11 May, 2020

Coronavirus & The Markets: How ESG Stocks Can Make Your Nest Egg More Resilient in the Long Term

Even before Covid-19, one of the interesting investment trends we have seen in New Zealand, and internationally, is a shift towards integration of Environment, Social, and Governance (ESG) factors in investing decision-making.

As investors, we have the power to vote with our feet, by continuing to invest with a long-term focus and urging companies to remain loyal to ESG principles. In the world of investing, it’s easy to think that it’s only the big players that count. But if you take into account all the KiwiSavers and retail investors across New Zealand, then our voices add up and our actions matter. Investors will continue to value the environment and social factors like treating employees well, and great governance is just as important, if not more important than ever, to pull us out the other end of this crisis.

After an initial downturn as the scale of the Covid-19 pandemic started to become apparent, most global share markets have been surprisingly robust given the likelihood of a significant economic slowdown in many countries.

Our Direct Broking retail clients have been buying shares roughly twice as much as they have been selling shares in the last few weeks, versus the same period last year when they were more evenly balanced buyers and sellers. Most days for the last six weeks, our retail trading desk has received two to three times the number of share orders as a typical day.

In addition to our existing clients becoming more active, we have received record numbers of new account applications, as much as ten times normal levels some days. Clearly many New Zealanders have used the lockdown as an opportunity to learn more about investing for themselves in addition to their continued investment via KiwiSaver.

Back in 2015, many KiwiSavers across a wide array of providers were concerned to learn that their portfolios were invested in companies that manufactured cluster munitions and nuclear explosive devices, for example. Now, many KiwiSaver providers have responsible investment options for investors. But there is a wide range in terms of “responsible” and we still have a long way to go in terms of retail investors being able to access investment choices that adopt the gold standard that NZ Super sets with its approach to responsible investment, including its efforts to make its portfolio more resilient to the risk of climate change.

We’ve seen a clear shift towards sustainable consumption more generally, with Kiwi consumers throwing their support behind brands that embrace purpose and sustainability. The rapid growth of Ethique’s beauty bar business, from New Zealand start-up to global powerhouse that so far has eliminated six million plastic bottles, is purpose and sustainability in action. We are also starting to see an increase in sustainable (low cost) exchange traded funds such as BetaShares’ Australian Sustainability Leaders ETF. We believe over time, the decision to invest in companies with ESG at their core will become more prevalent too, as investors see those companies performing strongly in the long-term against those who remain solely focussed on financial metrics, in addition to ESG positive companies better aligning with individual investors’ personal values.

The lack of “off the shelf” ESG tools for retail investors in New Zealand means we’re reliant on good non-financial disclosure from listed companies. Where historically, many companies could be accused of a “tick box” exercise by disclosing limited ESG data, now detailed ESG information can be a real indicator of a company’s long-term outlook and a differentiator for investors looking for a more holistic approach from the companies they put their money into. Companies that we believe are particularly strong at disclosing detailed responsible investment information include Air New Zealand, Kathmandu, and Z Energy.

At Direct Broking, we believe that most Kiwis can invest for themselves, with the right investment tools and products. However, consistently picking stock market winners is a pure skill game (or you need insane amounts of luck) - investing early and consistently over an extended period of time is something we can all do.

We’re hopeful that it will continue to get easier for Kiwi investors to assess companies listed on the NZX through an ESG lens. But in addition to taking steps to integrate ESG into your investment decision making, it’s particularly important for new investors to stay focussed on the basics, namely diversification of your portfolio, keeping investment costs low, having clear investment objectives and understanding your personal risk tolerance. For DIY investors, it’s also about managing liquidity (to avoid selling at the worst time) and using trusted data sources to make informed investment decisions.

It’s too early to say whether the impact of Covid-19 will speed up or slow down the move toward ESG integration. The concern is that it could create a backwards step, with companies and investors concluding that sustainability is optional in the face of a tough economic climate. Some ESG-leading companies might have to make difficult calls if economic survival is at stake. But those that manage to stay the course and stay focussed on the long term are often better positioned to manage times of crisis.

Above all, remember investing is a marathon not a sprint. From a pure investment perspective, it is easy in periods of crisis to lose focus on long-term asset allocation. But when we face short-term turmoil, it is more important than ever that both companies and investors stay focussed on long-term thinking to get good outcomes. And investing for the long run helps us to look through short-term market volatility like the current environment.  

We are at the beginning of the beginning with ESG integration for retail investors like you and me. But it is important that everyone stays on the journey; it’s not something that we should put on the back burner because balance sheets are under pressure. Now is the time to be bold and make some great decisions for the long term.

Fiona Mackenzie leads Direct Wealth, with a mission to empower Kiwi investors to take charge of their financial future through self-directed investments and innovative digital platforms. Before joining Jarden, Fiona was Head of External Investments and Partnerships at the Guardians of New Zealand Superannuation fund, overseeing a $6 billion portfolio and chairing the investment committee. She was Head of Traded Products, and later Head of Markets at NZX from 2009 to 2011. She previously held roles in Morgan Stanley’s institutional equities sales division in New York and San Francisco; and worked in e-commerce product development at Credit Suisse. Fiona holds an MBA from Columbia Graduate School of Business (New York) and a BCom (Accounting)/LLB from the University of Otago. She is a trustee for the Outward Bound Foundation and a board member for Sanford.

A version of this article was published on the New Zealand Herald on 10 May 2020. 

This article reflects the opinions and views at the time of publication, and is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision. Jarden is an NZX Firm, a broker disclosure statement is available free of charge at www.jarden.co.nz. Jarden is not a registered bank in New Zealand.

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