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 additional factors are often captured under the banner of “responsible investment”. Responsible investment is a rapidly maturing activity, driven by growing expectations from beneficiaries and a changing interpretation of fiduciary responsibility. The Guardians of New Zealand Superannuation must invest the New Zealand Superannuation Fund in a manner that adopts best-practice portfolio management and avoids prejudice to New Zealand’s reputation as a responsible member of the world community. Our governing legislation also requires us to adopt ethical and voting policies, which are brought together by our responsible investment policy. It is a core investment belief of the Guardians that environmental, social, and governance issues can affect investment returns over the long term, and we therefore view responsible investment to be part and parcel of best-practice investment management. Like many countries around the world, New Zealand has an ageing population, with the number of retired people expected to double by 2050. The Government set up the New Zealand Superannuation Fund in 2003 to help fund future New Zealand Superannuation payments whichwould otherwise place an unfair and unsustainable burden on the next generation of taxpayers. The New Zealand Superannuation Fund has over 3000 holdings in its portfolio which are selected by external managers. Many of these investments give rise to complex social, environmental or governance concerns.
The Guardians have developed a responsible investment framework, based on sound shareholder principles, to address these often complex issues. A first step has been to build a sound governance foundation for this framework. The Guardians established a Board-level Committee to develop and oversee the implementation of the Responsible Investment Policy. Responsible investment requirements are included in the terms of reference for the internal management, investment, and communications committees. We are required to report on our progress to the New Zealand Minister of Finance and we also report publicly on our activities. As a young fund, the responsible investment framework provides the basis for our future work-stream in this area.
The main benchmark for our framework is the United Nations Principles for Responsible Investment (UN PRI). The Guardians are a founding signatory to this effort, which at only 18 months old, is now supported by more than 300 investor signatories representing over US$10 trillion in assets. The UN PRI is a potentially powerful
catalyst for influencing corporate change. The UN PRI principles focus on active ownership, including collaborative engagement and integration of environmental, social and governance factors into investment management. They also aim to improve corporate disclosure.
So how do we implement the UN PRI principles?
In practice, we are beginning to integrate responsible investment considerations into investment mandates, investment manager selection, and increasingly, we are expecting our investment managers to integrate consideration of these extra-financial factors into their own processes. Other share ownership activities include voting, engagement, and divestment. We exercise our voting rights across the portfolio to promote good corporate governance practice, and we have also joined collaborative initiatives such as the Carbon Disclosure Project to improve reporting by companies to their investors.
We are assisted in our portfolio monitoring and proxy voting activities by external agencies that highlight potential breaches of our responsible investment standards. The UN Global Compact, another UN standard, provides a benchmark against which we can monitor corporate behaviour. The Global Compact is the world’s largest global corporate-citizenship initiative, and outlines ten principles in the areas of human rights, labour, the environment, and anti-corruption.
What do we do if companies held in the New Zealand Superannuation Fund are found to breach our responsible investment standards?We have a number of options for managing these situations including engaging with companies to improve practices, and in certain circumstances, divesting or excluding a holding, although this is not a decision we take lightly. As a shareholder, the Guardians preferred option is to engage with a company, in conjunction with other investors under the auspices of the UN PRI.
During 2007, we collaborated with other UN PRI signatories through the Clearinghouse on a number of issues. These included engaging with companies to address human rights and labour practices in the global steel industry, and to improve environmental, supply chain and employee practices in the retail sector. Another collaborative initiative is encouraging UN Global Compact compliance. We are also actively involved on the UN PRI Board and working groups.
How applicable is such a framework to the Asia context?
Both the UN PRI and UN Global Compact are standards that are suitable for Asian institutional investors and companies. The UN PRI now has 79 signatories in the Asia-Pacific region, dominated by Australia, Japan and South Korea. The UN Global Compact has over 400 Asian companies as signatories with China, India, Japan and Pakistan amongst the top 20 countries by business participation.
Asia is of prime importance to global investors’ responsible investment policies. Increasing exposure to the Asian capital markets is highlighting a lack of information on environmental, social, and governance issues, and how these are managed. Lower regulatory
requirements in some countries places a greater reliance on voluntary standards and shareholders often feel the brunt of criticism when this goes wrong.
European and United States funds are increasingly focusing their engagement and voting activities on the emerging markets. However, there are a number of challenges in introducing shareholder engagement in Asia. In many cases, the approach to engagement taken in Europe or the United States doesn’t work well here. This can be due to misunderstandings over roles and authorities, a preference for face-to-face meetings rather than correspondence, or a focus purely on the negative aspects of a company in a manner that is perceived by management as offensive, and unnecessarily damages communication. It is important that Asia-Pacific based institutional investors, with local skills and knowledge, become involved in collaborative activity in their markets to make these activities more effective. There are a number of institutional investors in the region who have active responsible investment programmes. For example, the Thai Government Pension Fund applies a Corporate Governance Rating system to its Thai Equity Portfolio and is developing a set of Corporate Social Responsibility guidelines which its investment managerswill need to incorporate into investment decisions. The Japanese and Australian market has been very active at offering responsible investment funds to the retail and personal pensions sector. And the UN PRI is developing an Asia-Pacific working group for local signatories to facilitate engagement and other responsible investment activities.
Creating change through shareholder activity is not quick work, and is at its early stages between most Asian companies and investors. The New Zealand Superannuation Fund is a long-term shareholder with investment horizons beyond 2025. Asia will become an increasingly important region for us and other investors over this time. We have a firm belief that, with commitment and diligence, we can make a positive difference to corporate behaviour and to the Fund’s returns by using our influence well.
Anne-Maree O’Connor is Head of Responsible Investment for the Guardians of New Zealand Superannuation. The Government set up the New Zealand Superannuation Fund in 2003 to help fund future New Zealand Superannuation payments. For more information: www.nzsuperfund.co.nz
This article first appeared in Investment & Pensions Asia.