Kiwi Wealth takes aim at blunt sector exclusions that undermine value
Kiwi Wealth has launched a broadside at its rivals over their use of blanket sector exclusions when trying to meet growing consumer demand for responsible investment, saying it falls short of international best practice and undermines the value of an investment.
The funds management arm of state-owned Kiwibank issued the warning in a white paper released at the Responsible Investment Association of Australasia conference in Auckland today, which showed responsible investment climbed 67% to $131.3 billion. Of that, 81% of all growth was through negative screening, primarily in KiwiSaver funds, where entire sectors were excluded to ensure undesirable stocks don't end up in a portfolio.
"Sector exclusions are a blunt instrument," Kiwi Wealth chief investment officer Simon O'Grady said in a statement. "Not only are sector exclusions inflexible and limited in building investor value, it's an approach that doesn't necessarily effect any real or positive change in the behaviour of companies within excluded sectors."
Mr O'Grady has just returned from the JP Morgan Asset Management 2017 ESG Investing Roundtable conference in New York, where he outlined New Zealand's recent experience with a surge in demand for responsible investment propositions after it was found a number of passive funds used by local providers inadvertently invested in cluster munitions and big tobacco.
One of the major issues global chief investment officers are grappling with is how to pursue responsible investment practices using environmental, social and governance standards without falling short of a fiduciary duty to a client to maximise returns.
"Responsible investment isn't just about reflecting personal values," O'Grady said. "It's about managing risk to long-term shareholder and stakeholder value."
Kiwi Wealth responded to the demand for responsible investing by working with JP Morgan Asset Management to develop the responsible enhanced index portfolio, which uses ESG principles to actively manage investments, avoiding certain sectors while overlaying those guidelines to an individual stock level.
"In our view, not incorporating those ESG considerations in stock selection is out of line with best practice, and may overlook our fiduciary duty to act in the best interests of clients," Mr O'Grady said.
Another benefit is that the locally domiciled fund doesn't lose tax credits such as the Australian-domiciled unit trusts, which the paper says adds another 0.2% to an investor's annual costs on top of headline fees.
Kiwi Wealth predicts other fund managers will be forced to follow suit, with the market likely to "move away from the single-minded focus on exclusions toward innovative and pragmatic policies that incorporate a range of ESG strategies and embed responsible investment at the security selection level," the paper said.
In a foreword to his paper, RIAA chief executive Simon O'Connor welcomed Kiwi Wealth's contribution saying "the bar is rising and merely a cursory consideration of responsible investment is no longer sufficient to properly manage the savings of our clients."