Kiwi fund managers embrace responsible investing, but worry it won't pay: study

Kiwi fund managers are embracing responsible investing, but worry it won't pay off. Photo / File

New Zealand fund managers woke up to the importance their customers place on investing in companies with high environmental, social and governance (ESG) standards, but worry more than their global peers that those priorities won't deliver high enough investment returns.

The second annual New Zealand Investment and Operations Outlook Survey shows 18 per cent of funds managers indicated "a lack of belief that ESG will improve long-term goals", compared with 7 per cent of their global funds managers, as surveyed by Paris-based global bank BNP Paribas.

The New Zealand survey, conducted in partnership with the Investment News NZ service, covered more than 100 market participants.

In New Zealand, concern to be seen doing the right thing on 'ESG' issues more than trebled from the inaugural survey in 2016, with 64 per cent of the 100 market participants interviewed identifying it as an area for increased focus in the year ahead, compared with just 20 per cent the year before.

Media reports highlighting the presence of cluster munitions manufacturers, tobacco companies and other 'nasties' in the index funds used by many KiwiSaver funds, especially default funds, galvanised public opinion and forced New Zealand investment fund providers to focus on the issue.

However, compared to fund managers in a range of other countries where BNP Paribas asks similar questions, New Zealand investment managers are relatively sceptical about the ability to generate adequate returns and there was a substantial difference in what Kiwi and international fund managers thought was important in this area.

New Zealand funds managers rated corporate governance by far the largest influence on generating returns among the three key ESG strands, at 64 per cent, compared with 25 per cent of international funds managers, who put far greater weight on social factors.

International funds managers put social factors at 58 per cent in terms of influence on returns, compared with 19 per cent for New Zealand managers.

The only area of alignment was on the relative significance of environmental measures. New Zealand and foreign funds managers both put environmental measures at 18 per cent for significance to returns, and rated environmental measures most difficult to implement, at 42 per cent and 41 per cent respectively, although international funds managers regarded social measures equally challenging.

Both New Zealand and international funds managers rated "lack of robust data" the biggest challenge to judging ESG achievements, at 21 per cent and 35 per cent respectively.

"The 2017 survey has confirmed ESG is now inescapably part of the mainstream investment conversation," the survey says. "It remains to be seen if future surveys reveal whether the industry sees ESG as merely another box-ticking exercise or a fully-fledged investment strategy."

Within their own operations, the survey found New Zealand funds managers were less concerned about regulatory threats now that the Financial Markets Conduct Act and its new requirements are in place, although 44 per cent said it had added to their cost of doing business.

Many were now focusing on the rapid rise of digital technology and "the double-edged sword of technologically-enhanced investing machines".

While KiwiSaver was identified by 35 per cent of those surveyed as the source for the majority of investment flows in the next 12 months, 30 per cent nominated retail investors outside of KiwiSaver, suggesting "the non-KiwiSaver retail market also looks to be in good health".