Responsible Investment Benchmark Report 2018 New Zealand - KPMG
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Responsible Investment
Benchmark Report
2018 New Zealand
SUPPORTING ORGANISATIONS RESEARCH PARTNER
Responsible Investment Benchmark Report 2018 | New Zealand
Contact us
RESPONSIBLE INVESTMENT
ASSOCIATION AUSTRALASIA
Level 9, 387 George Street
Sydney, NSW 2000
Australia
+61 2 8228 8100
info@responsibleinvestment.org
responsibleinvestment.org
© Responsible Investment Association Australasia, 2018
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otherwise noted all material presented in this document is
provided under a Creative Commons Attribution 4.0 Australia licence:
https://creativecommons.org/licenses/by/4.0
Licence conditions are on the Creative Commons website as is the
legal code for the CC BY 4.0 AU licence: https://creativecommons.
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Responsible Investment Benchmark Report 2018 | New Zealand
THANK YOU TO OUR SPONSORS
Australian Ethical Pengana Capital Group
Australian Ethical is Australia’s leading ethical wealth manager, Pengana Capital Group (ASX: PCG) is a listed diversified funds
providing investors with products that align with their values and management group specialising in global and Australian equities,
investments without compromise. with distinct investment strategies that aim to deliver superior risk
adjusted returns to investors. They offer a range of investment
With over $2.8 billion in funds under management across solutions that allow investors to align their portfolios with their
superannuation and managed funds, Australian Ethical has principles without compromising their investment returns, including
invested according to its Ethical Charter since its inception in 1986. sustainable impact investments, negatively screened managed
The Charter not only guides its investment approach but also funds and a listed investment company.
underpins all elements of the business. Since 2014, the company
has maintained its B Corp ‘Best for the World’ status, ranking it in Pengana is committed to best practice in ethical and sustainable
the top 10% of 1,800 B Corps globally. Ten percent of Australian impact investing. They are a member of RIAA, a signatory to the
Ethical’s annual profits (before bonus) fund its Community Grants UN’s Principles for Responsible Investment, source ESG company
programme. To date, more than $2.5 million has been granted to research from a specialist provider, and undertake an annual audit
charitable organisations and social impact initiatives through this by an independent research house focused on ESG analysis.
programme. Since 2016, Australian Ethical Super has been one of
the fastest growing super funds in Australia.
New Zealand Super Fund
AXA Investment Managers
The NZ$35 billion New Zealand Superannuation Fund invests
AXA Investment Managers is an active, long-term investor. From globally to help pre-fund the future cost of universal superannuation
equities, fixed income and real assets to alternatives and multi- in New Zealand. The Fund is managed by an Auckland-based
asset, we marry innovation and risk management in a bid to deliver Crown entity, the Guardians of New Zealand Superannuation. The
long-term value for clients. We are responsible investors; we believe Guardians believes that environmental, social and governance
that responsible investment not only delivers sustainable, long- (ESG) factors are material to long-term investment returns, and
term value for clients, it also makes a positive impact on society. is committed to integrating ESG considerations into all aspects of
This is why we incorporate environmental, social and governance the Fund’s investment activities. A founding signatory of the United
considerations into our investment decisions. We are committed to Nations Principles for Responsible Investment, the Guardians
making investing easier – we want to help investors cut through the also provides responsible investment services to the Accident
noise and empower them to make the right investment choices. We Compensation Corporation and the Government Superannuation
are bringing to bear the power of big data and technology not only to Fund Authority and is a member of the New Zealand Corporate
improve our investment offering but to enhance the ways in which we Governance Forum.
engage with our clients. We manage $1,145 billion* on behalf of our
clients, with 771 investment professionals in 21 investment centres
around the world.
Research support from:
* as at 31 December 2017
p1
Responsible Investment Benchmark Report 2018 | New Zealand
ABOUT THIS REPORT
This report is the 4th annual New Zealand ABOUT THE RESPONSIBLE
Responsible Investment Benchmark Report INVESTMENT ASSOCIATION
prepared by the Responsible Investment AUSTRALASIA
Association Australasia (RIAA). The report
details industry data on the size, growth
and performance of the New Zealand RIAA is the peak industry body representing
responsible investment (RI) market over responsible, ethical and impact investors
the 12 months to 31 December 2017 and across Australia and New Zealand. RIAA
compares these results with the broader is a growing active network of over 220
New Zealand financial market. members managing more than $9 trillion
in assets, including superannuation funds,
Through this report RIAA aims to support fund managers, consultants, researchers,
the ongoing growth of the responsible brokers, impact investors, property
investment industry consistent with our managers, banks, community trusts and
objective of both broadening the uptake of financial advisers. In NZ, RIAA has 30
RI whilst increasing the positive impact of member investment organisations cross
investments on society and our environment. funds management, asset owners through to
By providing clear and transparent data financial advisers.
on the development of the market and
the implementation of RI strategies, RIAA RIAA’s goal is to see more capital being
aims to support more investors undertaking invested more responsibly; shifting more
a responsible approach to investment. capital into sustainable assets and
Furthermore, by identifying the key drivers enterprises and shaping responsible
of increased RI, assets under management financial markets to underpin strong
(AUM) and the barriers to uptake, RIAA investment returns and deliver a healthier
works to increase the adoption and quality economy, society and environment.
of RI strategies.
RIAA does this through:
KPMG was commissioned by RIAA to
undertake the data collection and analysis 1 Acting as the member hub of timely and
for this 2018 report. KPMG developed relevant environmental, social, corporate
and delivered a survey to investment governance (ESG), ethical and impact
organisations across New Zealand, investing information to strengthen the
compiled the data derived from this primary capacity of the finance and investment
research, undertook secondary research on industries through regular events,
publicly available data, undertook the ESG webinars, conference calls and working
integration assessment based on RIAA’s groups, industry research and;
framework and analysed the data to deliver
the size, performance and growth of the 2 Growing the awareness and demand
responsible investment industry. for responsible investments through
communications and marketing work,
The report was designed by Loupe Studio. media activity, as well as by operating
the world’s first and longest running fund
Certification Program and the consumer
online tool Responsible Returns.
p2Responsible Investment Benchmark Report 2018 | New Zealand
CONTENTS
ABOUT THIS REPORT 2 TABLES AND FIGURES
EXECUTIVE SUMMARY 4 FIGURE 1Responsible investment AUM split into two distinct
categories based on their strategy: Broad responsible investment
Background 4
or Core responsible investment 4
Key findings 4
Broad responsible investment 5 FIGURE 2 RIAA’s Responsible and Ethical Investment Spectrum 6
Core responsible investment 5
Performance 5 FIGURE 3 Responsible investment AUM – totals by year 11
Key drivers and detractors of RI growth 5
Outlook 5 FIGURE 4 Responsible investment by approach 11
ABOUT RESPONSIBLE INVESTMENT 6 FIGURE 5 Frequency of issues being screened 12
Responsible investment strategies 6
Largest responsible investment asset managers
FIGURE 7
International context 7
and asset owners 14
Core versus Broad responsible investment 7
METHODOLOGY 9 Performance of Core responsible investments against
FIGURE 6
benchmarks 14
Reporting boundary 9
Data collection 9 FIGURE 8 Key drivers of market growth by those surveyed 16
Data analysis and reporting 9
Data completeness 9 FIGURE 9 Key deterrents to RI market growth by those surveyed 16
RESPONSIBLE INVESTMENT IN NEW ZEALAND 11
FIGURE 10 The time horizon over which performance is measured
Core responsible investment 12 and rewarded 17
Performance of Core Responsible Investment
funds- New Zealand 13
Broad responsible investment 13
MARKET DRIVERS AND FUTURE TRENDS 16
Key growth factors 16
Measurement of performance 17
APPENDIX A 18
Glossary 18
Definitions of responsible investment strategies 18
APPENDIX B 19
DISCLAIMER 20
p3Responsible Investment Benchmark Report 2018 | New Zealand
EXECUTIVE SUMMARY
BACKGROUND KEY FINDINGS 3 The Survey identifies a massive growth
in Core responsible investments –
primarily negatively screened funds –
Each year since 2002, the Responsible This Responsible Investment Benchmark for the second year running, growing by
Investment Association Australasia (RIAA) Report reinforces that a responsible 102% reaching $86.4 billion.
has commissioned research into the size approach to investing– one that
and growth of responsible investment systematically considers environmental, 4 Broad responsible investments – those
across Australasia. This 2018 report is the social and governance (ESG) and/or ethical integrating ESG considerations – grew
fourth stand-alone New Zealand report, a factors across the entire portfolio – is now by 9% to reach $97.0 billion AUM.
companion report to the 2018 Australian the expected minimum standard of good
Responsible Investment Benchmark Report. investment practice in New Zealand. 5 Core responsible investment funds are
The aim of this research is to gather data on outperforming equivalent New Zealand
the various forms of responsible investment Importantly an emerging understanding that equities and multi-sector balanced funds
and to present analysis of growth in the ESG factors are a driver of value across a over all time horizons.
sector. The New Zealand Responsible portfolio has significantly shifted more of the
Investment Benchmark Report charts the investment industry towards a responsible 6 There continues to be a massive increase
ongoing growth of responsible investing investment approach. in the use of negative screens in NZ in
strategies, whilst also identifying the key the last year, with increased frequency
drivers of increased capital flows towards 1 As at 31 December 2017, responsible of tobacco and controversial weapons
responsible investment (RI) and the barriers investment constituted $ 183.4 billion screens.
to uptake with the intention of increasing the assets under management (AUM), up
adoption and quality of RI strategies. a significant 40% from $131.3 billion
AUM in 2016.
This report details industry data on the size
and growth of the New Zealand responsible 2 Survey responses identified that
investment market over the 12 months to 31 a key driver of growth in RI funds
December 2017. was the further desire by clients to
align investments to mission with the
second most cited driver being the
understanding that ESG factors impact
on investment performance.
FIGURE 1 Responsible investment AUM split into two distinct categories based on
their strategy: Broad responsible investment or Core responsible investment
Broad Total Core
responsible $ 97 responsible $86.4 responsible
investment billion investment billion investment
strategy AUM $183.4 billion strategy AUM
p4EXECUTIVE SUMMARY Responsible Investment Benchmark Report 2018 | New Zealand
BROAD RESPONSIBLE PERFORMANCE Alignment to mission, indicating a growing
INVESTMENT interest by clients to align their investments
with Mission/values, continues to be the
For the first time this report has looked at the primary identified driver of growth in NZ,
Broad RI approaches – whereby ESG performance of Core responsible investment demonstrating the demand side interest
integration is the principle RI strategy – funds against relevant benchmarks. continues strongly in the Kiwi market.
continue to make up the largest portion of The second and third drivers relate to the
total responsible investment AUM, with $97.0 This report found very strong performance positive impact of ESG on investment
billion in AUM. results from Core responsible investment performance either as a predictor of growth
funds: or the avoidance of risk.
These organisations span community trusts,
• Core responsible investment New
investment managers and asset owners On the flip side, it was very clearly
Zealand share funds outperformed
including crown financial institutions. communicated that a lack of demand and
the relevant benchmarks across all time
awareness by both retail and institutional
periods.
clients continues to hold back ever greater
• Core responsible investment
growth in RI.
international share funds outperformed
their relevant benchmarks over the three
CORE RESPONSIBLE and ten year time horizons.
INVESTMENT • Core responsible investment multi-
sector growth funds (balanced
funds) outperformed their equivalent
OUTLOOK
In 2017 Core responsible investment
benchmarks over all time horizons.
strategies - and specifically the use of
negative screens - have emerged as a The elevated public focus on the underlying
significant part of the total responsible It is recognised that the above analysis is investment holdings of the KiwiSaver
investment AUM, jumping up substantially drawn from a small sample of performance market in 2016 caused a massive shift in
for the second year running to $86.4 billion data, especially for the New Zealand share the industry towards negative screening
AUM. This increase is due primarily to funds. However, analysis performed in of funds, which has effectively caused an
the inclusion of additional funds in this Australia, over larger samples produced a entire industry to switch to a base level
year’s survey, either from new entrants or consistently similar outcome1. of responsible investment practice in an
large managers screening tobacco and incredibly short period of time. There is an
controversial weapons investments. increasing understanding, at least within the
investment community, that in addition to
Core responsible investment approaches negative screening, RI strategies are also
apply at least one of the following primary KEY DRIVERS AND DETRACTORS an increasing component of driving better
strategies: negative, positive or norms based OF RI GROWTH investment outperformance.
screening; sustainability themed investing; or
impact investing and community finance. More work is needed to build retail
For the second year the survey asked awareness of the availability and the relative
The vast majority of Core responsible investment organisations to identify the performance of RI Core funds versus
investment involves screened investments key drivers of RI growth and key factors equivalent mainstream funds and to engage
which at $ 85.9 billion constituted 99.5% that have deterred RI growth. The top three stakeholders and influencers.
of the total Core RI (up from $42.3 billion responses were:
AUM in 2016). The major screened issues
included tobacco, controversial weapons,
but also nuclear power and gambling. TOP DRIVERS
Sustainability themed investments remained Key Driver % of respondents
constant at $0.4 billion ($0.4 billion in 2016). Alignment to mission 56%
Impact investing is an emerging responsible ESG factors impact on 50%
investment strategy having gained in performance
momentum in the last year, however as at Growing awareness of 36%
31 December 2017, still accounted for only a ESG risks impact on value
small amount of investments.
TOP DETRACTORS
Key Driver % of respondents
Lack of demand from 40%
retail investors
Lack of awareness by 27%
members of the public
Lack of demand from 27%
institutional investors 1 See Responsible Investment Benchmark Report 2018 Australia
Report
p5Responsible Investment Benchmark Report 2018 | New Zealand
ABOUT RESPONSIBLE INVESTMENT
All businesses, and therefore all and ethical factors are considered alongside RESPONSIBLE INVESTMENT
investments, have an impact on people financial performance when making an STRATEGIES
and the planet, both positive and negative. investment.
Responsible investing seeks to minimise
the negative effects generated by business Responsible investing considers a broad There are many different ways to engage
and promote positive impacts, ultimately range of risks and value drivers as part of the in responsible investment, as outlined in
delivering a healthier economy, society and investment decision-making process, beyond RIAA’s Responsible and Ethical Investment
environment and underpinning a stronger and in addition to reported financial risk. It is Spectrum, and investors often use a
investment outcome. a systematic approach that takes ESG and combination of strategies.
ethical issues into account throughout the
Responsible investing, also known as ethical process of researching, analysing, selecting As responsible investment becomes an
investing or sustainable investing, is a and monitoring investments. It acknowledges increasingly sophisticated component of the
holistic approach to investing, where social, that these factors can be critical in financial sector, it is guiding the investment
environmental, corporate governance (ESG) understanding the full value of an investment. approach of a broad range of products
FIGURE 2 RIAA’s Responsible and Ethical Investment Spectrum
TRADITIONAL RESPONSIBLE & ETHICAL INVESTMENT PHILANTHROPY
INVESTMENT
ESG INTEGRATION NEGATIVE POSITIVE OR THEMATIC/ IMPACT INVESTING
(including SCREENING BEST-IN-CLASS SUSTAINABILITY
shareholder (& norms based) SCREENING THEMED MARKET RATE CONCESSIONARY
engagement (& norms based) INVESTMENTS RATE
& voting)
FOCUS Limited or Consideration Industry sectors Investments that Investments that Investments that Investments that Grants that
no regard for & analysis of or companies target companies specifically target target social and target social and target positive
environmental, environmental, excluded/ or industries sustainability environmental environmental social and
social and social and divested from with better ESG themes eg clean impact and impact and environmental
governance governance (ESG) to avoid risk performance energy, green deliver market deliver below impact with no
factors factors as part or better align property rate financial market rate financial return
of investment with values returns returns
decision making
IMPACT Agnostic Avoids harm Benefits stakeholders
INTENTION
Contributes to solutions
FEATURES Delivers competitive financial returns
Manages ESG risks
Pursues ESG opportunities
Intentionality: delivery of impact is
central to underlying asset/investment
Impact of investment is
measured & reported
* This spectrum has been adapted from frameworks developed by Bridges Fund Management, Sonen Capital and the Impact Management Project
p6ABOUT RESPONSIBLE INVESTMENT Responsible Investment Benchmark Report 2018 | New Zealand
and services, from large investment CORE VERSUS BROAD investment strategy selected by the investor
managers who integrate ESG factors RESPONSIBLE INVESTMENT – or where they do, these are not the
into their decision-making to so-called primary responsible investment strategies
‘deep green’ ethical investment funds that – and are usually wholesale or institutional
apply exclusionary screening criteria over For the purposes of this report we products.
investments, and impact investments that distinguish between Core and Broad
intentionally seek to deliver positive social responsible investment. This allows us As this report demonstrates, asset
and environmental outcomes. It includes to differentiate the data to allow for an managers are increasingly applying multiple
superannuation funds that apply multiple RI enhanced analysis of the responsible responsible investment approaches. For
strategies across all asset classes to banks investment industry and the degree to example, a fund may apply Broad ESG
that take an ethical and socially minded which responsible investment strategies are integration as well as Core responsible
approach to lending. integrated into products and services. investment strategies such as negative
or positive screening. In such a case, we
Given the volume and variety of responsible Core responsible investment approaches have categorised the fund according to the
investment and banking products available apply at least one of the following primary primary responsible investment strategy
in New Zealand, individual investors are strategies: negative, positive or norms-based being pursued. The primary strategy
best positioned to determine the products screening; sustainability themed investing; is identified by the organisation in their
and services most closely aligned to impact investing and community finance; or survey response. In addition to this, RIAA
their values and beliefs. In other words, corporate engagement. performs a review of all survey responses
the determination of what constitutes to ensure that strategies are categorised
adequate or appropriate ESG screening Core responsible investment approaches consistently across the cohort of responses
for a particular product is subjective and are made up in large part of those and that investor responses are categorised
dependent on the individual investor’s funds traditionally referred to as socially consistently year on year.
expectations. There is a high level of responsible investing (SRI) or ethical
variability in the degree in which these investments, as well as sustainability It is important to note that this report aims to
factors are weighted, analysed and themed funds and impact investments. clearly and conservatively estimate the size
incorporated into investment decision-making. of the value and volume of the responsible
Broad responsible investment investment industry. Therefore, for the
To enable comparison of New Zealand’s approaches use ESG integration as the purpose of this report, AUM included under
responsible investment market with those principle responsible investment strategy. a Broad responsible investment strategy
of other regions, this report has been This involves the systematic inclusion only includes asset managers demonstrating
prepared in line with the seven strategies of ESG factors into traditional financial industry leading ESG integration practices
for responsible investment as detailed analysis and investment decision-making as opposed to including all self-declared
by the Global Sustainable Investment based on the acceptance that these factors ESG managers.
Alliance (GSIA) and applied in the Global are important drivers of risk and value in
Sustainable Investment Review 20162, companies and assets. This strategy is often It is noteworthy that RIAA sees the role of
which maps the growth and size of the accompanied by a structured approach to financial advisers as critical gatekeepers
global responsible investment industry. corporate engagement and other active in the finance industry and are an integral
These strategies are: ownership and stewardship mechanisms. part of the implementation of responsible
investment. Although this report doesn't
1 Negative/exclusionary screening RIAA and KPMG have undertaken a detailed estimate the state of play of responsible
2 Positive/best-in-class screening desktop analysis of: all New Zealand asset investment in financial advice, RIAA
3 Norms-based screening managers that are signatories to the PRI continues to work to ensure advisers
4 Integration of ESG factors (UN backed Principles for Responsible do understand their role in delivering
5 Sustainability themed investing Investment); other asset managers that responsible investment advice for clients.
6 Impact and community investing RIAA’s database indicates as practicing ESG
7 Corporate engagement and shareholder integration; and a selection of international
action asset managers with a strong presence
in this market and strong ESG credentials
Full definitions of each responsible investment that manage assets for local clients. In this
strategy can be found in the Glossary. case only assets specifically identified as
managed for local clients were included
in the assessment. Only those that score
above 80% against the RIAA assessment
methodology are included in the results. This
approach has been used in the survey for
INTERNATIONAL CONTEXT the past four years. For more detail on the
assessment methodology, please see the
breakout box on ‘How RIAA defines leading
RIAA is a proud member of the GSIA, practice in ESG integration’.
together with Eurosif (The European
Sustainable Investment Forum), UKSIF The Broad responsible investment market
(UK Sustainable Investment & Finance is largely comprised of institutional funds
Association, US SIF (The Forum for that apply ESG integration as part of a
Sustainable & Responsible Investment) and mainstream investment offering. These
2 Global Sustainable Investment Alliance, Global Sustainable
VBDO (Dutch Association of Investors for products for the most part do not include Investment Review 2016, http://www.gsi-alliance.org/members-
Sustainable Development). an ethical, SRI or sustainability themed resources/trends-report-2016
p7ABOUT RESPONSIBLE INVESTMENT Responsible Investment Benchmark Report 2018 | New Zealand
HOW RIAA DEFINES LEADING PRACTICE IN ESG INTEGRATION
Over the past decade, responsible This framework was developed by These pillars were weighted to ensure
investment has grown to a point RIAA based upon global definitions and balance between evidence of systematic
where a significant proportion of the existing assessment frameworks for ESG investment processes versus policies and
investment industry has now committed integration practices, and remains the public commitments. Using this framework,
to implementing a responsible investment same as the framework used by RIAA in RIAA then assessed New Zealand
approach. For large institutional investors, last year’s report. and a selection of international asset
this has focused primarily on applying managers who have an active presence
The framework acknowledges that
ESG integration practices to traditional in New Zealand based on their publicly
although it is difficult to prescribe a single
investment decision-making. available information including websites,
best practice process for the integration
PRI responsible investment transparency
Defining and measuring ESG integration of ESG factors into investment decision-
reports and all other available material. All
practices is challenging due to limited making, there are a number of leading
asset managers were scored using these
disclosure and a broad variation in practices and constituent parts of leading
criteria.
depth of integration – from systematic practice that can be identified. RIAA has
implementation embedded into investment established a framework drawing on the
Only those asset managers that scored
valuation practices and company core pillars of leading ESG integration
more than 80% have been included in the
engagement, to more ad hoc approaches. practices that assesses and scores:
Broad responsible investment category in
For the purposes of this report – to define this report. Some additional inclusions are
the size of the responsible investment made in the Broad responsible investment
• Publicly stated commitments to
industry in New Zealand – RIAA aims category where a fund manager or asset
responsible investment;
to include only those assets managed owner undertakes both ESG integration as
• Responsible investment policy;
by asset managers who are practicing well as negative screening.
• Commitments to the transparency
a leading approach to ESG integration,
of processes and approach;
rather than all assets managed by
• Systematic processes for ESG
organisations who have self-declared
integration as well as evidence
that they are implementing responsible
demonstrating how this process is
investment.
applied as part of traditional financial
For the fourth year in a row, RIAA analysis;
undertook a desktop review of asset • Evidence of activity in other areas
managers who are self-declared of active ownership and stewardship
responsible investors – either via their including voting and engagement;
commitment to the PRI, or other public • Membership of a collaborative investor
commitments – and rated each of these initiative; and
against a framework of leading practice to • Coverage of total AUM by responsible
ESG integration. investment or ESG practices.
p8Responsible Investment Benchmark Report 2018 | New Zealand
METHODOLOGY
REPORTING BOUNDARY DATA COLLECTION the depth of responsible investment
strategies applied, to identify any overlap
of approaches and to assist in categorising
This report covers the 2017 calendar year Data used to compile this report was funds. This approach was used in order
and where possible, data disclosed has generously provided and collected from the to create an accurate depiction of the
been recorded as of 31 December 2017. following sources: responsible investment environment in
Data from some asset managers was not New Zealand.
• Directly supplied by asset managers as
available on a calendar year basis and in
well as some asset owners;
these cases data was taken from the closest Fund overlaps between survey respondents
• Morningstar statistics for total assets
available reporting date. All financial figures have been removed, where identified, from
under management (TAUM) in New
are presented in NZD. the reported figures. RIAA is continuously
Zealand and the average performance
working to improve its data collection
of mainstream managed fund categories.
The financial sector is a globalised industry. process to enhance the quality of reported
Morningstar also provided a secondary
Responsible investment funds may be figures and to ensure that all products in the
source of AUM data for some of the funds
held in one country, managed in another New Zealand market are identified.
listed;
and sold in a third, meaning that a level of
• RIAA’s database and industry contacts;
estimation is applied in order to demarcate It is important to note that all information in
and
the boundary of the New Zealand this survey is ‘self-reported’ by respondents
• Desktop research of publicly available
market. This impacts on the accuracy/ and only limited analysis is performed over
information regarding assets under
usefulness of reporting survey results as statements made. There is no assurance of
management, performance data and
proportional to the market size as reported statements.
investment strategies from sources
with Morningstar’s statistics for TAUM.
including company websites, annual
Morningstar’s TAUM figures are limited
reports and PRI Responsible Investment
in their coverage of the full investment
Transparency Reports.
market in New Zealand by covering only
those assets managed by the New Zealand
managed funds industry through retail and Where survey responses were not received, DATA COMPLETENESS
wholesale funds, discrete mandates and publicly available information was used where
listed investments. Morningstar’s TAUM available. In total, this research managed to
does not capture overseas fund managers gather a comprehensive summary of the full Many of the products in the New Zealand
and direct investments. However, in the responsible market in New Zealand. responsible investment market are not
absence of a more appropriate measure, bound by any public reporting, disclosure
TAUM continues to be used for comparison Responses that identify the key drivers of RI requirements or independent review
purposes. This report is intended to and detractors were only taken from survey (assurance). This report includes both retail
inform readers of the range of responsible respondents. and wholesale investment products, and
investment products that are available in increasingly, institutional fund mandates,
New Zealand. As such it includes assets No data has been extrapolated from its individually managed accounts, and
managed within the region, as well as original source. separately managed accounts. Some
assets managed outside the region where investment custodians are reluctant to
these are on behalf of New Zealand clients. supply information for reasons of privacy
or commercial confidentiality. Data
pertaining to funds held outside of managed
DATA ANALYSIS AND REPORTING responsible investment portfolios was not
accessible. For this reason, as well as
matters identified in the Reporting Boundary
As many asset managers apply several section above, this report provides a
investment strategies, the data collection conservative depiction of the responsible
survey required respondents to identify investment environment in New Zealand.
a single primary responsible investment
strategy. The survey also requested to
respondents to nominate any secondary
strategies applied in order to determine
p9Responsible Investment Benchmark Report 2018 | New Zealand
Responsible Investment Benchmark Report 2018 | New Zealand
RESPONSIBLE INVESTMENT IN NEW ZEALAND
The responsible investment industry in
New Zealand has grown significantly in FIGURE 3 Responsible investment AUM – totals by year
2017 for the second year in a row to make
up an ever greater portion of the overall
investment market in New Zealand. Our Responsible investment approach 2016 2017 Change
research reveals that $183.4 billion in AUM Responsible Responsible
is managed under responsible investment investment investment
strategies as at 31 December 2017, a AUM ($bn) AUM ($bn)
growth of 40% since 2016.
Screening (including negative, positive, 33.6
42.3 147.7
85.9 340%
103%
best in class and norms-based screening)
When compared to the total professionally
managed assets (TAUM) in New Zealand, Sustainability themed investing 27.2
0.4 31.0
0.4 14%
4%
reported by MorningStar as $80.9 billion,
this represents a significantly larger figure. Impact investing and community finance 4.1
0.1 8.0
0.1 94%
0%
This figure surpasses the total value of Core responsible investment total 64.9 42.8 186.7 86.4 188% 102%
professionally managed assets due to many
of the assets captured in this report being Broad responsible investment total 557.1 88.6 679.3 97.0 22% 9%
managed outside of NZ on behalf of the ESG integration
institutional asset managers and owners in TOTAL RESPONSIBLE INVESTMENT 622.0
131.4 866.0
183.4 39%
40%
this study.
Of this total AUM just over half (53%) or
$97.0 billion – is accounted for by asset
managers and asset owners undertaking FIGURE 4 Responsible investment by approach
a Broad responsible investment approach,
using ESG integration as their primary RI
strategy. This demonstrates a growth of
9% year on year.
In 2017, Core responsible investment funds
doubled from $42.8 billion to $86.4 billion
AUM, constituting over 107% of New Total $85.9 billion
Zealand’s TAUM. This staggering step up is $ 97 responsible $86.4 Screening (including negative,
billion investment billion positive, best in class and
due primarily to the continued incorporation
$183.4 billion norms-based screening)
of negative screening across tobacco and
controversial weapons into mainstream
fund offerings.
$0.4 billion
Sustainability themed investing
$0.1 billion
Impact investing and
community finance
Broad responsible investment Core responsible investment
strategy AUM strategy AUM
p11RESPONSIBLE INVESTMENT IN NEW ZEALAND
Responsible Investment Benchmark Report 2018 | New Zealand
CORE RESPONSIBLE
INVESTMENT FIGURE 5 Frequency of issues being screened
100%
Core responsible investment funds grew Weapons
100%
significantly during 2017, increasing by 97%
Tobacco
102% to $86.4 billion at 31 December 100%
2017 compared with $42.8 billion for the 55%
Gambling
previous year. 40%
39%
Alcohol
34%
At $86.4 billion AUM, Core responsible
26%
investment funds represent 107% of the Fossil fuels
50%
TAUM held in New Zealand, increasing 47%
Nuclear power
from 61% of TAUM in 2016. 26%
39%
Adult content
The $86.4 billion of Core responsible 38%
investment in New Zealand is held by 23 13%
Human rights abuses
30%
asset managers managing 79 products (an
16%
increase from 51 in prior year). A range of Environment/climate
24%
Core responsible investment strategies have 37%
been applied to these funds and the key Animal welfare
10%
trends in these strategies are detailed below: 16%
Other
42% p 2016 p 2017
Screening, primarily negative, is the RI
Proportion of funds screening
approach applied to 99.5% of Core AUM. 0 20 40 60 80 100
for issue (%)
The use of screening has seen a significant
amount of growth year on year with AUM
increasing by 102% on 2016.
In August 2016, news reports revealed that Furthermore, we are increasingly observing responsible investing in NZ, as we have
KiwiSaver funds had investment holdings in the incorporation of ESG integration, or seen in other markets.
tobacco, cluster munitions, land mines and broad responsible investment practices, with
nuclear devices. This resulted in massive negative screens, as the market matures to Impact Investment: Early stages of activity
interest in the investment practices of reflect both consumer expectations as well within the category of impact investment
KiwiSaver funds, and it rapidly became as recognising the investment performance and community finance have now begun
apparent that the average New Zealander implications of ESG factors. in NZ, with a small but significant early
was not content to have their KiwiSaver moves occurring in 2017. This year’s report
investments invested in such industries. As noted in previous years, we see in identified activities by community trusts and
This resulted in a very rapid response from the NZ market some very significant private foundations making allocations to
the industry whereby the largest KiwiSaver asset owners who incorporate screening impact investment, as well as a sizeable first
providers put in place exclusions across into their funds, such as the Accident green kauri bond issued by the International
these main industries. Compensation Corporation and New Finance Corporation. But in the months
Zealand Superannuation Fund. These since the end of 2017, activity continues
This 2017 survey indicates that managers funds, for example, all incorporate screening to ramp up in the NZ impact investment
are continuing to put in place screening in across tobacco, controversial weapons market, and we look forward to seeing more
portfolios, both labelled ‘ethical’ portfolios (cluster munitions, nuclear explosive activity in this category in coming years.
as well as mainstream portfolios. As shown devices, anti-personnel mines) and whaling
below all Core funds included in the survey sectors, however, also incorporate an
have screens over weapons and tobacco. ESG integration approach across their
investments. For these asset owners, we
In addition, overall there was an increase have included them under their primary RI
in the number of issues screened, with strategy that we take to be Broad RI – ESG
significant increases in screens over fossil integration.
fuels and environmental and climate issues
compared to the prior year. Sustainability themed investing remained
consistent with the prior year at $0.4bn with
Some funds have traditionally marketed the small change driven by organic growth
themselves as being ethical or socially in the two funds identified. Interestingly,
responsible funds, and typically include this seems to indicate the market is still
more than just a base level of screening very much focused on both ESG as a
across one or two issues. There continues to investment value enhancer and negative
be both a growth in those funds marketed as screens as meeting client expectations, with
SRI or ethical funds, as well as mainstream only early moves to tap the client interest in
offerings incorporating a baseline of more positively screened, more sustainably
negative screens. themed funds, as we’re seeing emerge in
other markets. We would expect to see this
opportunity emerging as the next wave of
p12RESPONSIBLE INVESTMENT IN NEW ZEALAND
Responsible Investment Benchmark Report 2018 | New Zealand
THE GROWTH OF IMPACT INVESTING IN NZ
A focus on impact investment is truly of approaches across New Zealand, one network to foster market development
taking off in NZ. There is now an active pioneering the early stages of this market and activity, and as a community to share
community combining investors, social development. learnings to date. Furthermore, a New
enterprises, philanthropists, civil society Zealand Impact Investment National
and government who are working together The Growing Impact in New Zealand Advisory Board has been established that
to ensure capital is directed to support Report, launched by Akina, EY and JB will connect NZ with the Global Steering
social and environmental outcomes along Were in September 2017, maps out the Group for Impact Investment, allowing the
with financial returns. current and emerging impact investment market to leverage the experience of other
landscape in detail, highlighting the thriving markets at this important emerging stage.
This year’s Responsible Investment activity underway across multiple sectors.
Benchmark Report New Zealand again Importantly, the report also estimates the As we’ve seen in other markets, we
finds only small total value of assets future market potential for impact investing anticipate that in future years there will be a
invested as impact investments in 2017, of NZ$5 billion based on the relative size of rapid ramp up of activity and capital flowing
however this masks the amount of activity the NZ economy, charity sector and capital to impact investments, from green bonds to
underway in this market, and due to markets. social impact bonds, venture capital funds
the nature of this study, likely misses to private lending, micro finance to social
smaller private investments and lending Progress is now well underway, and infrastructure. NZ is now establishing a
activities that are happening outside of the pleasingly capital is starting to flow towards strong foundation for its impact investment
mainstream capital markets. investments that create positive social activities.
impact, connecting capital markets to
Community trusts, private foundations, social and environmental outcomes.
angel investors, as well as major banks
and asset managers have all now been In the recently year, an Impact Investment
actively seeking and making impact Network has been formed bringing
investments and lending with a diversity together the hive of activity and actors into
PERFORMANCE OF CORE The results of this analysis indicate: BROAD RESPONSIBLE
RESPONSIBLE INVESTMENT • Core responsible investment New
INVESTMENT
FUNDS- NEW ZEALAND Zealand share funds outperformed their
equivalent benchmarks for all periods.
Beyond Core responsible investment, ESG
• Responsibly invested international share
This report, for the first year, has assessed integration constitutes a major force in the
funds outperformed their benchmarks in
the performance of New Zealand Core mainstream investment industry today. As
the three and ten year time horizons, but
responsible investment funds compared with at this survey period 18 New Zealand asset
underperformed over the one and five
their benchmark index and the average of managers and eight asset owners have
year terms.
equivalent mainstream funds. declared their commitment to responsible
• Additionally, responsibly invested
investment by becoming signatories to
balanced portfolios outperformed the
The average performance in each time the PRI. Signatories to the PRI commit
multi-sector growth fund average for
horizon has been determined using the to incorporating ESG considerations into
all periods (with no benchmark data
asset-weighted returns (net of fees) as investment analysis and decision-making
available for 10 year period).
reported by each responsible investment processes and to publically report on their
fund within its category. Mainstream performance.
performance indices and fund comparison This pleasingly reinforces global studies
data were calculated by MorningStar using as well as our own Australian performance Combined, these investment organisations
a comparable methodology. research that support the conclusion that demonstrate that ESG integration is
responsibly invested funds provide similar becoming a key consideration in mainstream
Figure 6 shows a comparison of the or stronger risk-adjusted returns to their investment strategies.
performance of the principal categories of mainstream peers.
core responsible investment funds against RIAA has always taken a conservative
the performance of mainstream funds over approach to estimating the value of AUM
one, three, five and ten year time horizons. relating to funds that consider ESG factors.
The AUM attributable to asset managers and
p13RESPONSIBLE INVESTMENT IN NEW ZEALAND
Responsible Investment Benchmark Report 2018 | New Zealand
asset owners comprising the $97.0 billion
AUM in this report was determined using a FIGURE 6 Performance of Core responsible investments against benchmarks
combination of approaches including RIAA’s
responsible investment survey results as
well as a desktop assessment of eight asset NZ share funds 1 Year 3 Years 5 Years 10 Years
managers who are self-declared responsible
Average responsible investment fund (between 29.9% 17.3% 19.0% 10.0%
investors (primarily from PRI signatory lists).
1-2 funds sampled depending on time period)
As outlined in the earlier section on ‘How NZ OE Equity Region NZ 21.8% 14.6% 15.8% 8.8%
RIAA defines leading practice in ESG S&P/NZX 50 TR NZD 22.0% 14.7% 15.6% 7.6%
integration’, the asset managers were
reviewed against a framework of leading
practice in ESG integration as determined International share funds 1 Year 3 Years 5 Years 10 Years
by RIAA, and based on global research, in
Average responsible investment fund (between 14.2% 22.6% 10.5% 6.7%
order to determine those asset managers
2-8 funds sampled depending on time period)
demonstrating a leading approach to ESG
integration. Asset owners were included Large-cap international share fund average 20.0% 12.8% 15.0% 5.9%
who also had in place extensive negative MSCI World ex-Australia Index 20.9% 11.5% 13.3% 4.9%
screening in addition to their ESG integration
practices.
Multi-sector growth funds 1 Year 3 Years 5 Years 10 Years
In this year’s report, included in the Broad RI Average responsible investment fund (between 14.7% 7.0% 10.4% 6.4%
assets are: 6-17 funds sampled depending on time period)
• The largest NZ asset owners applying NZ OE Multisector - Balanced 12.0% 6.3% 8.5%
multiple RI approaches;
• Asset managers that apply an ESG
approach coupled with screening (mainly
p Over performance p Under performance
for institutional mandates);
• Community trusts undertaking ESG
This assessment found that four domestic These four asset managers were able to
integration through their external
asset managers in New Zealand are applying clearly demonstrate a systematic process
managers; and
a leading approach to ESG integration in to ESG integration in their investment
• Asset managers demonstrating leading
their Broad responsible investment approach. process, through policies, clearly defined
practice in ESG integration taken from
These four managers are: approaches to stewardship, active ownership
our assessment.
that includes engagement and voting, and
• AMP Capital meaningful disclosure.
To ensure no double counting, RIAA’s survey
• Harbour Asset Management
asks asset owners to identify the underlying
• HRL Morrison Where asset managers report some of their
asset managers, and where there is overlap,
• Southern Pastures Management funds under Core RI, the Core RI fund value
those assets are removed from the total AUM.
was excluded from the Broad RI to eliminate
double counting.
FIGURE 7 Largest responsible investment asset managers and asset owners
Accident Compensation Corporation
New Zealand Supperannuation Fund
ANZ New Zealand Investments Limited
AMP Capital
ASB Group Investments Ltd
HRL Mossion
Northern Trust Asset Management
Mercer (N.Z) Limited
Westpac
Kiwi Wealth
Government Super Fund Authority
Fisher Funds Management Ltd
p 2016 p 2017
Harbour Asset Management Limited
$ millions 0 2,500 5,000 7,500 10,000 12,500 15,000 17,500 20,000 22,500 25,000 27,500 30,000 32,500 35,000 37,500 40,000
p14Responsible Investment Benchmark Report 2018 | New Zealand
Responsible Investment Benchmark Report 2018 | New Zealand
MARKET DRIVERS AND FUTURE TRENDS
This survey clearly shows that there KEY GROWTH FACTORS Key deterrents
has been a significant increase in the
number of products and strategies subject In the previous year, the largest factor
to responsible investment across the 56% of respondents attributed growth to deterring additional growth was associated
investment industry as well as an increase the desire by underlying clients to align with concerns around the financial
in AUM in those strategies driven by both by their investments with their organisational performance of responsible investments.
retail and institutional investors. missions or values. This factor has significantly reduced this
year (from 34% to 23%) and when coupled
It is increasingly clear that appropriate and Half of respondents (50%) identified the with performance being identified as the
properly executed RI strategies can have a impact of ESG factors on performance as second biggest driver of growth, it appears
significant positive impact on the environment a key driver of growth (again a significant that RI has reached a point of inflection with
and society whilst at the same time increase on the prior year), and a further positive performance being increasingly
generating sustainable financial returns that 35% identified the recognition of ESG risks attributed to RI funds.
outperform comparable mainstream funds. as important to portfolio valuation. Asset
managers now are seeing ESG as a value A lack of demand from retail investors and
In order to gain insight into the factors behind creating factor rather than solely one that is an associated perceived lack of awareness
the increased use of responsible investment driven by client demand. of responsible investment by members of
strategies we asked respondents to identify the public, identified by 40% and 27% of
and rank the key drivers of increased respondents respectively, were the two
adoption of responsible investment most common observations – pointing to
strategies and AUM and the key factors in a need for capacity building and education
the market that have restricted growth. of retail investors as to the availability and
performance benefits of RI products.
FIGURE 8 Key drivers of market growth by those surveyed FIGURE 9 Key deterrents to RI market growth by those surveyed
33% Lack of demand from 24%
Align to mission
56% retail investors 40%
ESG factors impact 18% Lack of awareness by 34%
on performance 50% members of the public 27%
33% Lack of demand from 24%
ESG risk
36% institutional investors 27%
33% 34%
Demand from retail investors Performance concerns
25% 23%
Demand from 33% Lack of viable 34%
institutional investors 8% product/options 23%
8% Lack of qualified 15%
Industry competition
8% advice/expertise 20%
International initiatives 4% Mistrust/concern about 20%
6% greenwashing 17%
External pressure (NGOs, 15% 4%
media, trade unions, etc) Lack of external pressure
6% 10%
18% 4%
Fiduciary duty Risk concerns
3% 7%
4% Lack of legislative 4%
Social benefit
3%
p 2016 p 2017 requirements 3%
p 2016 p 2017
0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60%
p16MARKET DRIVERS AND FUTURE TRENDS Responsible Investment Benchmark Report 2018 | New Zealand
MEASUREMENT OF
PERFORMANCE
For the first time this year the survey asked
respondents to report the time horizon
over which performance is measured and
rewarded. The responses are shown below
in Figure 10.
Respondents reported that performance is
measured over a number of time periods,
the majority reporting a short term (less than
one year and quarterly) and long term (five
years or more) measurement period. Many
respondents identified a number of time
periods over which performance is measured.
It is good to see that the majority of asset
managers’ performances, at least in part, is
measured over a period of five years.
More investigation is needed to understand
the prioritisation of monitoring or focus of
asset owners and investors.
FIGURE 10 The time horizon over which performance is measured and rewarded
5 years 83%
3 years 25%
1 year 67%
6 months 50%
Quarterly 67%
Monthly 17%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
p17Responsible Investment Benchmark Report 2018 | New Zealand
APPENDIX A
GLOSSARY DEFINITIONS OF RESPONSIBLE Norms-based screening – involves
INVESTMENT STRATEGIES the screening of investments that do not
meet minimum standards of business
AUM practice. Standards applied are based on
Assets under management Broad responsible investment – international norms such as those defined
investment that applies ESG integration as by the United Nations (UN). In practice,
ESG
the key responsible investment strategy. norms-based screening may involve the
Environment, social and governance
exclusion of companies that contravene
GSIA Core responsible investment – investment the UN Convention on Cluster Munitions,
Global Sustainable Investment Alliance that applies at least one of the following as well as positive screening based on ESG
responsible investment strategies: criteria developed through international
PRI
bodies such as the UNGC (United Nations
UN backed Principles for Responsible • screening of investments – negative,
Global Compact), ILO (International Labour
Investment positive or norms-based screening;
Organisation), UNICEF (United Nations
• sustainability themed investing;
RIAA Children’s Fund) and the UNHRC (United
• impact or community investing;
Responsible Investment Association Nations Human Rights Council).
• corporate engagement and shareholder
Australasia
action.
Sustainability themed investing – relates
TAUM
to investment in themes or assets that
Total assets under management
ESG integration – ESG integration involves specifically relate to sustainability themes.
the systematic and explicit inclusion of This commonly involves funds that invest in
environmental, social and governance clean energy, green technology, sustainable
factors into traditional financial analysis and agriculture and forestry, green property
investment decision-making by investment or water technology. This category also
managers. This approach rests on the includes multi-strategy portfolios that
belief that these factors are a core driver may contain a variety of asset classes or
of investment value and risk. a combination of these themes.
Negative screening – screening that Impact investing – targeted investments
systematically excludes specific industries, aimed at addressing social or environmental
sectors, companies, practices, countries issues while also creating positive financial
or jurisdictions from funds that do not align returns for investors. Impact investing
with the responsible investment goals. This includes community investing, which
approach is also referred to as values-based involves projects that have a defined social
or ethical screening. Common criteria used purpose, as well as environmental investing
in negative screening include gaming, that typically aims to finance initiatives that
alcohol, tobacco, weapons, pornography address key environmental issues.
and animal testing.
Corporate advocacy and shareholder
Positive screening – involves screening action – refers to the employment of
investment in sectors, companies or projects shareholder power to influence corporate
selected for positive ESG or sustainability behaviour. This may be conducted through
performance relative to industry peers. It direct corporate engagement such as
may also be referred to as best-in-class communications with senior management
screening. It involves identifying companies or boards, filing or co-filing shareholder
with superior ESG performance from proposals and proxy voting in alignment
a variety of industries and markets. with comprehensive ESG guidelines.
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