During recent years, investors have increasingly considered environmental, social, and broad governance issues in their investment decisions, over and above a narrow focus on financial return.
These factors are often captured under the banner of “responsible investment”. This investor trend has paralleled consumer trends, where products and services are increasingly selected using factors other than just price, quality, or convenience.
Responsible investment is a rapidly maturing activity, and one that the guardians are taking notice of. The guardians care about being responsible investors in part because of their governing legislation, which requires us to, among other things, avoid prejudice to New Zealand’s reputation as a responsible member of the world community.
It is also a core investment belief of the guardians that environmental, social and governance issues can affect investment returns over the long term. As the field of responsible investment matures, the guardians view it to be consistent with best-practice portfolio management. We have made rapid progress towards being a leading authority in New Zealand on the issue, and are able to stand beside and influence our peers in the global investment community.
However, many issues need to be worked through in a principled and transparent manner. We are confident we are in control of the issues. The New Zealand Superannuation Fund is a broadly diversified portfolio across global markets, encompassing at present over 3000 stock holdings valued at more than $14 billion.
The size of the fund and its diversification will continue to increase. These stock holdings are selected largely by external managers contracted by us. As such, there is a constant stream of responsible investment issues that confront the guardians, ranging from company products and practices through to the location of firms and the performance of their suppliers.
In order to best meet our legal requirement and put our investment belief into practice, the guardians have developed a global best-practice responsible investment framework to assess these issues. This framework is based on shareholder principles which guide our investment decisions.
The main benchmark for investor principles comes from the United Nations Principles for Responsible Investment. The guardians are a founding signatory to this effort, which is only 18 months old but is supported by more than 200 investor signatories representing $12 trillion in assets. The principles are a potentially powerful catalyst for influencing corporate change, and focus on active ownership and integration of environmental, social and governance factors into investment management.
The guardians also use the United Nations Global Compact, which provides a globally accepted benchmark for corporate behaviour. The compact is the world’s largest global corporate-citizenship initiative, and outlines 10 principles in the areas of human rights, labour, the environment and efforts to battle corruption.
Locally, we also look to New Zealand law as a representation of national accord on key issues and Crown actions that support international conventions. With these global and local benchmarks in place, we are using global search engines to look for potential breaches of our responsible investment framework, as well as commitments on our external investment managers to flag potential issues.
We also operate in a transparent manner, enabling the public to highlight issues, as has been done by some political parties and media. What do we do if companies held in the fund are found to breach our responsible investment standards?
We have a number of options, including asking companies to alter their behaviour and selling or excluding a holding where that cannot be done to our satisfaction. As a shareholder, the guardians’ obvious preferred option is to engage with a company, in conjunction with other investors under the auspices of the United Nations principles. We do so recognising a shareholder is in a privileged position to influence company practices by raising concerns. It is a serious and disappointing decision to relinquish our shareholder rights through selling a stock or excluding it from the portfolio.
Important to the engagement process are joint initiatives with like-minded investors and consumers. These initiatives aim to provide practical solutions to complex problems such as bribery and corruption, climate change, or operations in countries with poor human rights records.
The UN Global Compact and the Carbon Disclosure Project (to which we are a signatory) are good examples of initiatives with a global reach. Last year we collaborated with other signatories to the UN principles to engage with companies over human rights and labour practices in the global steel industry, and to address environmental, supply chain and employee practices in the retail sector.
We are also actively involved on the board supervising the principles, and with working groups. Increasingly, we are expecting our investment managers to integrate consideration of these extra-financial factors into their own processes.
As it becomes normal for companies to be confronted with questions about their corporate behaviour from investment analysts, the more seriously they will address key concerns. We also actively and diligently exercise our voting rights as a shareholder to promote good corporate governance. In some cases we have needed to sell shares of companies that breach our responsible investment standards. Last October we announced our decision to quit tobacco stocks. In 2006, the fund sold securities in four companies involved in producing anti-personnel mines. We also excluded a company involved in processing whale meat.
Creating change through shareholder activity is not quick work. But the fund is a long-term shareholder with investment horizons beyond 2025. We have a firm belief that we can make a positive difference to the fund’s returns by using our influence well. In doing so, there are many concerns ahead that we are working through in a principled and transparent manner.
I invite you to visit our website and read more about our framework and activities, which best outline the principles used to make our responsible investor decisions. www.nzsuperfund.co.nz