Responsible Investing
Responsible Investing

Responsible investing 

At Nikko AM we believe environmental, social and governance considerations (ESG) are key to creating future value for our clients. Here we discuss responsible investing, explain how we approach it at Nikko AM through our ESG policy, and we share things to consider when evaluating fund managers you may choose to invest with.

Ethical farming

Understand how your fund manager approaches responsible investing. You won’t get this through just a rating.

What does responsible investing mean to us?

As in many industries today, the financial services sector is no stranger to the rise of socially conscious, environmentally aware customers. Responsible investing has become an area of much discussion, with different interpretations across the industry.  It’s good that there is more data available but it’s not standardised and with an increasing number of rating systems it can be confusing.

A common methodology that many firms are employing is ESG - an investment policy that considers the Environmental, Social and Governance impact of the companies included in managed funds.

Whereas ratings are often limited to the published data available and rules based, ESG is a more holistic approach that requires in depth understanding of companies and investments that comprise a fund.

Having a more in depth understanding means not just looking at how a company is catagorised or which sector it is in but also understanding the types of activities they do and don't perform, for example, we specifically look at activities related the following categories:

    • Tobacco
    • Fossil Fuels
    • Controversial Weapons
    • Gambling
    • Adult Entertainment
    • Alcohol

If understanding what companies do and not just how they are categorised is important to you, then in addition to the ratings take the time to research funds you're investing in and understand the investment approach.

Approach to ESG

ESG is not about making one-off exclusions to our funds, but it is part and parcel of a holistic analysis we do to ensure that, as a company, we make strong long term investments.

The Nikko AM approach to ESG

Nikko AM has a Global ESG steering committee that governs the fulfilment of ESG commitments and is mandated by the Global Executive Committee and chaired by the Global Head of Investment. Composed of leaders from Nikko AM’s equity and fixed income investment teams worldwide, it is responsible for evaluating and maximising the effectiveness of Nikko AM’s approach to ESG and the United Nations’ Principles for Responsible Investment. 
 

But what does this mean in practice?   

Our approach to investment and our approach to ESG are both intertwined. We look for companies that are likely to hold and grow their value over the long term.  While on the face of it this goal is focused on generating returns, it is also unlikely that a business that is unsustainable, poorly governed, or socially unjust would meet our criteria to be identified as a business that will hold its value over the long term. This is because these are all factors that call a company’s long-term prospects into doubt. 
 
So for us, ESG is not about making one-off exclusions to our funds, but it is part and parcel of a holistic analysis we do to ensure that, as a company, we make strong long term investments.      
 
Our investment teams engage proactively with and can influence companies to lift the bar in relatively weaker areas or areas where ongoing improvement is beneficial to stakeholders. As an individual investor, you cannot have this influence.
 
Companies we invest in are also screened using the MSCI ESG Research Tool, assisting us by adding another layer of inspection to our knowledge of companies. Companies that rate well or are actively improving ESG standards will ultimately be recognised by market participants, hence our process is likely to highlight these opportunities.
 
Besides our responsibilities managing investments, we are also actively engaged in sustainability efforts as a firm. 
Ethical investment tips

Ask: “Am I with a fund manager who's thinking about these things? If not, why not?"

3 things to look for in responsible investments


#1 Look beyond the ratings

Companies can achieve a high rating by simply ticking the right boxes to achieve the requirement of the rating system. With rating systems alone, you can't see what specific criteria have or have not been met.

For example: Are activities such as off-setting carbon emissions and planting trees enough to meet your personal criteria for environmental responsibility?

#2 Focus on what you care about

Think about how you want to invest - your goals and values - and look for funds (and fund managers) that align with this. This area is relatively new and is evolving fast, so do your research.

#3 Consider working with a fund manager

There are some very important benefits of working with a fund manager who has a responsible investment approach:

  • A manager can dedicate time to research companies and understand the ratings and other information available to make responsible investment decisions.
  • A manager will always act in the best interest of their investors, and as a larger investor can actively engage and have a greater influence with companies.
  • By continuously researching companies, fund managers have access to the latest information and so are better informed when making voting decisions.

Summary

Responsible investing is an evolving area with increasing amounts of information becoming available. Be sure to do your homework and consider investing with a professional fund manager who aligns with your personal philosophy and what you care about. A fund manager that invests responsibly should be continuously evaluating companies against ESG principles to make successful long term investments.

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