Insights
Decisions regarding Gaza, the UN and Pathfinder.

We have been reviewing investments Pathfinder holds that were mentioned in the Special Rapporteur's report to the UN ‘From Economy of Occupation to Economy of Genocide’.

For the full backstory, you can read this blog.

This article provides an overview of our process in reviewing the claims made against these companies and the decision our Ethics and Investment Committee has come to regarding each of them.

The intersection between technology and warfare is complex; while we've decided on the best actions to take for now, we want to make clear that this is an evolving ethical area and our positions may change in response to available information.

The Pathfinder KiwiSaver Plan is unique; we offer deep ethical consideration of investments alongside high-quality financial analysis. We take seriously the obligation to act in accordance with our Ethical Investment Policy, alongside working to generate wealth for our members. It's often not straightforward or perfect – but that's likely part of why our members chose us to manage their savings - because we're committed to doing the research, navigating complex issues and making difficult, informed decisions with a better world (and their retirement) in mind.

Based on the background data that informs many of our exclusions, the companies (Amazon, Alphabet, IBM, Microsoft & Volvo) did not breach our Ethical Investment Policy for weapons - but we wanted to dig deeper. As such, our investment team produced a comprehensive review of all available material relating to these claims, drawing on extensive third-party reporting, and including multiple direct attempts at engagements with each company.

Our research focused on whether the claims made against the companies constituted ‘inconsistent activities’ under our Ethical Investment Policy. If they did, the company would be in breach of the policy, regardless of how small the revenue generated from these activities might be relative to their overall business, and we would either need to divest it or grant it an exception.

For each claim, we examined how the alleged activity could be characterised, such as the nature of the harm involved (psychological, physical or fatal), the company’s level of responsibility (direct or indirect), and how the company responded to the allegations (constructively, poorly, or not at all).

We surveyed our Pathfinder KiwiSaver Plan members to better understand how seriously they took these claims and what options they felt most comfortable taking if a company breached our policy.

With this insight, we evaluated and ranked the companies from 'worst’ to 'least worst’ (a familiar spectrum in the world of investing) and made our recommendations to our Ethics and Investment Committee for a thorough assessment.

As per our Ethical Investment Policy, we have two options if a company is found in breach. One: we can divest (sell). Two: we can grant it an Exception. Exceptions are applied in exceptional cases only, and there are only three possible reasons for them:

- Transition (the company is in the process of stopping an activity that breaches).

- Transformation (the activity that breaches will result in overall improvements).

- Financial (without the company we would risk not being able to create a portfolio with appropriate diversification and/or risk return characteristics). Read more about our Exceptions here.

Note that Volvo has already been sold, this decision applies if we were looking to reinvest.

Microsoft & Volvo:

Both these companies scored lower (that is, our concerns were mitigated) in part because they addressed the claims made in the report. In our engagement with them, Volvo stated they haven't sold to the Israeli Ministry of Defence or Israeli Defence Force for more than five years, and sales to Israel are well below 1% of group revenue. They also raised the issue of limited visibility on end users due to distributor sales and asset resale (meaning once they sell to someone, they don't control who those people on sell to). Despite this, they are undertaking research into the claims, looking to better understand how their vehicles are ending up being used to demolish homes. Volvo were responsive and we believe, taking the issue seriously.

Microsoft, under scrutiny from journalists (notably reporting in The Guardian), has taken some responsibility for the harm their technology has been used to cause. We are continuing our monitoring of Microsoft as this is an evolving situation, but are heartened by their cutting off Israeli access to Azure when it was proven that Unit 8200 was using it to store an expansive surveillance archive of everyday Palestinian communications. Despite questionable initial actions, Microsoft have since taken positive steps and we believe are serious in their approach.

Note, “hold and monitor” means active oversight rather than accepting business as usual. We are actively tracking the outcomes of internal and external investigations, recent announcements, if and how safeguards are implemented, and/or any evidence of further misuse. If corrective actions are not implemented, or if new information shows escalation or direct involvement in harm, we would reassess our position, including considering divesting.

Alphabet:

Our mission is to generate individual wealth and collective well-being by investing ethically. This ‘duality’ means that while we have a significant ethical focus, we must also be mindful of financial performance for our investors.

Alphabet's size gives it huge influence over the stock market. Its current market capitalisation at time of writing is US$4.07 trillion and it represents approximately 6% of the S&P 500 index.

Why does this matter?

To track the success of our performance, we get reviewed based on whether we outperform, underperform, or match the market index. Financial advisers (people who recommend our product), the media and investors themselves assess our product quality partially based on how we perform compared to the index.

If we don't invest in the companies that make up a large portion of the index, we seriously risk underperformance, and this could mean losing out on returns for our members.

Why can't we just invest in another company? This category of company (tech giants), based on size, has few peers and they all have some exposure to concerning activities. You may have heard of these companies, often called the "Magnificent Seven". They're called that because, collectively, they are very large and are a key driver of stock market returns. Essentially, to maintain performance on or above index for international stocks, Pathfinder has a strong imperative to be invested in some of these companies. We are currently invested in: Apple, Microsoft, Nvidia, Alphabet and Amazon. Of the seven, we are not invested in Tesla and Meta. As a result of this review, we are divesting Amazon (because we believe it has more ethical issues than Alphabet), and we have taken the difficult decision that we should not risk the stability of returns further by also divesting Alphabet.

We understand that there is no perfect solution to these complex matters, and that members hold a range of views. However, our decisions were informed by the evidence of our review, as well as member sentiment, and reflect a careful application of our Ethical Investment Policy.

We recognise that our investment approach may not align with every member’s expectations. If this outcome means you want to explore other options, we encourage you to use the Mindful Money Fund Checker. This tool will help you compare Pathfinder with other potential KiwiSaver providers, highlighting exposure to a range of ethical concerns, returns performance, and fees.

We are proud to feature as a leading provider on Mindful Money for investors looking for longer term returns that seek to avoid human rights violations, weapons and social harm.

In addition, we don't invest in any of the companies (at time of writing there were 158) listed by the Human Rights Council in their database of companies involved in activities related to the Israeli settlements in the Occupied Palestinian Territory.

We also want to reassure you that Pathfinder remains committed to our dual mission of generating both individual wealth and collective well-being. This requires aiming to limit harm, engage to improve company behaviour, and still aim to generate robust financial returns for our members.

We live in an imperfect world and invest within a range of limitations, but despite this, we hope our actions in this matter - not made lightly, but instead with deep, investigative input and oversight from our entire team - reflect our intention to make the best possible decisions, ethically and financially, on behalf of our members.

Regards,

The Pathfinder Team

Which Pathfinder KiwiSaver fund will be most impacted by these decisions?
All four Pathfinder KiwiSaver funds will be affected to a small extent. The High Growth Fund is likely to be the most impacted, while the Conservative Fund will be the least. This reflects the different levels of exposure each fund has to global shares, with higher-risk funds holding a larger proportion of global shares and lower-risk funds holding less. Overall, the impact is expected to be modest due to diversification across many investments.

Has Pathfinder ever made a similar divestment of this nature? What was the impact?
Yes, for example we divested from Tesla last year in Q1 due to governance concerns and United Health Care in Q4 2024 due to broader ethical issues. Overall, these divestments did not have a material negative impact on fund performance. This reflects the benefits of diversification and illustrates our approach of prioritising long-term risk management over short-term market movements.

What are the divested holdings being replaced with?
At this stage, funds from divestments will be reallocated across the portfolio in line with our existing holdings and risk settings. This is likely to result in small increases to other holdings, including large global technology companies that remain consistent with our ethical investment policy.

Could these decisions cause my Pathfinder KiwiSaver Plan fund to underperform?
In the short term, excluding or reducing exposure to large companies like these can mean our returns move slightly differently relative to the overall market. However, your Pathfinder KiwiSaver Plan fund is diversified across many companies and sectors, so no single stock drives overall performance. This is an example of our ethical universe of stocks being reduced by applying our exclusions.  This means that there will be some profitable investments that we turn down because they do not align with our ethical values and this is a risk of ethical investing.

Will these companies be divested immediately? How does this process work?
We will look to divest these holdings as soon as practicable. This involves placing trade orders with our brokers and rebalancing the portfolio once trades are completed, with the aim of managing costs and minimising short-term risk during the transition.

Is this divestment permanent, or could Amazon and IBM be included in Pathfinder funds at a later date?
Divestment decisions are not necessarily permanent. We keep all companies under review, and a company could be reconsidered if there is new information demonstrating meaningful improvements. Any future inclusion, however, would also need to align with our broader ethical and sustainability criteria.

How do you monitor companies on the Companies of Concern Register, like Microsoft?
We actively monitor company disclosures, regulatory filings, public announcements, and reporting from reputable media and research organisations.

Microsoft are actively participating in an engagement conversation with Pathfinder via their Investor Relations lead. During this process we have learned about:

- Their new whistleblower policy (a new channel for staff concerns over how Microsoft products are used & the provision of an escalation framework)

- The Covington Report (this is a legal review Microsoft are undertaking to review if their Terms of Service have been breached).

- Broadening their due diligence for new contracts (for Human Rights Issues).

As part of our ongoing review we have asked to read the Covington Report (as yet unreleased).

What kind of changes would mean Microsoft did breach your ethical investment policy?
Regarding the current claims and review, there would need to be new and reliable evidence that they were entering into contracts with altered or weakened safeguards, failing to address known risks, or knowingly allowing products or services to be used in ways that cause harm. Conversely, credible corrective actions, transparency, and meaningful changes to governance or safeguards could mean they move off the Companies of Concern Register.

How often is the register reviewed and updated?
The Companies of Concern Register is reviewed and updated monthly, or sooner if material new information becomes available.

Will members continue to be notified when companies are added or removed?
We don't notify members every time we update this document, but it is publicly available on our website.

Where can I see a full list of companies granted an exception?
You can view the list of companies granted an exception any time online here. This list is updated periodically.

Who can I contact if I have further questions or concerns?
We're happy to answer questions related to both the financial and ethical construction of our funds. Please send us an email at feedback@pathfinder.co.nz.

To learn more about the trade-offs required to balance ethics and returns, read this article: War: Learn how your KiwiSaver can and can't avoid it.

Photo by CHUTTERSNAP on Unsplash