The Voyage So Far – Beneath the Surface of Responsible Investing – Part 3

Charting the Course

The roots of responsible investing arose from negatively screened investments at religious organisations.

1. Around the mid-1700s the Quakers prohibited members from associating with the slave trade.
2. In the early 1900s the Methodist Church wished to exclude companies involved in alcohol and gambling from their investment portfolio.
3. Shariah-compliant investing developed from the 1960s onwards where funds aimed to exclude companies deriving an income from alcohol, pork, and gambling.

Winds of Change

Social issues through the 60s and 70s started to influence how investment decisions were being made.

• The origins of corporate engagement and proxy voting can be traced back to 1970 in the United States. Ralph Nader proposed corporate responsibility amendments at the General Motors annual shareholder meeting. These sought to address issues like air pollution and vehicle safety. This was supported by a student body at the University of Pennsylvania. The University was a significant shareholder in General Motors. 
• Negative screening became more prevalent during the Vietnam War where protesters called for a boycott of companies manufacturing weapons for the war. For example, Dow Chemical was boycotted for manufacturing napalm. In 1971 the Pax World Fund was created by two Methodist ministers for the churches’ funds which excluded weapon manufacturers. Anti-war protesters also put pressure on US university endowment funds to avoid investments associated with the war.
• Anti-apartheid pressure through the 70s and 80s forced widespread withdrawal of capital from South Africa. The Sullivan principles were created in 1971 which promoted social responsibility as part of a corporation’s code of conduct. One example of these principles in use were by Catholic nuns who were able to confront corporations by filing shareholder proposals via holdings in their pooled retirement assets. The Calvert Social Investment Fund was launched in 1982 which integrated ESG factors and opposed any investments associated with apartheid.
• The Exxon Valdez oil spill in Alaska in 1989 sparked the need for more environmental awareness in business conduct. Non-profit organisation, Ceres, was formed as a direct result of the oil spill with a specific focus on sustainable business practises.
• The Domini Social Index (now called the MSCI KLD 400 Social Index) was created in 1990 to benchmark several US mutual funds that integrated ESG factors into their investment decision making.
• In 2006 the United Nations Principles for Responsible Investment (PRI) was launched which created guidelines for the integration of ESG factors.
• The United Nations Global Compact was launched in 2000 which encourages businesses to adopt more socially responsible and sustainable policies.
• Responsible Investment Association Australasia (RIAA) was created in 2000, originally known as Ethical Investing Australia.
• The Paris Agreement, often referred to as the Paris Accords or the Paris Climate Accords, is an international treaty on climate change, adopted in 2015. It covers climate change mitigation, adaptation, and finance. The Agreement was negotiated by 196 parties at the 2015 United Nations Climate Change Conference near Paris, France.
• The United Nations Sustainable Development Goals were adopted by all member states in 2015. The SDGs have progressively made their way into investment management strategies.
• From 2015 onwards there has been a proliferation of organisations with a focus on sustainability, including the Australian Sustainable Finance Initiative, Investor Group on Climate Change (IGCC), and the Centre for Sustainable Finance.
• The United Nations Climate Change Conferences are global forums for multilateral discussion of climate change matters held on an annual basis.

The Mainstay of Today

RIAA issue a benchmark report each year which provides a comprehensive look into the responsible investment industry in New Zealand and Australia. Some of the key findings in the 2022 benchmark reports were:

• Of the total professionally managed assets under management in New Zealand, approximately 49% (NZ$179bn) could be defined as responsible investment, compared to 43% (AU$1.54tn) in Australia.
• Of the survey respondents, the most common primary or secondary responsible investment approach in New Zealand was negative screening, followed by ESG integration, and corporate engagement and shareholder action. In Australia, ESG integration was the most common followed by corporate engagement and shareholder action, and negative screening.
• Of the investment managers within the responsible investment universe in New Zealand, 92% have a responsible investment policy but only 90% make the policy publicly available. This compares to 87% in Australia (a decrease from 92% in 2021), with 84% disclosed publicly (an increase from 76% in 2021).

Looking at a comparison on a global scale, the proportion of sustainable investing assets relative to total managed assets differs significantly according to the biennial Global Sustainable Investment Review 2020. Canada had the highest proportion of sustainable investing assets (62%), followed by Europe (42%), Australasia (38%), the US (33%) and Japan (24%).

Figure 1 Proportion of sustainable investing assets