“New Zealand was a long way behind international benchmarks for ESG a couple of years ago but we have since made great progress,” said Slade Robertson, managing director at Devon Funds Management. “We are still below the global average but we are clearly moving in the right direction.”

Perhaps most important for the evolution of ESG integration in New Zealand asset management, fund managers appear to be confident about sustainable investment’s value proposition. In particular, several investors speaking at the RIAA event argued that ESG commitments not only do not require sacrificing returns but in fact can be performance enhancing.

Fund managers believe they can identify value opportunities by requiring companies to account for their own ESG performance and have long-term plans in areas like emissions reduction.

Simplicity NZ’s managing director, Sam Stubbs, explained: “The question is not why we would invest this way but why we wouldn’t – in fact, we could be failing our fiduciary duty by not investing ethically. What’s interesting is that the nature of this debate in New Zealand has totally changed.”

Robertson added: “As investors, we want to see companies that are innovative, creative and responsible. What we find is that those that aren’t tend to be much more exposed to macro risks, and therefore deserve a higher cost of capital.”

Fund managers have more readily available levers to alter companies’ ESG performance in the equity sector – and New Zealand investors say they are becoming increasingly willing to pull them. In fact, when it comes to areas like environmental transition being an active and engaged investor could be a key catalyst for unlocking value.

Kiwi Wealth’s chief investment officer, Simon O’Grady, explained: “Governance is the dominant factor driving value, and engaging at corporate level can create better outcomes for our clients. A company with a clear goal of improving on poor ESG performance can deliver a capital gain.”

Robertson described working with Australia’s Local Government Super to persuade Woolworths to improve its emissions performance – an area in which the company has made significant steps.

“Collaboration between asset managers and asset owners has become very important, and at the same time there is a much greater awareness of where the responsibility for greenhouse gases is coming from,” Robertson added. In this context, he claimed that more than 70 per cent of total greenhouse-gas emissions from 1988 to the present day has come from just 100 companies globally.

Direct and ongoing engagement with management is harder to achieve in the debt market, fund managers agree. However, having a clear ESG view is still critical. O’Grady pointed out that investors’ actual exposure to poor ESG behaviour is in fact particularly acute in the bond market, especially towards the high-yield end of the spectrum where the binary possibility of not having capital returned increases.

The good news, according to Robertson, is that management in New Zealand tends to be very responsive to ESG-related questions. “We rarely get black and white push back, though of course some companies still do better than others,” he commented.

There are still plenty of challenges ahead for ESG evolution in the New Zealand investment landscape, though. Kristen le Mesurier, portfolio manager at AMP Capital, admitted that running an integrated ESG portfolio inevitably requires exclusions – reducing available diversity and the number of portfolio-management tools available – and requires “constant juggling of risk, return and having a positive impact”.

One risk is that a sort of ‘ESG light’ approach might come to the fore. Le Mesurier said: “At the moment, few funds target full exclusion of fossil fuels – instead they tend to seek broader emissions-reduction goals. This means they could well still be holding major resources companies, albeit possibly underweight.”

The challenges could become greater if, as Stubbs believes, New Zealand investors intensify the exclusion aspect of their ESG policies in the coming years. What has happened so far, he adds, is really little more than picking low-hanging fruit.

“The conversation among New Zealand fund managers has been easy so far – we’ve all been pretty quick to exclude cluster munitions, nuclear and tobacco,” Stubbs explained. “The first real challenge is likely to be gambling, because we will all have to confront whether we want to be exposed to SKYCITY. We are now at the sharp end of looking to divest things that will have real consequences in our own economy.”

Simplicity announced in June that it will institute a full exclusion of companies involved in fossil-fuel extraction, military and civilian weapons, pornography, gambling and alcohol across its portfolios – adding these sectors to tobacco, landmines and nuclear weapons on its banned list. In this announcement, the company said it would sell all its shares in SKYCITY.

“I think fund managers are going to be challenged in new ways in the future, because we will be facing some very subtle decisions,” said Stubbs. “If we take the work we have already done to its logical conclusion there will certainly be some very interesting questions to be answered.”