New Zealand Super hails sea change in ESG observance

Private equity has seen the most change and it has become very common for asset owners to integrate ESG factors into their selection process, says NZ Super's Anne-Maree O'Connor
New Zealand Super hails sea change in ESG observance

The head of New Zealand Super’s responsible investing strategy says great strides have been made in getting companies to recognise environmental, social and governance (ESG) issues.

But while progress has been made and pressure brought to bear on corporates and fund managers, there remain strong pockets of resistance.

Anne-Maree O’Connor, head of responsible investment for the $20 billion NZ Superannuation Fund says years of work on standardising non-financial reporting is “coming to a head now”.

She observed that global investors have now integrated ESG factors when it comes to investments at home and are now looking to their overseas holdings, including emerging markets.

“Emerging markets represent fewer investment holdings but (asset owners) want to integrate across the portfolio and across asset classes” said O’Connor.

Earlier this month, NZ Super and other sovereign financial institutions in the country, appointed BMO Global Asset Management to oversee its responsible investment engagement in public equities globally, outside New Zealand.

O’Connor observed that in public equities investing, NZ Super is often a minority investor and has had to work with other shareholders to promote change within portfolio companies. In New Zealand, the superannuation fund is a large enough investor to have influence. Overseas the super fund sees value in engaging another asset manager to help coordinate this engagement.

O’Connor cited BMO’s track record in taking the local context into account and collaborating with other local and regional asset managers.

But it was in private equity that she saw most change. In contrast to public equity, NZ Super takes larger stakes when it comes to PE investing.

O’Connor said that it has become “very common for asset owners – especially PRI signatories – to integrate ESG factors into the selection process” when it comes to PE investments, referring to the United Nations’ principles for responsible investment.

All of the managers that NZ Super allocates to “manage to integrate our policies into what they do” said O’Connor – whether they are large or small. She cited KKR and Actis – an emerging markets-focused manager which was spun out of the UK government’s development arm CDC a decade ago – as examples of firms at the leading edge.

She sees the same thing happening across private markets – particularly in real estate and infrastructure. “Any manager with global clients investing in emerging markets will develop an ESG integration strategy” she said.

Asset managers are also being encouraged to focus more on ESG factors by asset owners. Stewardship codes, already having a significant impact in Japan, are expected to be released for consultation later this year in countries ranging from Korea to Singapore.

These new codes are expected to encourage investment managers to incorporate the ESG information disclosed by companies into their investment analysis.

In turn, the amount of information which listed companies are required to disclose is increasing. Hong Kong’s stock exchange, for example, published a consultation paper on July 17 on proposals to amend its ESG reporting guidelines.

O’Connor acknowledged that even with increased disclosure, research organisations “struggle with gaps in information disclosed”.

Those gaps were highlighted by a recent study from Robeco in collaboration with Hong Kong University of Science and Technology’s business school. The study highlighted that markets outside Asia (but not within) already price good corporate governance into share valuations. Relative to social and environmental factors, governance was much more important in Asia, said the report, in the selection of stocks which would deliver higher risk-adjusted returns.

Still, limited data precluded analysis of the difference between countries in Asia. Robeco senior investment specialist, Ronnie Lim, said that “at this moment, only Australia, Japan and Korea have enough data to continue further country analysis and comparison…more data and research is needed in order to draw conclusions that are statistically significant”.

Local guidelines are required, said O’Connor. To date, few asset owners based in the region have signed up to the global UNPRI standards.

For example, there are more PRI asset owner signatories in New Zealand (8) than there are in Japan (6) and Korea (1). Asia is conspicuous in having so few PRI signatories.

Still, New Zealand – with a further nine investment management firms signed up – lags Australia, which has made an impressive commitment to ESG amongst its investing institutions. It has 33 asset owners and 73 investment management firms as PRI signatories.

The higher ratio of asset owners to investment manager signatories in New Zealand suggests, nonetheless, that there is a strong culture of integrating ESG factors into investment decision making.

Neither is the US particularly enlightened when it comes to signing up to the global compact. The US is home to only 22 asset owner signatories and 174 investment management firms Sources remark that many asset owners in the US are still wary of integrating ESG factors into investment decision-making.

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