16 minute read
PROFILE
from ASSET OCTOBER 2020
by ASSET
Harnessing the ‘appetite for change’
Mindful Money CEO Barry Coates has a singular focus: educating and enabling investors to invest in a more positive future for the world.
BY DANIEL SMITH
With the rising popularity of sustainable investing it is easy to forget where this kind of thinking all started. One man who hasn’t forgotten is the founder and CEO of Mindful Money, Barry Coates. He remembers where it started because he was there. His career has been a long line of projects that have used finance to champion sustainability and social good. The latest iteration may be his most powerful tool for change yet. Coates explains that: “Mindful Money is a charity we established in order to try to shift investment funds from what could be euphemistically called ‘bad stuff’ to the ‘good stuff’.” Its goal sounds relatively simple, but the wider impacts of the project represent a revolutionary change in the way investors consider the social impacts of their investments. This is a change that Coates has been pushing for almost his entire career: “These really big concepts have been around for a long time. I was involved in ethical investing in the UK in the early 1990s after what was called the Earth Summit in 1992, where the whole sustainability movement originated from. I've been waiting for it to become wildly popular, and it hasn't done so. Until now.”
Recent years have seen a change in the waters around sustainable investing that Coates puts down to the research finally catching up to what ethical investors have known for years: “When the research came in it showed that it is really important to consider systemic risk, which is not priced accurately by the market. This kind of approach said that, ‘well, actually, if a company has bad environmental performance, that's a financial risk as well as an environmental risk’.”
Equating social and environmental risks with financial risks has now entered the mainstream. Coates points to the European Union now having regulations on sustainable investing, the New Zealand government has announced that managed funds over $1 billion must
declare climate risk reporting, and the RIAA and Mindful Money 2019 report found that eight out of 10 New Zealanders expect their KiwiSaver or other investments to be invested responsibly and ethically.
But Coates warns: “There’s a big difference between people saying they are doing it and people actually doing it. Mindful Money is one of the ways that the public can sort out the wheat from the chaff.” This chaff-sorting is done by bypassing the financial rhetoric that keeps a lot of retail investors from engaging with their funds, Coates tells me that all of the complicated terminology can leave retail investors feeling disempowered. “What we're trying to do is we're trying to provide information that gives back the empowerment to individual investors. To be able to say to them that where you put your money has consequences.”
If the first step is financial literacy the second step is research. Coates is realistic with the amount of time that an average investor can afford to spend analysing the ins and outs of their funds. To aid this, the Mindful Money website has been developed as a free-to-use interface where investors can access all the information they need at the click of a button. “It shows people what is in the portfolios of all the funds, categorised by the issues that people choose to avoid. Say for example, they want to avoid funds with fossil fuels, tobacco, alcohol, gambling and pornography. We categorise investments in every one of 670 funds registered in New Zealand alongside these parameters.”
The aim of Mindful Money is not to lambast investors, but to present what Coates calls “radical transparency”. The transparency is radical because the information shown is stuff that a lot of fund managers may not be revealing to investors. “As far as we know, there is no initiative around the world that does what we do. And we do it for free. If you have transparency then for most people, what they want to do is avoid the really bad stuff.” This approach reflects Coates’ belief that most people do not want to be investing in “bad stuff” and once they are shown the impact their investments are having in the real world, we will see a real change.
The desire to enact social change has deep roots in Coates. After graduating from university he worked for Volunteer Service Abroad in the Pacific and ended up working for the Samoan government, becoming the country’s economic development coordinator from 19781981. Of his time in Samoa Coates says: “It was a really wonderful thing to do in a fabulous country. I was the only white man playing rugby, and I played fullback. So I'm lucky to be alive.”
After returning from Samoa and working in the financial sector, Coates went to Yale to complete a master’s degree in management. After this period of study his work in the world of sustainability really kicked off. He was a member of the World Wildlife Fund delegation to 1992’s Earth Summit, what many activists see as the modern call to action over many of the issues we are facing today. After a long stint at Fairtrade Australia and New Zealand, Coates became the executive director of Oxfam for ten years. After this he worked with the University of Auckland in developing their sustainability programme.
Coates says that after being in a “position of wanting to change politics from the outside for many years, I decided I would try to change things from inside”. He became a member of the Green Party from 2016-2017. Of the time Coates says that: “When I didn't get into politics for the last election, I wasn’t really disappointed. Politics is a tough game, and it gave me time to do the Mindful Money initiative which I'm really enjoying. I think it's all about knowing where you can make a difference.”
Making a difference is still at the forefront of Coates’ mission. When asked his proudest career moment he tells me that “the issues of climate finance, and the way that climate change is kind of an issue of equity as much as just environmental sustainability. I’m quite proud that I played a role in getting that message out there.”
You would think that an entire career trying to get people to act on climate change would make you a bit cynical. Coates is anything but. He says that regarding the precarious future faced by our generation he’s “not pessimistic, just nervous”. But these nerves haven’t dampened his spirit, with a laugh he tells me, “there’s got to be hope. I just read this book by Jonathon Porritt called Hope in Hell. It’s given me a degree of optimism.” Coates is positive that out there in the wider community there is a “real appetite for change”, he hopes that Mindful Money will help investors connect that appetite to their portfolios and start investing for a more positive future for the world. A
Clean and green: how clients can access environmentally-friendly investments
Investor trends are changing, with environmentally sustainable choices increasingly popular. Which product providers are meeting demand, and do green choices impact returns?
In May, mining giant Rio Tinto blasted a 46,000-year-old Aboriginal site in Juukan Gorge, Western Australia, in search of iron ore. Despite pleas to preserve the sacred and archaeologically-significant site, the miner proceeded to destroy the cave. Precious items linked to Aboriginal heritage, including artefacts and objects documenting early human history, were lost forever.
Following the blast, public outrage grew. Pressure mounted on shareholders to hold Rio Tinto executives accountable. After months of scrutiny, the mining company’s long-standing chief executive Jean-Sébastien Dominique Francois Jacques was forced to resign in September, along with executives Chris Salisbury and Simone Niven.
The ousting of Rio Tinto’s chief executive was heralded by environmental, social and governance (ESG) proponents as a watershed moment for the ethical investment movement. ESG had claimed a major scalp, and with it, shockwaves rippled through corporate boardrooms. As the scandal underlined, environmental matters are more important than ever in 2020.
In line with global trends, Kiwis are becoming increasingly environmentallyconscious. According to the Responsible Investment Association of Australasia’s latest annual report, released in September, about 94% of New Zealand
BY DANIEL DUNKLEY
investors have a commitment to some form of ethical or responsible investment vehicle.
According to RIAA, New Zealanders have shifted from simply screening out environmental and social harms to considering broader active ESG factors when investing, be it in KiwiSaver or into non-pension investment vehicles.
RIAA says there has been a significant increase in responsible investment activity, including all ESG-related funds. The responsible investment market in New Zealand was worth $153.5 billion in 2019, representing over half of professionally managed funds, according to the association.
Impact investing grew thirteen-fold to $4.74 billion in 2019, with green, social and sustainability bonds accounting for 88% of those products. Green bonds enable capital-raising for projects with environmental benefits. The bonds are typically issued by corporates, banks or governmental bodies, and pay interest to investors, backed by the assets of the issuer.
A host of Kiwi Impact funds launched over the past year, including the Purpose Capital Impact Fund, which raised more than $20 million to invest in regenerative agriculture on dairy farms, green housing, and social improvement through horticulture projects.
The PCIF fund was backed by The Tindall Foundation, K1W1, WEL Energy Trust, BayTrust and TECT. However, the vehicle is out of reach for most ordinary investors, with a minimum contribution of $100,000.
There are a growing number of investment options with environmental features across KiwiSaver, managed funds, and ETFs. Product providers are expanding their range of green investment options to meet growing demand.
Which providers offer climate-friendly investment options? How will the green investment market evolve? Do environmentally-focused investments sacrifice returns? And what are the challenges for advisers broaching the topic?
RIAA’s Simon O’Connor says the sustainable investment market is “maturing” in New Zealand, driven by an increased regulatory focus, and official bodies such as the Sustainable Finance Forum.
He says environmental and social factors are increasingly underpinning investment decisions and investor pressure across Australasia.
O’Connor says ESG is going beyond exclusions and placing active scrutiny on companies and their behaviour: “There’s much more focus on the impact responsible investors can have. Broadly, we’re seeing more engagement and shareholder action, going beyond negative screens, and starting to influence corporate behaviour.”
Which funds are available?
Most sustainable and green investment initiatives are part of broader ESG funds. More funds than ever are offering an environmental and sustainability component to their investment vehicles, as more Kiwis ask for eco-friendly and non-harmful savings options.
Not-for-profit KiwiSaver provider Simplicity has long been outspoken about environmental issues. The firm excludes investments in fossil fuels, and rules out companies that contravene the principles of the UN Global Compact under environmental issues, as well as human rights, labour and anti-corruption.
KiwiSaver provider Generate is another investment manager to offer
ESG investing options. The firm, which operates unit trusts alongside pension funds, takes an ESG approach across its range of products.
Generate conducts ESG due diligence on potential investments. Its strategy: “Promotes consideration of investments that are expected to have a positive realworld impact,” and prefers investments “that have positive findings regarding ESG issues where all other factors are equal.”
Generate conducts due diligence on the “quality and functioning of the natural environment and natural systems”, including pollution, resource depletion, use of toxic chemicals, and the endangerment of animal species.
Booster, meanwhile, offers socially responsible investment options on KiwiSaver and non-KiwiSaver funds, with moderate, balanced and growth vehicles. The funds feature ESG-informed fixedincome allocations.
Nic Craven, senior manager – research at Booster, said the company offers standard exclusions but looks at all harmful effects of a company’s operations. For example, it rules out Z Energy, a producer and distributor of fossil fuel products.
Craven said Booster’s approach was “evolving”, and from last year, ESG performance had begun to inform its non-SRI investment approach: “We source data on ESG and compare companies to their peers,” Craven said.
According to Craven, millennials drive a big portion of the company’s ESG market. “We also see a lot of women in their late 30s and 40s. That makes sense because they are mums, socially-aware and thinking about the future of the planet.”
Craven doubts pure environmental impact funds will become a mainstream feature of the NZ investment space any time soon, given the small size of our domestic market.
Mint Asset Management is another investment manager that incorporates ESG throughout its product range. The firm has a New Zealand SRI Equity Fund, offering Kiwi institutional investors the chance to back environmentally-friendly and socially-conscious domestic names.
David Boyle, head of sales and marketing at the firm, says Mint scores companies based on a range of criteria, with environmental, social and governance among the main considerations. “We think ESG principles will become increasingly important, and that’s why ESG is a big part of our scoring system.”
Boyle said the New Zealand-only SRI fund would be offered to retail investors by the end of the year.
“Clients are looking for investments that reflect their standards and values, and we’re seeing more demand from investors,” Boyle added.
Meanwhile, Pathfinder’s CareSaver ethical KiwiSaver fund also boasts environmentally-friendly credentials.
CareSaver invests in companies on ESG metrics, avoiding industries that cause “environmental harm” and focusing on those “that have a positive impact on our planet”. It says it engages with companies to influence corporate behaviour.
Investment heavyweight Russell Investments has developed environmental and wider ESG initiatives over decades. For retail investors, the firm offers a Low Carbon Global Shares Fund and a Low Carbon Australian Shares Fund, which are weighted towards companies with strong green credentials. The firm also offers an Australian responsible investment ETF.
Alister Van Der Maas, managing director for Russell in New Zealand, says demand for environmental and other ESG funds has grown over the past three to four years, and adds the firm is developing more products with an environmental component.
The environmental aspects of ESG were “getting a lot more attention across the client base”, he said.
Van Der Maas said retail and institutional investors were keener than ever to access environmental funds, but as each investor had different needs and demands, these specific requirements meant it was difficult to find products that were the right match.
“Everyone has a different understanding; therefore, at product level, everyone wants a different product,” he said.
He added it was difficult for product providers to design completely-bespoke environmental products to suit each investors’ specific requirements, unless they were very large institutional investors with separate custody relationships.
At retail level, he said different individual preferences made it tough for advisers to find the right fit for their clients. He said it was a challenging area for advisers.
“An adviser might be looking at this issue, thinking what do I do? It’s hard, even for institutional investors. Institutional investors are still grappling with what is the right thing to do, and what they need to do. Most people are trying hard, and that’s a step in the right direction. For advisers, having the conversation with clients is an important step.”
Van Der Maas says advisers should hold ESG conversations with clients at the discovery process. “The [adviser] research process should incorporate responsible investing,” he says. “Understand what your client is thinking about responsible investing. What does the issue look like for them? Can you find a fund that meets their objectives?”
He expects broader engagement from Kiwi fund managers with NZX companies on environmental topics in the coming years.
“There could be more shareholder engagement on this,” Van Der Maas said. “The likes of NZ Super, ACC, and the larger asset managers are becoming more active. I would think they are going to become more active as regulation and political pressure come to bear.”
“Most people are trying hard, and that’s a step in the right direction. For advisers, having the conversation with clients is an important step.” _ Alister Van Der Maas
For all of their social benefits, do environmental funds sacrifice performance? What does the latest evidence suggest?
The RIAA report suggests environmentally-focused funds performed strongly through the Covid financial crisis. While a growing body of evidence indicates environmental, social and governance funds outperform benchmarks in short and long-term performance.
For the first time in New Zealand, responsible investment manager financial performance has been reported for one, three, five and ten-year time horizons.
RIAA compared NZ responsible investment fund averages against Morningstar’s multi-sector KiwiSaver index, with the results showing responsible strategies matched or outperformed the benchmark on all but the ten-year horizon.
RIAA’S O’Connor expects more dedicated environmental, climate change, and sustainability fund offerings to emerge in line with consumer demand. He believes there will be more positive, active environmental funds in the years to come.
“We’re very early in that journey,” O’Connor says. “And that will be the next evolution in responsible investing.”
He adds: “Mirroring global trends, we will see more positively-screened sustainable funds start to emerge. Investors may get more passive index funds with environmental themes. Funds that are not just about avoiding harm but delivering positive change.”
RIAA also expects growth in environmental fixed-income products. Green bonds are already popular in New Zealand according to the association’s annual report.
Regional banking giants have hopped on the green investment bandwagon. In August, ANZ launched an A$1.25 billion bond linked to the United Nations’ Sustainable Development Goals, the first bank-issued bond of its kind in Australia. The bank launched its first green bond in June 2015.
Westpac has also issued green bonds and climate bonds. In June last year, the lender raised A$860 million from European investors to support “climate change solutions”, attracting more than 1 billion in interest from investors.
Green bonds are expected to grow in prevalence across the region, opening up more investment opportunities to KiwiSaver managers and asset managers across the country.
“Fund managers might allocate 1015% of their fixed income allocation to green bonds, giving them exposure to thematically green assets,” O’Connor said. “That will help mainstream asset managers with their fixed income allocation and allow KiwiSaver managers to incorporate more green investments into their portfolios.” A
