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.

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 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.

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.