Speeches and presentations
Guardians Chair Catherine Drayton's introductory remarks on responsible investment to the Foreign Affairs Select Committee
POSTED ON: 12 August 2021
Tena koutou, tena koutou, tena koutou katoa.
We are pleased to have the opportunity today to present on our approach to Responsible Investment. With me today are Matt Whineray, our CEO, and Anne-Maree O’Connor, Head of Responsible Investment.
I have a prepared statement that covers the operation of our responsible investment strategy and propose to quickly go through that before moving to questions, if that is ok chair?
As you are aware: the Fund was set up to partially pre-fund future rising costs of superannuation.
From net contributions after New Zealand tax has been deducted of approximately $10.7 billion, the Fund is now worth approximately $58 billion having returned 10.54 percent per annum since its inception in 2003. This equates to approximately $39 billion of additional crown wealth added over the cost of borrowing during that time.
The Guardians has a long-standing commitment to Responsible Investment stemming from our belief that environmental, social and governance considerations, including climate change, are fundamental to long-term risk and return.
These “ESG” considerations are integrated into all aspects of the Fund’s investment activities via our publicly-available Responsible Investment Framework.
We are a founding signatory of the United Nations-backed Principles for Responsible Investment – the leading global network for investors to:
- demonstrate their commitment to responsible investment;
- collaborate and learn with their peers about the financial and investment implications of ESG issues; and
- incorporate these factors into their investment decision making and ownership practices.
Our approach has been recognised internationally and I am proud of our Responsible Investment team, which is led by a globally renowned expert.
A key aspect of the accountability built into our legislation is a requirement that the Minister of Finance appoints an independent reviewer every five years to undertake a performance review of the Guardians and the Fund.
We have had four of these reviews completed so far. Most recently, in 2019 the Government appointed global investment consultancy Willis Towers Watson to undertake this review. Willis Towers Watson:
- rated the Guardians’ responsible investment approach as “excellent”
- noted our transparency; and
- said that our approach to responsible investment integration, engagement and exclusions was aligned with best practice standards.
Our approach was also examined recently by the High Court which supported the way in which we gave effect to the statutory mandate by way of our responsible investment policies and practice.
That’s not to say issues will never arise in a $59 billion portfolio that invests in thousands of stocks to get broad exposure to global markets and wide diversification.
We are looking to meet the different parts of our mandate through getting broad diversified global equity exposure at low cost, in line with globally accepted principles of best practice portfolio management, while being careful about the application of our responsible investment framework. This involves proactively thinking about particular categories of exclusion, and responding to issues arising with individual companies.
Exclusions can occur in three different keti or baskets. The baskets are country, product and corporate practices. Decisions surrounding these baskets become progressively more complex and more judgemental.
Countries: we exclude sovereign bonds of specific countries if they are included on New Zealand’s sanctions list. The decision to exclude is made by the Board of the Guardians.
Products: decisions on the exclusion of companies producing certain products are guided by New Zealand or national law, international conventions that New Zealand has signed, significant policy positions of the New Zealand Government and other factors as set out in the reading material we have provided to you.
Corporate practices: when issues with individual companies arise with respect to their corporate behaviours or practices, we take a considered and structured approach to identifying where there has been a material breach of our RI standards, in particular in one of our focus areas, such as human rights. We then assess the best way forward in responding to the situation under our RI framework.
It is important to gain an understanding of the issues involved and, given the complexity of the issues and of companies’ commercial arrangements, we use international experts MSCI to monitor and assess the business practices of the companies we invest in.
If we believe our RI standards have been breached, we will generally conduct further research and add the company into our engagement programme. We will set out key milestones to be reached as part of that engagement.
- The first milestone is usually that the company recognises there has been a breach of good practice standards. If we do not believe this will be the case, it can be difficult to move on to the next stage. Depending on the materiality of the issue and of the company to the portfolio, we may proceed to exclusion.
- The second milestone is for companies to set out their response to remedying the situation.
- And finally, we look for the company to ensure prevention of a repeat occurrence including through enhanced Board and Senior Management oversight.
In cases where no progress can be, or is likely to be made, we will assess if a company should be excluded. We don’t automatically move to exclude companies when issues emerge, given the complexity of ESG issues, and the number, breadth and varying importance of holdings in the portfolio.
You will appreciate that with such a large portfolio, we need clear established priorities, processes and decision making criteria to ensure we act in a consistent manner when considering the many issues that arise.
Our company engagements are most frequently undertaken by specialist service providers and in collaboration with other investors – this collective approach, a single message from many voices, is far more powerful than acting alone.
Depending on the issue, we may also engage directly.
For example, following the Christchurch terror attack we helped lead an initiative that resulted in more than one hundred investors representing approximately USD7.5 trillion of assets-under-management join a global collaboration to encourage Facebook, Alphabet and Twitter to strengthen controls to prevent the livestreaming and dissemination of objectionable content.
Where companies have not responded to engagement or we consider engagement is unlikely to be effective, we may exclude.
Exclusion is normally a last resort option. Decisions to exclude an individual company based on corporate practices are made by the Chief Investment Officer. The establishment of the ‘corporate practices’ exclusion basket within the RI framework was a decision of the Board.
We are happy to take your questions.