More and more consumers are becoming conscious about the environmental, social and governance (ESG) impact of their purchases, creating opportunities for companies to create sustainable long term businesses whilst having a positive impact on the world. It’s not just consumers either. Stakeholders and investors are increasingly factoring in a company’s ESG performance as well as bottom line performance.
To help guide investors through these metrics, Craigs Investment Partners draws on the expertise of Vanessa Stevens, a sustainability analyst in the Private Wealth Research team. Vanessa shares with us the development of Craigs’ sustainability research to enable clients to align their investments with their values.
Can you describe some of the work that Craigs has done in terms of adding some nuance to ESG measurements for companies?
We kicked off our sustainability initiative almost three years ago. We thought about getting an off-the-shelf sustainability rating product from one of the big international agencies. In the end we decided that we needed to develop our own sustainability framework to have this capability and understanding in-house to give us the ability to properly engage with clients and companies in this area.
We based our framework on internationally recognised approaches, where we looked at the environmental, social and governance pillars and came up with the factors that we need to take into consideration when assessing a company’s sustainability efforts. We decided it was important to clearly separate out each of the pillars because we found that our clients all have different values; one person might focus on the environmental side, whilst someone else might be more interested and concerned about the social impact. One of the best things about investing sustainably is that you can align your investing choices with your values.
As you started providing that level of insight, were you surprised by how your clients reacted? In general, do they have a certain interest in a particular area of ESG?
Initially we saw that clients viewed sustainable investing as a way to exclude companies that are involved in particular industries. However, we are now starting to see a shift towards clients taking steps beyond this by considering a wide range of sustainability factors before investing in companies.
I don’t think all clients are interested in the same areas, as each client has had different life experiences, so what they view as ethical or sustainable will differ from others. However, I think climate change and social inequality are at the forefront of a lot of people’s minds given they have been in the media a lot. Investors are often interested in what companies are doing to reduce their carbon footprint and how they are tackling social divides.
Do you get the sense that the public is looking for more than just financial returns from their investments?
Absolutely, a recent survey conducted by the FMA on ethical funds found that 68% of New Zealand investors prefer their money to be invested ethically and responsibly. However, of these investors who prefer their money invested ethically, only 26% have selected a fund manager based on ethical credentials. This shows there is a great opportunity for financial advisers, fund managers and companies to provide clear information regarding their sustainability stance and progress and to be able to help educate investors in this space.
You talk about the evolution of ESG portfolios from being based on exclusion to more of a proactive approach. Have you got any advice for companies who want to be profitable, but also want to have a positive impact on the world?
A key consideration for any company should be talking to stakeholders, find out what is most important to them, and then making a plan to address those particular issues and clearly communicate the plan. The information we analyse is based on what is publicly disclosed, so if a company is not disclosing ESG information, then we (and investors) can’t make this assessment.
Do investors start pulling away from an interest in those metrics during harder times? Is it just about return and bottom line?
No, investors that are in sustainable funds are actually less likely to pull out in hard times than those in traditional funds. In a recent Morningstar report, which looks at the flow of funds into sustainable investment funds and ETFs in the first quarter of this year, there was an overall drop of 73% due to the market volatility, but if you looked at the sustainable funds, the drop was less, about 36% percent. This clearly shows that whilst investors might look more closely at the timing of when they invest when there is market volatility, your underlying ethical values don’t go away.
Do you get the sense that investors seem to understand how power in numbers works and being able to impact the market?
If you think about whenever you buy a product at a shop, it creates demand for that product. If multiple customers buy the product, it shows the company is creating something that is desirable to consumers and they will continue producing the item. If you apply this in terms of investing, every dollar that a client invests into a company is endorsing what that company is doing (or producing) and how they go about it. Having a stake in a company means that you have a voice that can be heard.
Last year, there was a record number of shareholder resolutions focused on ESG topics according to a study undertaken by an advocacy group and researchers. That’s when shareholders put forward proposals to companies such as to disclose details on carbon emissions or workplace diversity. We are seeing a shift where there are more shareholder proposals, but also the number of people who are voting for those proposals is also increasing. There is power in that, and investors are no longer just a drop in the bucket.
With the insights that you get from understanding company disclosures and their approach to ESG, have you noticed a difference in terms of the general approach between New Zealand companies and international companies?
I think many of the New Zealand companies are still catching up in terms of reporting and understanding the scope of their sustainability impact relative to the international companies we have looked at. Historically, international companies have had many more resources dedicated to this area which has pushed them ahead.
The mandatory climate-related disclosures that will require large financial institutions to prepare climate statements by as early as 2023, means that these companies and fund managers will have to disclose information on areas such as their emissions profile, potential risks and opportunities in terms of climate change and how they are managing those risks. New Zealand is the first country in the world to introduce this requirement.
Recently Europe introduced a classification system for investments to clarify which ones are environmentally sustainable making it easier for investors to identify greener options. I think we will likely see something similar in New Zealand over the coming years to help investors make ethical choices.
Are there any industries that are doing better than others?
A lot of sustainably focused funds will invest in technology companies. From an environmental perspective they generally have a low operational carbon footprint and are starting to turn their efforts towards supply chain emissions both upstream and downstream. Because these companies are so big and well known, they’ve got a lot of power to influence other companies.
Sometimes we have to be careful not to focus on one part of “ESG” when thinking about particular companies, for example there have been stories in the media around human rights. Large corporates can’t afford to have reputational risks. They have to do their homework and investigate their supply chains thoroughly to make sure all the workers and all of the supplier’s workers are being treated fairly.
Are there any industries that must try harder?
The oil and gas sector is at the forefront of a lot of people’s minds. Often those with a sustainable focus want to avoid those industries because of the detrimental environmental impact it is having on the planet. It’s an interesting discussion though because if we didn’t support this industry in the interim, while we transition to a low carbon future, we then start to find ourselves in situations that may have a detrimental social impact. This is when it becomes valuable to sit down and really think about the implications of investing in a particular industry.
Have you found that sustainability starts to influence your personal life when you’re dealing with insights, in terms of different companies and their impact on the world?
I have always been interested in sustainability but even more so since I have had children. I look at the products that I use in my house and make sure they are environmentally friendly. When I am buying clothes, I think, is this going to last the distance or am I buying it because it’s on trend? After initiating this piece of work at Craigs, I have gone through my own investment portfolio and removed companies and funds that haven’t scored well against our assessments.
When you think about your children, are you optimistic about the world they will be inheriting?
Honestly, I think there has been a major mind shift in the last couple of years, especially with climate change which gives me optimism. We are at this critical point where if we do not do something about it now, there are going to be major implications for the future. I finally feel like the public and the regulators are starting to get behind this and it is creating real change.
Disclaimer: This article is general in nature and is not financial advice. It does not take into account your financial situation, objectives, goals, or risk tolerance. All investments involve risk and can go down as well as up. The Craigs Investment Partners Limited Financial Advice Provider Disclosure Statement can be viewed at craigsip.com/tcs. Visit craigsip.com.
Published 7th September 2022.