Getting to know Kernel’s Sustainable Funds

Since 2019 ESG and sustainable investing has been gaining momentum in the investment industry, with growing demand for ESG funds both in New Zealand and globally.

Many investors are becoming interested in more than just the financial outcome of their investment decisions. In fact, in a 2020 Responsible Investment survey showed 60% of New Zealanders said they would be motivated to save and invest more money if they knew their savings and investments made a positive difference in the world.

And this is where our new sustainable fund series comes in. Offering Kiwis the opportunity to grow their long-term wealth in a sustainable way. Read on for a quick overview of a few must-knows about the new funds…

Our sustainable fund series consists of three funds, launched in 2021. They are:

• A NZ share fund tilted towards companies’ ESG scores;

• a Green Property fund, considering the sustainability of global real estate companies construction project, building efficiency and operations, and;

• a Clean Energy fund, investing in global companies with significant exposure to renewable energy production and distribution.

You may choose to invest in our sustainable fund series if you wish to walk the talk, and have an allocation to listed companies with good ESG scores. Additionally, investors might believe in and want to benefit from the adoption of sustainable trends, like Clean Energy, as the world shifts away from fossil fuel sources towards renewable sources and storage.

It’s important to remember that the shares within the fund are being bought from an existing shareholder, not the company itself. Therefore, as an investor, you are only supporting the company by increasing demand for shares and receiving profits when they’re distributed as dividends.

Exclusions to this include rare public offerings and rights issues where existing companies raise more capital for their activities and aspirations.

While we truly believe the S&P/NZX 20 Index is the best overall benchmark for the NZ share market and likely to perform well in the future, it doesn’t have enough companies to up-weight and down-weight within an industry sector according to their ESG scores. Applying the index methodology to just 20 companies results in a highly concentrated fund, which can be quite distorted.

By choosing the S&P/NZX 50 Portfolio Index as the starting point for the S&P/NZX 50 Portfolio ESG Index, there were more companies to assess through the ESG criteria.

For example, in the S&P/NZX 20 Index, the only ”Consumer Staple” company is A2 Milk, as against the five in the S&P/NZX 50 Portfolio Index (A2 Milk, Sanford, Synlait, Fonterra and Scales Corporation).

A very good question and one that is difficult to answer, as there is a subjective element to any assessment. For this reason we have chosen a globally standardised process used in multiple countries and with a growing database from over 11,000 assessed companies.

First, there are multiple exclusion screens (excluded industries and business activities, low United Nations Global Compact scores and exclusions for controversies) as well as weighting formulaically according to a standardised scoring process. You can read the index methodology for the full details.

In this way we can be as systematic and robust as possible. Furthermore, by using the S&P Corporate Sustainability Assessment (CSA) each company is compared with its industry peers.

This is so that industrial companies are not compared to IT firms and the assessment relies on over 10,000 data points, not just companies’ self-assessment or reporting, reducing the risk of “greenwashing”.

The CSA has been consistently identified as the highest quality ESG assessment by global sustainability professionals. It combines comprehensive data sources, sound methodology and a laser focus on material issues. Read more on the Corporate Sustainability Assessment.

Not necessarily. While it is impossible to accurately predict the future, the evidence to date since the ESG indices have been launched has been the opposite. ESG indices have actually performed better.

Comparing the S&P 500 index where there is 10 years of data available, the S&P 500 ESG Portfolio Tilted Index has outperformed by 0.21%p.a. over 10 years and 0.57% over 5 years, with identical volatility.

Additionally, when comparing to the S&P/NZX 50 Portfolio Index‘s performance, the S&P/NZX 50 Portfolio ESG Tilted Index has come out on top. The three- and five-year annualized returns of the S&P/NZX 50 Portfolio ESG Tilted Index outperformed the benchmark by 0.90% and 1.62% respectively.

Read more about how the S&P/NZX ESG Portfolio Tilted Index has performed here.

Now, if you want the quick facts about the new funds – what they are, when they rebalance and more, here’s a few facts for you:

• To be eligible for inclusion in the fund, global companies owning and operating real estate are assigned an ESG total score from GRESB and assessed against seven sustainability factors. Those who score highly are overweighted and those with lower scores underweighted

• This fund is hedged to NZD to remove most of the exchange rate fluctuations

• 253 global constituents as at 30 June 2021

• Rebalance frequency: annually. No companies are added between rebalancings

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• The first ESG Index in NZ shares!

• The fund excludes any companies with business activities in controversial weapons, tobacco and thermal coal

• In addition to these exclusions, the methodology overweights and underweights companies with relatively high and low S&P Dow Jones Indices ESG Scores, while maintaining sector balance

• All companies have a UNGC score based on the normative principles of the United Nations Global Compact: Human Rights, Labour Rights, the Environment and Anti-Corruption. Companies that score at or below the bottom 5% of the universe globally are ineligible for the index

• 48 companies in the fund at 12 July 2021

• 10% individual stock cap as at the rebalance date

• Rebalance frequency: quarterly

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• This fund invests in companies with significant or total clean energy exposure and low carbon-to-revenue footprints according to independent assessors Trucost

• To be eligible for inclusion, companies must be involved in the production of Clean Energy or provision of Clean Energy Technology & Equipment

• This fund can act as a satellite holding as part of a core-satellite strategy

• 74 companies in the fund as at 30 June 2021

• Rebalance frequency: quarterly

While an easily misunderstood topic (it’s not about Environmental or Boardroom activism), the Kernel sustainability series are a way to show that ESG matters to you without expecting to sacrifice returns. Simply by definition, sustainable means “able to continue over a period of time” and thinking and encouraging long term is incentivised, not just annual profit.

Considering ESG elements in the construction of a portfolio means encouraging companies to address their ESG dimensions, participate in benchmarking themselves and be rewarded with higher demand for their shares. Using basic economics principles, higher demand should also lead to higher prices. Ultimately, whether from higher demand or benefits from recognition of the long-term benefits, both NZ and US ESG Tilted indices have performed better over time.