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How are KiwiSaver investments changing the world?

While ESG helps you choose higher quality companies, it won’t necessarily change the world.

john HeadshotsTRY sq John Berry 3 minute read

A third of professionally managed investments apparently have a sustainability focus. That’s either great news or a huge exaggeration. 

Last week New Zealand’s financial regulator, the Financial Markets Authority (FMA), published its review of funds, including KiwiSaver, that are labelled green, responsible, ethical or sustainable. 

Firstly, let’s address why these products exist.  I believe how we invest our money can be as important as how we choose to spend our money.  We can invest to influence companies and corporate behaviour, as well as make good returns.

Others are more cynical, having seen the investment industry continually reinvent itself to profit from the latest fad. Once it was dotcom companies, then credit default swaps.  With downward pressure on fees and the need for brand differentiation, responsible investing is seen as an answer by some.

Consumers have an information imbalance when dealing with companies; invariably the company knows a lot more.  Whether buying food, a car or financial product, laws are needed for disclosure and minimum standards. 

The FMA is clear that ethical investing disclosure could be better.  Explanations of how investments are made, trade-offs between financial and ethical factors and even what ‘ethical’ actually means are often lacking. 

A particularly contentious area is understanding exactly how investments are 'changing the world'.  Fund managers, including KiwiSaver managers, adopt different approaches.

By far the most common strategy in New Zealand is exclusions.  This can mean avoiding industries or activities from weapons to animal testing. Unless large fund managers globally adopt exclusions, this ‘avoidance’ strategy won't necessarily change the world in a hurry. Avoiding harm does however help us sleep better at night.

If avoiding harm isn’t necessarily the answer, investing positively must be.  I’m a fan of tilting towards ‘sustainable’ investment themes like clean energy, energy efficiency and water.  Another reasonably common approach is called environmental, social and governance investing (ESG).

However, it’s becoming increasingly clear that while ESG helps you choose higher quality companies, it won’t necessarily change the world. ESG data is not an ethical overlay.

The next step is active ownership which means voting as a shareholder and engaging with companies to effect change.  One of the most startling examples in recent times was three directors with renewable energy experience being voted onto ExxonMobil’s board.  Shareholders forced this change.

The final category is 'impact' investing, widely regarded as the new frontier for ethical investing.  This generally involves investments that are not stock exchange listed, aiming to both make money for investors and provide measurable social or environmental benefits.

Examples include social housing, renewable energy and disruptive new environmentally friendly products.

We know many consumers want their money invested ethically, yet at the same time it can be hard or confusing getting the information they need.  The FMA’s onto the fact that there’s scope for marketing departments to get ahead of what an investment product actually delivers.    

Consumers need financial services firms to be transparent around exactly 'why' and 'how' they invest ethically.  This matters because we’re dealing with people’s savings, and because greenwashing is nothing but deception. 

And actually we need change in the world around carbon emissions, environmental degradation and human rights. We might often feel individually powerless, but make no mistake, how we choose to invest really can bring change.

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