Last year the New Zealand funds management industry apparently experienced the financial equivalent of a religious conversion, switching en masse to the ‘socially responsible investment’ (SRI) persuasion.

In less than 12 months, according to the Responsible Investment Association of Australasia (RIAA), the amount of NZ funds devoted to SRI jumped from $1.6 billion to about $43 billion – an increase of almost 2,700 per cent.

Simon O’Connor, RIAA chief, said the NZ survey result was “one of the most significant global changes to happen to the [SRI] sector in 2016”.

“We have never seen a market switch so rapidly to responsible investment,” O’Connor said.

But the fund management miracle of Aotearoa was no supernatural event. Initially sparked by a public outcry over potential exposure of KiwiSaver schemes to cluster munitions manufacturers via global shares index products, the NZ funds industry enthusiastically took up the SRI faith.

In the rush to be righteous, just about all KiwiSaver providers have since cleansed their portfolios of offending stocks (typically by building or investing in new funds) – with most also extending their new-found SRI principles to non-KiwiSaver products.

Furthermore, many NZ fund providers have broadened the list of banned sectors or industries from the original (and possibly illegal) cluster munitions manufacturers to include firms involved in all armaments, tobacco or even fossil fuels. Since the SRI storm broke, NZ-based investors have sold down hundreds of millions of dollars worth of stock (and in some cases, bonds) to comply with the new set of beliefs.

But while the end result of the SRI binge may be a more PR-friendly product suite for the NZ market, most of the changes have been pushed through at the institutional level rather than via individual investor action.

Indeed, regular NZ investors could be forgiven for being confused by the multi-acronymed SRI that at one time or another (including now) has been labeled environmental, social and governance (ESG), ‘sustainable’, ‘ethical’ or just plain ‘responsible’ investing.

SRI is perhaps evolving as the dominant terminology but, in general, all of the above can almost be used interchangeably to describe an investment process that considers factors beyond the financial bottom line.

Today, those non-financial factors are usually lumped under the ESG banner, which (still somewhat confusingly), is also sometimes used to describe the entire investment process.

In fact, the real differences between responsible investing styles lie not in the overarching label but in how, and how far, managers go in implementing those ESG factors.

The most well-known SRI tactic – as demonstrated in the recent KiwiSaver saga – involves cutting out, or avoiding, certain investments deemed as off-limits – technically described as ‘negative’ or ‘exclusionary’ screening. Note that investors need to be aware, though, that cutting stocks or entire sectors may introduce new risks into their portfolios. For example, a passive fund with a significant number of stocks screened out could hardly be expected to mirror the index.  While SRI  supporters might argue that the effect will be positive, the opposite could also be true.

The RIAA lists six other SRI strategies including:

  • Positive or ‘best-in-class’ screening – or investing more in companies that have high ESG attributes;
  • Norms-based screening – cutting exposure to firms that don’t comply with international ‘best practice’ standards produced, for example, by the United Nations;
  • Sustainability-themed investing – such as ‘green’ technology;
  • Impact investing – typically private equity investments targeting a specific social goal;
  • Corporate engagement – where funds use their power as shareholders to push for change in company behaviours; and,
  • ESG integration.

Interestingly, InvestNow already offers funds that have  SRI elements within them, such as the Vanguard International Shares Select Exclusions Index Fund (that cuts out, among others, controversial weapons and tobacco stocks) and the Hunter Global Fixed Income Fund.

As well as focusing on an asset class (global bonds) that is absent from most public SRI discussions, the Hunter Fund, in particular, provides an interesting example of a multi-level approach to the task. In addition to screening out a number of sectors for NZ investors (tobacco, nuclear weapons, fossil fuels etc), the underlying manager of the Hunter fund, global giant PIMCO, also uses ESG factors in constructing the portfolio (an example of ESG integration).

InvestNow is fielding many enquiries from members looking for more SRI products – and we have some under consideration.

Clearly, though investors need to scratch well under the surface to understand how responsibly sustainable that ethical fund is, or vice versa.