Home ListingNovember 20, 2015

Divestment Doesn't Work, Says NZ Super

But the sovereign wealth fund argues that many other ways of practically addressing environmental, social, and governance issues within a portfolio do work.

Reported by Featured Author

Exclusion and divestment do not boost investment performance, according to a white paper from the New Zealand Superannuation fund (NZ Super).

In the paper, the NZ$29.8 billion (US$19.4 billion) sovereign wealth fund outlined its approach to environmental, social, and governance (ESG) investing—and how that approach has proven financially beneficial.

The only cases of responsible investing where there was not significant outperformance, the fund found, were in socially responsible funds. These typically exclude whole sectors such as tobacco or armaments for ethical reasons, rather than reasons of risk and return.

“Overall, there is strong evidence that companies that do well on ESG metrics tend to perform better.”According to the paper, these funds neither outperformed nor underperformed the market on average, suggesting that divestment on its own is not sufficient for boosting performance.

In contrast, factors such as governance, employee relations, safety, and environmental risks are “material to the long-term successful performance of any business.” By identifying and managing these factors, NZ Super said it has been able to “find new opportunities, steer our capital towards more attractive areas, and manage long-term investment risks.”

“We believe that responsible investing is good for the portfolio,” wrote CIO Matt Whineray. “It can be a source of opportunities and a way to control risk.”

The paper listed several ways the fund’s performance has improved through good ESG management, including more consumer support of businesses in which NZ Super invests, early detection of risks that could otherwise be overlooked, and investing in “more dynamic, innovative, and productive” companies.

Additionally, NZ Super said investing early in the life cycle of assets with ESG drivers creates more potential for returns, while also making better use of the fund’s long time horizon.

“Overall, there is strong evidence that companies that do well on ESG metrics tend to perform better,” NZ Super reported, citing lower costs of equity and borrowing, higher profitability, and higher stock prices.

NZ Super also highlighted that, within an ESG-driven process, it was an active and engaged asset owner, maintained a robust analytical and decision process, and benchmarked the fund’s performance against its own responsible investing standards.

“By identifying and managing these ESG factors, we are more confident in our ability to allocate capital toward more attractive areas, and better manage long-term investment risk,” the paper concluded.

Institutional investors are split on the benefits (or otherwise) of divestment. Dutch pension PFZW last week outlined plans to overhaul its investment portfolio, dumping carbon-producing companies, and the University of California has taken a similar approach to fossil fuels. In the UK, the London Pension Fund Authority recently rejected calls for it to exit such assets.