New Zealand responsible funds surpass laggard funds

  • Responsible investment funds reach $183 billion
  • Engagement and shareholder action drive ESG behavior
  • Norms-based screened funds increase from $16bn to $125bn in one year

Responsible investment funds in New Zealand have overtaken traditional funds for the first time, reaching a record $183 billion in 2022, while traditional investments dropped 9% to $169 billion, a new report by the Responsible Investment Association Australasia (RIAA) has revealed.

The Responsible Investment Benchmark Report Aotearoa New Zealand 2023, researched in collaboration with EY, shows the responsible investment market now makes up more than half (52%) of the total managed funds market in New Zealand.

Dean Hegarty, Executive Manager at RIAA said, “It’s only a few years since responsible investment was seen as a niche market. But the landscape has now turned on its head – today, funds not actively engaged in responsible investment are not just lagging; they’re stranded at the starting line of a race that’s already in full swing.”

“A combination of factors such as the new External Reporting Board climate-related disclosures regime, high profile investment in renewable energy projects and a consumer focus on environmental and social wellbeing is driving greater demand for responsible and ethical investing,” Dean said.

Pip Best, Partner at EY, said, "Responsible investment in Aotearoa New Zealand continues to grow with an increasing focus on investments aligned with clients' value. As mandatory climate-related disclosures come into effect for large managed investment scheme managers and greenwashing concerns continue to rise, responsible investment practices and disclosures will gain greater significance”.

The study shows excellence in responsible investment is typically beneficial for long-term performance, with products certified by RIAA as quality, true-to-label responsible investments consistently matching or outperforming mainstream products over the medium and longer terms. In New Zealand, 64% of KiwiSaver funds are now certified by RIAA.

“Long-term performance benefits are now a key driver of responsible investment growth among investment managers, along with surging consumer demand. There is a growing acceptance that environmental, social and governance factors impact financial performance, and that proactive, targeted management of these factors reduces risk,” Dean said.

He noted that despite the longer-term positive outlook for sustainable funds, Russia’s invasion of Ukraine had produced a blip. Short term, mining and energy stocks performed more strongly across the globe in 2022 – driven by the Ukraine war and subsequent surge in energy and fossil fuel valuations. By comparison, over 2022 responsible investment products saw lower average short-term (one-year) returns.

Meanwhile, for the first time ever in New Zealand, corporate engagement, and shareholder action – also known as stewardship – has become the most popular responsible investment approach for fund managers, overtaking negative screening and ESG integration. This follows the launch of the Aotearoa New Zealand Stewardship Code in September 2022, an industry initiative that gave investors a clear framework for using their influence to steer the companies they own on critical ESG issues.

“In terms of shifting company behaviour and generating positive real-world outcomes, stewardship is one of the most effective strategies available to an investor, and the Stewardship Code provided much-needed guidance on best practices. Investors use various levers of stewardship to influence a company towards more sustainable outcomes, including voting, engaging directly with the company, filing shareholder resolutions, or advocating for policy changes,” Dean said.

Norms-based screening – the screening of investments based on international norms and conventions, such as those defined by the UN – grew almost eightfold in 2022, from $16 billion AUM in 2021 to $125 billion. This approach hasn’t always been popular among New Zealand investment managers. Changes to KiwiSaver requirements from the end of 2021 mean investment managers are now required to exclude companies involved in the production of fossil fuels and illegal weapons, spurring growth in screening based on this ‘norm’.

Additionally, among the investment managers who use this approach, 52% of their AUM is now being informed by the Task Force on Climate-related Financial Disclosures (TCFD), up from 0% the previous year. The Government’s introduction of mandatory climate disclosures for the country’s largest asset owners and listed companies is likely to have charged this growth in alignment.

In this study, RIAA changed the way it designates Responsible Investment Leaders, as a growing number of fund managers are reaching higher standards.

“This year we set a higher bar for investment managers chasing Responsible Investment Leader status,” said Dean. “This was to reflect evolving expectations of leadership and rising standards both domestically and internationally. What was once considered leading practice in responsible investment is now becoming the baseline.”

Sixteen managers placed in the top 20% and were named Responsible Investment Leaders, while another six reached the threshold on RIAA’s Responsible Investment Scorecard, earning the new Responsible Investor status.

Positive screening grew over threefold while impact investing grew 38% in 2022. But at $13 billion and $11 billion AUM respectively, capital flows to these strategies remain well below investor expectations, with recent research highlighting surging demand for positive outcomes.

RIAA’s Benchmark Report is the most comprehensive review of the responsible investment sector in Aotearoa New Zealand. The 2023 report reviewed the investment practices of 70 financial institutions.

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