For KiwiSaver investors, 2020 has delivered sharp losses followed by a strong rebound. This year has demonstrated that investing ethically is not only good for our planet but also really good for returns. Our CEO John Berry explains how.
Economies, communities and share markets have all had a bumpy start to 2020.
In these times it may be tempting to take an easy route – for example should we ease off on our ethical investment approach? The answer is a resounding ‘no’. It turns out that being ethical actually helps us with better returns (as well as having better environmental and social impacts).
The first quarter (January, February and March) was hard on savers. At one point during March the US share market was off about a third. But thankfully markets rebounded – in fact the NZ market is only 3% off its all-time high. It’s likely you’ve seen these swings reflected in your KiwiSaver balance.
Funds that employ ethical investing strategies have performed ahead of the average. The Wall Street Journal has summed it up well, saying “funds focused on socially responsible investing have been a rare bright spot in this year’s market meltdown.”
Mindful Money (a website that gives investors transparency into what their KiwiSaver is invested in) compared four ethical KiwiSaver managers to the average in Conservative, Balanced and Growth Funds. Over the first quarter the ethical funds generated better returns in each category.
Barry Coates, CEO of Mindful Money says: “Ethical funds have been resilient during the COVID-19 crisis so far. The companies that manage their environmental, social and governance (ESG) risks have had lower financial losses, and even some gains, in the financial downturn.”
This is no surprise given the wealth of research pointing to companies that care about ESG issues being more resilient in tough times.
This means their share prices tend to fall less in a downturn, and fewer of them go bankrupt. In fact, a study by Bank of America covering 2008-2015 showed investing in ‘good’ companies avoided 90% of bankruptcies.
Intuitively this makes sense. ‘Good’ companies look after their staff with fair pay, decent working conditions, staff training and open communication. This encourages staff to be more engaged, take fewer sick days and be more productive. This, in turn, means the company is better at what it does – and is a better financial investment.
A ‘good’ company listens to its customers and local communities and responds to what they want. An authentic user experience is important – everything from a focus on the safety of the product, monitoring the supply chain and finding ways to test the product (like cosmetics), other than on animals. All these build consumer trust in a company, and give it a stronger brand and more loyal following. A strong brand provides resilience in a downturn.
CareSaver KiwiSaver has benefited from these very effects. According to Mindful Money, over the first quarter, CareSaver outperformed the average KiwiSaver by 4.9%.
As an ethical investor, we held no coal producers, no oil companies and no casinos, because they all failed our ethical screens. All three sectors have been poor performers. While US technology stocks are up this year, oil and coal energy companies are down strongly.
Instead we have focused on selecting quality companies. This not only means a strong balance sheet but importantly how these companies manage environmental, social and governance risks.
So what companies do we like? Our 5 largest listed investments are Microsoft (+35% this year), Fisher & Paykel Healthcare (+61%), Pushpay (+124%), SolarEdge (+66%) and NextDC (+71%). Our largest holdings have done well but of course not every holding is a winner, for example Ebos is down 7% this year. Overall though, returns from including ethical investment considerations are solid.
Covid-19 has forced us to look at our world in new ways. I’d love one of those new ways to be the desire to invest ethically, knowing our savings choices (like KiwiSaver) have real-world impacts and deliver better long-term financial returns.
The information in this article is general and is not personal financial advice. Returns mentioned were calculated at 8 July 2020. This article was first published in the July edition of Good Magazine.