Russell Investments on responsible investing
Q&A with Noah Schiltknecht, Director, NZ Institutional, Russell Investments
What is responsible investing?
Responsible investing is a term for a broad set of investment strategies, and the definition may vary significantly - depending on who you ask. At Russell Investments, we consider responsible investing to be a long-term investment approach that accounts for a wide range of environmental, social and governance (ESG) factors.
What are the current trends you see in this area?
Over the last couple of years, we have seen a quasi-standard arise in terms of exclusions that apply to portfolios of shares offered to New Zealand investors. Producers of tobacco and controversial weapons like cluster munition or nuclear weapons are generally excluded from flagship investment funds offered in the New Zealand market. Some of these exclusions are also standard in other parts of the world, for example in some European countries.
Numerous institutional investors around the world have also started to address the risk of climate change by adopting strategies that reduce the carbon footprint of their investment portfolios. More broadly, significant effort is also being put into understanding how ESG factors affect security prices across the investment industry.
What are the main challenges with responsible investing?
One of the most difficult parts of responsible investing is to find a consensus among stakeholders on what exactly responsible investing should comprise. A bit like in politics, people often disagree about what the priorities are and how they should be addressed. Furthermore, some people tend to have very strong beliefs and may struggle to accept a solution that does not fit their personal views. Often when people invest collectively, be it through a managed fund or a superannuation scheme, this creates considerable challenges for investment decision makers.
Another important challenge is the impact of the interconnected and globalised world on responsible investing. While it may seem relatively straightforward to exclude from a portfolio a producer of nuclear weapons, for example, it is quite difficult to come up with a definition that is unambiguous and fair. As an example, are the companies that provide components to the main producer of nuclear weapons also considered producers? What about the construction company that may have benefitted financially from building the silo for nuclear missiles? And should we also exclude the bank that lent money to the nuclear weapons producer? How should we treat government debt securities, as this is typically the main source of funding for nuclear weapons? Questions like these will have to be answered, and this will, in all likelihood, automatically lead to compromises and – at least in the eyes of some – somewhat ambiguous solutions.
How do these challenges impact UniSaver?
The Directors of UniSaver believe that responsible investment can reduce risk and impact returns positively. As a result, UniSaver has adopted a responsible investment policy that is documented in the Statement of Investment Policy and Objectives (SIPO).
The main challenge for the Directors of UniSaver is to weigh every change they make in relation to responsible investing against their fiduciary responsibility. UniSaver is a retirement savings scheme, and as such, the Directors have to ensure members’ best financial interests are considered. While there is some empirical evidence that excluding certain sectors may add value, there are also studies that are less supportive from a return perspective. All else equal, the greater the number of securities which are excluded from a portfolio, the greater the risk of a significantly different outcome in a portfolio compared to the original opportunity set.At Russell Investments, we therefore generally support considered and gradual changes in this regard, as and when more evidence and sophisticated strategies become available.
However, this is not the only challenge that the Directors of the scheme must consider. They also have to find a solution that represents the views and beliefs of the membership, or at least the views and beliefs of a minority that is significant enough to justify a financially viable, separate investment option. As indicated above, this could be very difficult given the diverse membership of the scheme.
How does Russell Investments incorporate responsible investing into its investment process?
We incorporate responsible investing practices in our manager evaluation process, portfolio management, advisory services and portfolio implementation. Our practices are informed by a series of beliefs around responsible investing, which are detailed in a recent summary document titled Best Practices for Responsible Investing.
Our investment solutions are also influenced by the responsible investment policies adopted by our clients. UniSaver’s policy is detailed in the SIPO and guides us in how we manage the scheme’s assets.
Is excluding stocks from a portfolio the only viable solution to effect change for investors?
No, not at all. In our view, engagement with companies is a very important part of responsible investing. The wonderful thing about owning shares is that it gives investors a seat at the table. In particular, it provides the right to vote on the appointment of directors and resolutions at annual shareholder meetings. This so-called proxy voting process is very important and has the potential to effect more change than an exclusion policy. Convincing someone to act more responsibly may very well have a greater impact than simply walking away from the conversation, so to speak.
Does Russell Investments undertake proxy voting on behalf of UniSaver?
Yes, we voted on over 90 thousand proposals in 2017, and in about 13% of cases, our votes were against management. We regularly update our investors and the general public about our efforts in our annual engagement report, which is available on our website.
What is the future of responsible investing?
It is likely that responsible investing is here to stay and will become routine over the next few years. The number of solutions and initiatives in this area will also continue to evolve and improve.
At Russell Investments, our current research agenda includes investigating water intensity metrics, the impact of transport-related greenhouse gas emissions and a set of proprietary ESG scores that are informed by the financially material sustainability metrics identified by the Sustainability Accounting Standards Board (SASB), and the subcomponents of ESG associated with the UN Sustainable Development Goals.
As new strategies evolve and more research and evidence become available, we will continue the discussion with the Directors of UniSaver and support the scheme as it considers its next steps in this area.
The information contained in this publication was prepared by Russell Investment Group Limited (RIG). RIG is the investment manager for UniSaver. This publication has been compiled from sources considered to be reliable, but is not guaranteed. This publication provides general information only and should not be relied upon in making an investment decision. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation and needs. All investments are subject to risks. Past performance is not a reliable indicator of future performance.
Copyright © 2019 Russell Investments. All rights reserved. This information contained on this publication is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments.
For a more formal analysis of exclusions, request a copy of our research paper Overview of negative screening and performance consequences