The investment process which underpins TAHITO is effectively measuring ‘Aroha Connection’. We are measuring the transition of companies from the ‘substantive’, internally focused, very self-absorbed behaviours, to the ideal ‘Relational’, externally connected, collective behaviours.
This requires ethically strong and committed governance with a clear drive toward sustainability to enhance financial returns.
Māori ethics put people and the environment first because both are fundamental to living and thriving. This thinking is implicit in the ancestral Māori worldview which centres on connection and the interdependence of all things.
ESG processes and procedures focus on
non-financial performance indicators that address
a company’s approach towards responsible
investment, sustainability, its impact on society and
the environment, as well as other ethical and
corporate governance considerations. ESG criteria
are a set of standards and measures of a
company’s operations that conscientious investors
use to screen potential investments.
Environmental criteria look at how a company
performs as a steward of nature.
Social criteria examine how a company manages
relationships with its employees, suppliers,
customers and the communities where it operates.
Governance deals with a company’s ethics, values,
leadership, executive pay, audits, internal controls
and shareholder rights.
Essentially ESG measures indicate the level of risk
exposure companies have relative to the key ESG
criteria.
To understand how ESG information improves investor returns, ethics and sustainability expectations, we focus on three 'channels' published by the MSCI ESG research team.
These channels are called; the cash-flow channel, the idiosyncratic risk channel and the valuation channel. These three channels are based on the following rationales:
Cash-flow channel: High ESG-rated companies are more competitive and can generate abnormal returns, leading to higher profitability and dividend payments.
Idiosyncratic risk channel: High ESG-rated companies are better at managing company-specific business and operational risks and therefore have a lower probability of suffering incidents that can impact their share price. Consequently, their stock prices display lower idiosyncratic tail risks.
Valuation channel: High ESG-rated companies tend to have lower exposure to systematic risk factors. Therefore, their expected cost of capital is lower, leading to higher valuations in a DCF model framework.
ESG investing is a very broad field, with many different investment approaches addressing various investment objectives. At the top level, we can break down ESG investing into three main areas that each have their own investment objective:
Values-based investing: where the investor seeks to align their portfolio with their norms and beliefs.
ESG integration: where the key objective is to improve the risk-return characteristics of a portfolio.
Impact investing: where investors want to use their capital to trigger change for social or environmental purposes, for example, to accelerate the decarbonization of the economy.
Values-based investing is the primary investment objective for TAHITO ESG integration.
ESG measures primarily indicate the level of risk exposure relative to key ESG criteria, therefore ESG measures alone do not indicate that a company has attained sustainable, ethical and or impactful standards. This is achieved through our TAHITO ESG integration process.
We use ethical screens in selecting investments, for which Māori indigenous values, principles and behaviours serve as the foundation.
The TAHITO process uses mostly positive screens and its measures are both quantitative and qualitative.
The quantitative TAHITO scores (T Score) are obtained using research from the MSCI ESG system. The qualitative T Score (or Mauri screens) are obtained by direct research. Securities are ranked by their total T Score.
Māori ethics put people and the environment first because both are fundamental to living and thriving. This thinking is implicit in the ancestral Māori worldview which centres on connection and the interdependence of all things.
Sustainability measurement is the quantitative basis for the informed management of sustainability. The metrics used for the measurement of sustainability (involving the sustainability of environmental, social and economic domains) are still evolving: they include indicators, benchmarks, audits, indexes and accounting, as well as assessment, appraisal and other reporting systems.
The UN Sustainable Development Goals (SDGs) are the blueprint to achieve a better and more sustainable future for all. They address the global challenges we face, including those related to poverty, inequality, climate change, environmental degradation, peace and justice.
The 17 Goals are all interconnected, with a target achievement goal of 2030. (https://www.un.org/sustainabledevelopment/susta inable-development-goals/)
Corporate sustainability reporting is growing quickly. Some of the best known and most widely used sustainability reporting and measures include:
- Triple Bottom Line accounting
- Global Green Economy Index (GGEI)
- Environmental Sustainability Index
- Environmental Performance Index
- International Integrated Reporting Council (IIRC)
- Global Reporting Initiatives (GRI)
- Fit for Future
- B Corp
- Circular Economy
TAHITO favours a holistic socio-ecological, balanced environmental system. This is driven by our values and consistent with the holistic Māori world view. Therefore, we would suggest that the Inclusive Development Index (IDI) as defined and measured by the World Economic Forum (WEF) is a better measure of a country’s sustainability than GDP.
The TAHITO system favours companies that:
- Adopt credible sustainability reporting systems
- Understand and measure their ‘externalities’
- Are transparent with and accountable for their non-financial measures
- Set clear and achievable sustainability targets
- Demonstrate how they intend to reduce or better these measures
- Have incorporated or are moving toward circular economy principles
Impact investing is considered alongside the higher convictions of sustainable and ethical investing as opposed to the more easily attainable responsible investing. The International Finance Corporation (IFC) defines impact investing as ‘investments made with specific intent to make a measurable contribution to the achievement of social and environmental goals, as well as achieving a financial return’.
A key feature of this definition is that impact investments are defined by the approach of the investor. In principle, investments may be made into the full range of public and private assets, as long as by doing so the investor contributes to achieving impact. Specifically, the definition encompasses three observable attributes of impact investors that can distinguish them from other investors.
Intent: The investor articulates an intent to achieve a social or environmental goal by identifying outcomes that will be pursued through the investment and specifies who will benefit from these outcomes.
Contribution: The investor follows a credible narrative, or thesis, which describes how the investment contributes to achievement of the intended goal—that is, how the actions of the impact investor will help achieve the goal. In this case, contribution is considered at the level of the impact investor and can take financial or non-financial forms.
Measurement: The investor has a system of measurement in place, linking intent and contribution to the improvement in social and environmental outcomes delivered by the enterprise into which the investment has been made. The measurement system enables the investor to assess the level of expected impact in order to continuously monitor progress and take corrective actions when appropriate, and to evaluate the achievement of impact.
In our philosophy we state that Māori ethics put people and the environment first and that this thinking is derived from our ancestral world view where everything is interconnected, and nothing exists of itself.
- Its ethics strive for balance and consensuality
- Its behaviour is complementary and co-operational
- Its target is reciprocity and harmony
The TAHITO process identifies companies with the following impact intentions:
- Intend to lower their GHG emission and set reduction targets and/or zero carbon targets
- Aim to lower their energy and water use, waste levels and toxicity waste
- Plan to reduce the use of energy from fossil fuels and transition to clean energy sources
- Are aware of their biodiversity and aim to reduce their impact on their ecosystem
- Strive for equality and equity in the workplace, governance and management
- Aim to have a positive impact on the communities they are in
Concurrent with our TAHITO indigenous ethical screens we also screen for undesirable business activities.
Most of these undesirable business activities are excluded during our TAHITO screening as they will generally have a low overall T score they are;
- Alcohol Producers
- Adult Entertainment/Pornography
- Civilian Firearms
- Global Sanctions
- Defense and Weapons
- Fossil Fuels
- Gambling
- Human Rights & Environmental Violations
- Palm Oil
- Tobacco and Vaping
- Nuclear Power
- No Female Board Representation
TAHITO adheres to the United Nations-backed Principles for Responsible Investing (PRI). We support and apply these six principles as set out by PRI.
- Incorporate ESG issues into our investment analysis and decision-making processes
- Be active owners and incorporate ESG issues into our ownership policies and practices
- Seek appropriate disclosure on ESG issues by the entities in which we invest
- Promote acceptance and implementation of the Principles within the investment industry
- Work together to enhance our effectiveness in implementing the Principles
- Report on our activities and progress towards implementing the Principles
TAHITO has incorporated PRI into our funds management systems and process and our business processes and practices.
Engagement
TAHITO is an active portfolio manager. When we consider there to be significant issues or conflicts with respect to a company’s strategic direction, values, remuneration, or other material matters, TAHITO will engage with senior management, and directors, and where possible other investors, to find an acceptable outcome. If issues are significant or are not resolved in a reasonable timeframe TAHITO will divest of its interest.
TAHITO may divest an investment quickly without engagement if the issue is extreme and has been verified directly by reliable authorities or sources.
Company annual and extraordinary meetings along with investor reporting forums provide an opportunity for engagement and allow us to ask ESG and TAHITO values and ethics-related questions.
Proxy Voting
TAHITO will vote on behalf of fund investors. We will vote all material resolutions at both annual meetings and extraordinary meetings. The voting will be directed by our values and ethics. TAHITO applies an internal validation process for proxy voting via our internal compliance manager and
senior analysts. All voting is recorded and reported to the TAHITO Investment Committee.
A record of all voting is available to clients on request. We are also open to consultation with clients, prior to voting on any significant high profile and contentious issues.
Ethical, Sustainable, Impact Investment Development and Promotion
TAHITO team members regularly attend seminars, conference and workshops relating to sustainable, ethical, impact and/or responsible investing. Occasionally a TAHITO member may have a presenter or panellist role at these events.
TAHITO promotes ethical, sustainable and impact investing within the ISG group of companies among key stakeholders and where practicable among the community.
Reporting
TAHITO communicates our ethical, sustainable, impact investment activities and proxy voting to client investors quarterly via our fund commentary.
Information on these activities is also provided to client investors and other stakeholders on request.