INVESTMENT ADVISER PROFILE

Walking the talk

Investment adviser Peter Lee holds his whole firm to high standards when it comes to ethical investment.

BY JENNI MCMANUS

Nobody who knows Peter Lee, the founder of boutique financial planning and advisory firm Ethical Investing NZ, would be surprised to learn that his office is furnished largely from recycled products.

Nor that his carpet tiles are made from recycled plastic and his boardroom table and chairs are second-hand.

For Lee, the winner of the Best Ethical Financial Adviser gong at this year’s Mindful Money awards, it’s all about walking the talk.

His team can all commute by public transport to their offices in Auckland’s CBD – and his clients are encouraged to leave their cars at home and do the same.

“Sustainability isn’t just about the investments we recommend,” he says on the company’s website. “It also includes how Ethical Investing NZ acts as a firm.

“To be truly authentic means we must commit to, and follow, the same principles we apply to investments – as individuals and as a firm.”

Evidence required

Walking the talk applies also to fund managers, he says. If they make ethical or sustainable claims about a product or company, Lee will be looking for evidence.

“Are they committed to sustainability? Are they a member of one of the two main sustainability business network groups? Or have they just got a token fund sitting there and basically as a business they look like any other fund manager?

“Looking behind the scenes, and having clients do that, is the point. We find it hard at times to try to find information from the fund managers, so we know it’s going to be doubly difficult for potential investors to do it.”

Lee set up Ethical Investing NZ in 2014 after a career which ran the whole gamut of financial and corporate life. His CV includes Guardian Trust, OnePath, Fidelity Life, the Sustainable Business Network and, just before setting up shop on his own, a senior manager’s role at the ANZ bank.

Along the way, from 2010-2012, Lee was chief executive of the Institute of Financial Advisers – the body which later morphed into Financial Advice New Zealand.

He loved that job, he says.

“Of all my corporate roles, that would have been my favourite. You got to mix with a whole lot of really smart and professional people.

“I’d already known a lot of financial advisers from my Guardian Trust and Fidelity Life days, but this was taking it to a whole new level.

“When you’re working with the very best people, it’s very inspiring.”

Nevertheless, when he decided to strike out on his own, Lee says he had no clients and none of the sort of contacts one might need to set up a business.

“I’d been working at the bank and decided, at the age of 56, if I was ever going to be an adviser, now was the time.”

Making a difference

Lee says he was driven by the desire to make a difference – to make the world a better place by using the skills he’d built up over 25 years in the financial services sector.

At university he’d studied commerce but also trained as a scientist (initially he’d wanted to be meteorologist). For 30 years, his passion has been working as a volunteer on a community conservation project on Tiritiri Matangi, a small island in the Hauraki Gulf.

Lee has been chairperson of the group twice and is currently treasurer. It gives him a lot of satisfaction.

“I think it’s an innate human desire to do something that you lose yourself in, something that’s bigger than you. You can come back year after year and see the difference.”

Ethical Investing NZ now has a team of seven. It’s a fee-based, independent advisory firm which helps clients develop and build their portfolios.

That side of the business is bogstandard for the industry, Lee says.

The other side is the strong sustainability lens used to tailor portfolios to meet individual client needs.

“We call it ethical investing, because virtually every client out there calls it that. At heart, it’s all about your personal sense of ethics that seems to drive all behaviour.”

Last year the firm tore down its investment portfolios and rebuilt them with an increased and more proactive focus on sustainability.

“We’d been doing a lot of work using index-type funds and the ethical ones screened things out, but we wanted to work with clients who said they actively wanted to invest in [particular] funds; so we put together some portfolios for that,” Lee says.

Willing to pay

Lee says he generally doesn’t find clients baulk at paying fees for financial advice.

“We’ve generally found that if you get professionals, they’re usually time poor, have conflict situations and they’re used to paying fees. In that respect, they’re outsourcing a problem and they’re wanting the problem to go away. They’re happy to pay fees.

“The other ones generally are those with a reasonable amount of money, particularly those who have got it through an inheritance, and for them wherever the money is invested, it’s about kaitiaki (stewardship). Who can it benefit along the way, and how they can make the money last? They are generally willing to pay [fees], because for them it’s important that the money be preserved for the right things.”

Impact investing

Over the past year, Lee has been looking at impact investing, after becoming aware of “two or three funds we might be comfortable doing”.

“As a business, we really want to investigate it, because a reasonable percentage of our clients want to do that sort of thing and have the money to do it in a way that doesn’t compromise the funding of their lifestyle.”

By his definition, impact investing is different from simply putting an ESG (Environmental, Social and Governance) screen across a fund or investment. If you’re doing ESG, he says, “Normally, getting a good return is as important as where your money is invested, whether you want to avoid things or favour things.

“Impact is generally focusing on one area - for example, social housing or climate change. It’s very narrowly focused and the people who’re looking for it probably have the primary driver of wanting to make a difference and hopefully make some money along the way.

“So, it gets inverted, from ‘we want to make some money and do good’ to ‘we want to do good and hopefully get a good return but if we lose a bit, that’s fine, because ultimately we want to make an impact on some part of society’”.

Impact investing is very much in its infancy in New Zealand, however, and Lee says his firm would need to go through its normal due diligence processes before putting clients into any of these funds.

Lee cites as interesting a couple of impact funds developed by New Ground Capital, but says it was “a bit early” for his clients.

“Now they’re doing a second tranche focused on social housing which we’re going to look at for some clients.”

‘Sustainability isn’t just about the investments we recommend. It also includes how [we] act as a firm’

Illiquidity

Along with most other advisers, the other problem Lee raises with impact funds is their illiquidity - meaning they’re probably not suitable for retail investors.

“Our problem in New Zealand is that we like having products that retail investors can pull out of as well as invest into, but with impact investing, until recently, that’s been quite difficult. Lee says.

“But [impact] suits clients who have enough money to meet their lifestyle needs. Essentially, it’s a legacy investment. If they don’t need to touch it in their lifetime, how well or badly it does is not going to impact on their ability to achieve their own goals.”

And, Lee says, investor demand for sustainable investing is also changing.

“The big change I’ve noticed in the past two or three years is that the focus of clients has gone away from avoiding stuff.

“Investors now expect you to rule out tobacco and gambling and so on. They don’t even ask about it anymore. It’s a given. But what they’re increasingly saying is that they positively want to make a difference.

“So, we ask clients about whether there are areas where they want to make a positive difference and not just areas they want to screen.” A

As Aotearoa New Zealand’s largest non-Government philanthropy entity by volume, Perpetual Guardian’s responsible investment philosophy and strategy are informed by its stewardship of charitable trusts; it has $650 million in charitable and philanthropic funds under management. On behalf of its generous clients, Perpetual Guardian has stewarded the distribution of $288m in the last six years, or more than $41.2 million in philanthropic grants per year on average.

The Perpetual Guardian Group’s inaugural philanthropy report, ‘Engaged Philanthropy 2017-2022’, provides a detailed overview of giving in this period and indicates the importance of a strategic, responsible investment approach which takes a long-term view:

• $110 million was stewarded to the social services sector by Perpetual

Guardian (representing 50 percent of all funds given). • An average of $12.7 million p.a. went to the health and well-being sector, including medical research (30 percent). • $10 million went to education scholarships (5 percent). • The remaining 25 percent went (mainly) to the environment, animals, and the arts, heritage and culture sector.

• Between 3,000 and 5,000 grants are paid annually, with an average grant value of $9,000.

While the ultimate beneficiaries of Perpetual Guardian’s investment approach may be generally different than for other large-scale investors such as major financial institutions, its process is nonetheless aligned with global best practice and mindful of the demands and concerns of the investor base.

The rise of ESG as a cornerstone of responsible investing has been part of its response to these investor and broader consumer demands. Its ESG process incorporates environmental (carbon emissions, energy use, waste, environmental policies and risk management), social (health and safety, modern slavery, positive human and animal rights, stakeholder relations, and diversity), and governance principles (board composition, executive remuneration and incentives, ethics, anticompetitive practices, and promotion of fair and transparent workplaces).

Its commitment is that Perpetual Guardian, alongside investment partner Openly Investing Limited, makes and will adopt all reasonable endeavours to ensure its Conservative ESG Fund, Balanced ESG Fund, and Growth ESG Fund are compliant with ESG principles and considers these factors alongside financial factors in the investment decision-making process.

Tim Chesterfield, Chief Investment Officer of Openly Investing Limited (part of the Perpetual Guardian Group), says the focus of the approach to ESG was to provide easy access to national and global investment markets. “We do this by adopting a well-researched approach to local shares selection, with exposure to global shares provided through the use of geographic and sector specific Exchange Traded Funds (ETFs). Typically, large global markets are efficient and generally fairly priced, which leaves little room to consistently enhance returns through active management. However, the use of ETFs enables us to be nimble in the allocation of capital to opportunities in geographies and sectors without taking stock-specific risk.

“Our high-conviction approach to local markets is complemented by a big building block approach to global markets, where we can access global exposures through ETFs at highly competitive prices. We do not operate a high stock or fund turn-over approach, preferring instead to adopt a long-term outlook with a focus on quality. This means we can keep our trading costs down and concentrate on providing quality investments with consistent returns, rather than chasing the latest trend or fashion.

“We continue to see significant growth in this approach to investing, with demand for ESG considerations forming an integral part of the decisionmaking process. Business-to-business relationships are also demanding high ethical standards, and we are observing charitable trusts driving ESG mandates, with many regarding ‘investing with a conscience’ as a must-have when aligning corporate, trustee and personal values.

“Often the terms ESG and Socially Responsible Investing (SRI) are used interchangeably; however, there are important distinctions between the two. As part of our investment process, we overlay both strategies when narrowing down our investment universe into manageable opportunities. This will result in us removing any exposures to undesirable industries but also ensuring that the companies in which we invest have a clearly defined strategy that is demonstrably addressing their ESG credentials and footprint.

“This strategy is symbiotic in nature to our desire to invest in companies that we consider to be of the highest quality. This approach is embedded in our philosophy and belief that over any given cycle, companies that invest capital efficiently and in a responsible way will lower the risk of missteps whilst simultaneously lowering the risk of ownership. This is particularly important in times of economic and geopolitical stress in which we find ourselves in 2022. Our natural bias is to allocate capital in such a way as to preserve capital in periods where the investment outlook is uncertain, while continuing to provide long-term capital and income growth through investment in companies that enjoy favourable end market dynamics. This approach is of particular importance to those organisations engaged in philanthropic giving; their work does not stop simply because investment markets are volatile.

“Both ESG and SRI investment strategies are decades old but more relevant today than at any point in the past. Increasingly, investors are focused on the impact of the companies in which they invest on the environment as a whole. In part this has been a gradual genesis over the years; however, it has accelerated with the younger generations looking to have their money invested in a way that mitigates the harms of old and provides for their future. This is not a fad and we do not simply pay this lip service. It is embedded in our process.” A

Ethical KiwiSaver leaves others in its wake

Ethical KiwiSaver provider Pathfinder has marked its third anniversary by delivering threeyear financial returns that are number one across all funds; Growth, Balanced and Conservative (Morningstar data to 31 July 2022*).

The award-winning, boutique investment firm committed to building a better world has delivered returns of 11.39% per annum over the three-year period in its Growth fund, streaks ahead of the average of 5.01%. Its Balanced and Conservative funds returned two and two and a half times the New Zealand average, respectively.*

This stellar financial performance is a welcome piece of good news for Pathfinder investors considering the state of the financial markets recently.

And it’s a huge achievement for the Pathfinder team, who are justifiably proud of the results. “This has been a really challenging period for investing,” says Pathfinder co-founder & CIO Paul Brownsey. “Our industry has battled the far-reaching effects of the pandemic, historically low interest rates, the worst six- month period for bonds in history, high inflation and technical recessions in some major economies, just for starters. To eclipse 11% per annum for three years for our Growth fund, three percent ahead of our nearest competitor, is phenomenal in these conditions.”

“Another benefit is that we take a long-term view, buying companies that perform over the long run, meaning we don’t get caught out with fads,” says Brownsey. “Most importantly, Pathfinder embraces a highly ethical approach to investment. We not only avoid companies and sectors harming society and the environment, but also invest with the intention of generating as much positive benefit as possible. Examples include investments at the forefront of positive societal change, such as renewable energy, microfinance and a biodegradable replacement for plastics.”

It's a strategy that has met with both criticism and skepticism, says cofounder & CEO John Berry. “As anyone who’s followed this path knows, it can be challenging convincing people that ethical investments

There are a few key things that set Pathfinder which launched its KiwiSaver product in 2019 from others, Brownsey continues. “One is that we’re truly active managers, allowing us to modify the risks apart we take on behalf of our investors. We don’t feel constrained to match a benchmark like a passive manager. For instance we have, for a long time, not invested in long-dated bonds. This approach helped us avoid a big sell-off in those securities this year. are capable of generating great returns. But we’ve proven you can. In fact, we’ve generated number one returns.”

Berry says Pathfinder is experiencing growing demand from those looking to live more consciously – which includes how they invest. And Pathfinder has a track record of making better choices for the environment and for communities. “We’ve been investing ethically since before it was cool,” Berry continues. “We have strong roots in this space, having launched our first ethical fund – the Global Water Fund – back in 2010. A decade ago we were told ethical investing was for tree-hugging greenies. A fund focusing on investing with the world’s water crisis in mind was seen as fringe.”

Walking the talk, Pathfinder’s KiwiSaver operates on a social enterprise model with the firm donating 20% of its KiwiSaver management fees annually to Kiwi charities. This has provided $396,950 worth of additional funding to charities over the last three years, rising from $15,000 in year one up to $280,000 in 2022.

Business is much more than short term profits, says Berry. “Businesses should embed ‘good’ into their DNA to help solve environmental and social issues. They should think long term and support wellbeing and prosperity in society.

“Pathfinder plans to keep proving that ethical investments, with strong financial returns, can help build a better future.” A

For full three-year comparative results please see https://bit.ly/3w8XnSz

For more information or to arrange an interview with John Berry and/or Paul Brownsey please contact:

Lily Richards Creative Director – Pathfinder lily@pathfinder.kiwi 027 585 5541

*Based on Morningstar data https://bit.ly/3w8XnSz comparison for each KiwiSaver fund reported in the same Morningstar category, since inception (July 2019) till July 31st 2022. Find more about return data (annualised before tax and after fees) and benchmark for each fund on our website www.pathfinder.kiwi. Future performance is not guaranteed. Check out the risks of investing from our Product Disclosure Statement (PDS) available at www.pathfinder.kiwi. Pathfinder Asset Management Limited is the issuer of the Pathfinder KiwiSaver Plan.

Creating a brighter, more sustainable future

Social licence is key

Maintaining a social licence is one of the key elements for companies to be able to operate, and a strong risk management tool for investors. High-profile disasters, such as the destruction of the 40,000-year-old Aboriginal heritage site Juukan, can almost immediately erase a company’s social licence; smaller issues, such as abhorrent comments by executives, can have an impact too.

Losing social licence can, at its worst, lead to a company’s collapse and significant financial loss for its shareholders. Social media, mining, and chemical companies have all stumbled through the court of investor verdicts in the last couple of years.

To build social licence, companies must hold themselves accountable to society’s expectations of tomorrow. This means continuously re-evaluating supply chains, environmental impact, and labour practices with a critical eye. The reputational damage borne from problematic activities can negatively impact the investors’ value of the holding, while the misalignment of values reduces the tolerance of consumers.

Investors have awoken

Investors are waking up to competing crises negatively affecting both their investment performance and their everyday life. According to the FMA’s research, 68% of New Zealanders are interested in ethical investment. These investors are letting companies and investment managers know this in two ways: taking a hands-on approach to investing directly into capital markets, and taking a keener interest in the decisions made by their provider of products including KiwiSaver.

Individual retail investors are also driving an increase in shareholder proposals that push for ethical change. They have been enabled through both financial innovation – such as shareholder activism platforms – as well as the ability in the US for any shareholder who has held $25,000 in stock for at least a year to raise a proposal. This has seen a rise in overall shareholder proposals. At Kiwi Wealth, we supported 33% more shareholder proposals aligned with socially responsibly investment principles than the same period of last year.

The outcomes of these individual proposals include simple majority voting, decarbonisation targets, the amendment of executive compensation principles and pay equity reports, and disclosures on political spending.

We’re taking action

At Kiwi Wealth, we are closing the distance between the day-to-day actions of our clients and their expectations of us. Each decision is sharply focused by customer feedback and a philosophy of guardianship – both of your wealth and also our children’s and grandchildren’s futures.

As kaitiaki (guardians) of wealth, we value the trust you place in our ability to make responsible investment decisions and duties that are not to be delegated. Our active approach means we assess company structure, the independence of boards, whether controlling owners are also executives, and whether the business operates in a way that has the potential to devalue the business.

Active investments have the power to shape a prosperous, sustainable future. We seek to engage with companies where harm is reversible and use exclusion as a last resort for companies that are resistant to change. In the past year, through active ownership at more than 20 listed companies, and incremental improvements in the boardrooms of more than 1,200 companies, we believe we are driving positive structural change. Our first Stewardship Report is available now on our website: www.kiwiwealth. co.nz/stewardship22 which details the depth of Kiwi Wealth’s engagement in responsible investment outcomes. A

At Kiwi Wealth, we believe that responsible investing and active engagement will deliver sustainable investment products that enable investors to have a brighter financial future. For more information on our responsible investment approach visit

www.kiwiwealth.co.nz/ri