Investing as a responsible member of the world community

ADRIAN ORR
Last updated 13:35 11/08/2014

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OPINION: Our job is to invest public money (the NZ Super Fund) in order to smooth the increasing cost of future pension payments. In doing so, amongst other things, our legislation specifically requires us to "avoid prejudice to New Zealand's reputation as a responsible member of the world community".

Responsible investment for us means we deliberately rely on New Zealand and international law, conventions to which the NZ government is a signatory, and significant NZ Government policy positions for investment guidance.

We also deliberately rely on globally accepted corporate standards, and we take account of environmental, social, and governance (ESG) factors in our investment activities. We believe that ESG factors are material to long-term returns. These are the best collective indicators of New Zealand's desired reputation in the world community.

Our role is not to make Government policy, or domestic or global political decisions. Inevitably, there will be those who disagree. For example, some people define responsible investment differently, such as wanting to exclude companies involved in gambling and alcohol, both activities that are legal in New Zealand.

We are highly transparent in all of our activity - our responsible investment framework and decisions are published on our website. We have full time staff working with our investment professionals specifically on these issues. We have received international recognition for responsible investing. We are a founding signatory to the UN Principles of Responsible Investment, the international benchmark for this field, and our performance is rated in the top quartile of investors globally.

We invest the public's money in a highly diversified global portfolio and seek to minimize the costs of investing. We do this by investing according to broad  global sharemarket and fixed income indices. These indices give us low-cost access to thousands of companies in 45 countries.

Across such a deliberately-diversified universe there are bound to be activities that do not meet our responsible investment standards. This is why we continuously monitor and assess company activities against our required standards, and respond when we see issues.

Even then, with more than 6,000 companies in our investment portfolio, it is not surprising that from time-to-time there are headlines expressing concern about the activities of companies which are in our portfolio. The most recent of these was Superfund has deadly portfolio.

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When implementing our responsible investment framework, the key challenges for us are to:

  • establish a clear definition of Responsible Investment, consistent with our legislative mandate - that is, define what it is we care about as investors;
  • be clear about the environmental, social and governance standards we expect of companies in which we invest - that is, to draw the line;
  • decide, based on the evidence available, whether a company is in material and continuing breach of our standards; and
  • engage with a company in breach, with a view to improving their behaviour, before deciding whether to exclude or divest from the company.

If a business activity is illegal in New Zealand we will not invest in it e.g., nuclear bases. If a company breaches international conventions we will not invest in it e.g., manufacturing cluster munitions or commercial whaling. And activities where there is a clear New Zealand Government policy position may also be excluded e.g., tobacco manufacturing.

We also exclude companies whose activities have breached our responsible investment standards in a material and continuing way, and where we feel engaging with them to change their approach would be ineffective. We believe that responsible investors should engage first, and exclude or divest as a last resort. We are aware that, in some cases, engagement may be futile.  In total, 163 companies have been excluded from the Fund to date.

When looking at a specific company's actions, we also need to decide whether it is directly and intimately involved in an activity that breaches our adopted standards. This involves assessing credible evidence. We have taken this approach in relation to the environmental impact of mining companies, other companies' safety practices,  and companies operating in the occupied Palestinian territories.

In the case of the illegal Israeli settlements in Palestine, we decided some companies, such as Israeli banks and telecommunications companies, were not breaching our standards, while others, such as Elbit and Africa-Israel Investments, were, and were excluded. This required us to exercise our judgment.

These exclusions are directly tied to protecting New Zealand's reputation as a member of the world community. As a result, they will differ sometimes from other like-minded responsible investors, or from what some New Zealanders would wish. The Norwegian Fund, for example, an active UNPRI supporter and respected peer fund, does not exclude whaling activities. Likewise, Australia's Future Fund does not exclude companies involved in the manufacture of nuclear warheads. We exclude these activities because they are ruled illegal or are inconsistent with New Zealand's laws and conventions.

We will continue to take a transparent and evidence-based approach to responsible investment, taking our lead from NZ and international law, and significant policy positions of the NZ Government.

Adrian Orr is the chief executive of the Guardians of the NZ Superanuation Fund.

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