Responsible investing seems to be front of mind at the moment. Many countries are a long way ahead, New Zealand included, in the way the topic is integrated and discussed at a political level. Europe arguably led the way in certain areas, but many of the challenges lie in Emerging Markets, and since Covid-19 and Biden’s election we have seen greater focus from US managers. But what is responsible investing? The topic is so broad and the interpretation so far reaching.
In this paper, we aim to shed some light on the topic, explore some of the jargon and pose some questions to investors and fiduciaries to help frame your thinking in this area. Responsible investing has become a focus area in the investment industry, but greenwashing is rife and the sales pitch is strong, so what really matters?
At Research IP, we believe that ESG principles should be integrated into the process and in ten years’ time we won’t be discussing them like we do today. Integration will be assumed in managed fund investment processes, and investment exchanges will set the standard. However, this raises further questions, if all Fund Managers invest in this way what happens to the “other” assets, do more get pushed into private hands?
We also explore the investment landscape and the implementation through passive structures. Is the ESG thematic driving performance in market sectors? Is this performance persistent? Is there alpha in the opportunity set or is ESG simply a subset of a broader quality measure?
Responsible investing also opens a raft of other ethical considerations. Do you want your impact fund to outperform the market index? Is payday lending legal? If your country goes to war, do you want to know you are protected? What will we do with all the old batteries? Do you want a wind farm in your backyard? If coal production is banned in Australia (some of the cheapest and highest quality in the world) where does that production shift to – China, where it is “dirtier” and overall worse for the world? Do you turn the lights on at night?
A great example of the transition is the Danish company Ørsted. It was once one of the most coal-intensive energy companies in Europe. Today, they claim to be the world’s most sustainable energy company, and a global leader in the transition to green energy. This is a great example of where capital arguably should be directed, but appeared on many exclusion lists.
Most of these questions we cannot answer, they are personal preference, but hopefully Beneath the Surface of Responsible Investing highlights the many different ways to think about the topic.
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Photo credits: Onni Wiljami Kinnunen