Generate competitive returns while supporting sustainable solutions
Responsible Investment is a way to generate competitive returns and find sustainable solutions to many of the challenges we face in the 21st century. Though the options available in New Zealand today are limited, they are a solid starting point and with investor awareness and demand for Responsible Investments increasing all the time the market can only continue to grow.
There are many reasons people choose to invest responsibly. Following are four of the most commonly cited reasons.
- environment and climate change
holding businesses accountable
- avoiding another GFC
- ethical business practices
The environment and climate change
If you care about the environment and climate change, responsible investment is a powerful way to make a difference.
Preserving the natural environment and concerns about climate change are the most commonly cited reasons for people wanting to know their investments are working to improve the world for themselves and for future generations.
Responsible Investment gives you the chance to do what the governments of the world continue to grapple with. It is a way to ensure your money is directed toward companies that are making a positive impact on the environment and on society and away from those that cause harm.
The desire for environmental sustainability and a green future is now irrefutably mainstream. Savvy investors are already factoring the consequences of policies like carbon trading into their assessment of a company’s future value. And many of the world’s best business managers are already prepared for a low-carbon future.
By channelling your investment dollar towards funds and companies that have positive climate change and environmental management practices, you are directly encouraging positive corporate behaviour. Of course, climate change is not the only environmental challenge confronting us in the 21st century.
Water scarcity is a growing problem that affects governments, businesses and individuals in many parts of the world. The United Nations has forecast that by 2030 almost half of the world population will live in areas facing water stress or water scarcity and one fifth of the world’s population will not have access to adequate drinking water. Some companies whose productivity depends on access to significant water supplies (agriculture, food and beverage, electricity production, manufacturing) are already working to understand the exposure to risks associated with water scarcity.
According to World Wildlife Fund (WWF) the natural resources used by humanity have increased to 125% of global carrying capacity and could rise to 170% by 2040. When human activity is combined with population growth and the rise of consumerism, it is clear that access to natural resources such as energy, timber, land, food and water will become critical to corporate productivity and investment decisions in the future.
Hold Companies Accountable - Values and ethics are back in the limelight
Responsible investors can demand greater accountability from companies on important ethical and governance issues and their environmental and social practices.
The Global Financial Crisis (GFC) has had a devastating effect on individuals and communities worldwide, and has led investors to demand greater accountability from the companies they invest in. By adopting a responsible investment strategy you can make your voice heard on corporate responsibility issues that concern you.
Public anger at the excesses of banks and large corporations is evolving into a widespread public belief that companies and financial markets need to rebuild with an improved regulatory framework, improved ethics and governance standards, and address the short-term preoccupations which led to the Global Financial Crisis.
Addressing the investment risks associated with environmental, social, governance and ethical issues is now seen as being crucial to achieving an economic recovery that is about real and enduring change.
As a result there will be more pressure placed on companies to explain how they are dealing with key social and environmental challenges.
Responsible investors can ensure their voices are heard by investing in companies already systematically addressing issues such as the Global Financial Crisis.
GFC clean up
While New Zealand and Australia escaped the harshest consequences of the sub-prime crisis and global financial meltdown, the rest of the world didn’t. The loss of value of financial assets worldwide reached over US$50 trillion; unemployment increased by as much as 20 million; and about 53 million more people fell into poverty in the developing world.
At its heart, the GFC was about the way financial institutions dealt with high-risk, socially vulnerable people through “predatory lending”. In 2003 just 6% of all mortgage-backed securities were based on loans to people who had impaired credit ratings. By 2006, in just three years, that figure had jumped to 40%, or US$625 billion.
The collapse of the US sub-prime market, however, was merely a symptom of larger systemic problems such as an increasing appetite for risk, short-term remuneration incentives, excessive executive pay, the growing ability of financial institutions to distribute risk through the complex use of derivatives and securitisation and the lack of transparency about how these products worked.
As a consequence, individual and institutional investors around the world are now paying much closer attention to how the companies they invest in are governed.
The risks associated with practices like predatory lending and excessive executive pay have been built into Responsible Investment analysis for many decades, long before these issues reached a crescendo. That’s why Responsible Investment is often regarded as one of the most prudent and conservative of all investment styles.
The rise of corporate research responsibility has been driven by many factors, but none so powerful as the wake up calls experienced by companies who have been exposed for their harmful activities. 20 years ago the New York Times revealed the exploitative labour practices of Nike’s suppliers in Indonesia leading to a prolonged and high-profile consumer and activist backlash.
We’ve seen growing public pressure on pharmaceutical companies to provide cheaper drugs to poorer nations. Witness the extraordinary events of the Pretoria Drug Trials in 2001 – when five of the largest pharmaceutical companies banded together to defend their patents on AIDS drugs. The result was reputational loss on a grand scale and big wins for AIDS treatment and for Africa.
With the rise in obesity, diabetes and heart disease, food manufacturing companies are now rapidly becoming the target of litigation and regulation to force improvements in the fat, sodium and sugar contained in day to day food items.
In the future, companies assessed as poor performers in the “corporate responsibility” stakes may pay a risk premium on debt, increasing the cost of their servicing requirements or even need to heavily discount share offerings to attract investors. They will be shares to avoid whereas those with strong corporate responsibility policies and practices will be deemed to be lower-risk with better prospects for future performance.
Elements of the information appearing on this page were kindly provided by the Responsible Investment Association of Australasia.