impact.
Nick Stewart is a financial adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, wealth management, risk insurance and KiwiSaver solutions.
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