Clive Fernandes
Auckland, September 6, 2022
Most of us want to invest ethically, and KiwiSaver has become a vehicle for many Kiwis to do so.
But what is ethical investing? There is no standard definition, and therein lies a potential problem.
This leaves KiwiSaver providers with a broad runway to make claims about ethical, sustainable, socially responsible or ESG considerations in their offerings. In turn, KiwiSaver investors searching for a fund aligned with their values struggle to make comparisons.
Packaged Food vs KiwiSaver
When you buy packaged food, the manufacturer often determines the size of a serving and breaks down the nutritional information, per serve, on the label. Trying to compare that to another product can get messy with all the variations, which is why we use ‘per 100g’ to make quick comparisons on a level playing field.
On the other hand, KiwiSaver providers can set their own thresholds and criteria for their ESG claims, like the ‘per serve’ measure. We are missing an apples-to-apples comparison, like the ‘per 100g’. The further you go beyond the advertising and deeper into product disclosure statements (PDS) and statements of investment policies and objectives (SIPO), you find the bars can be set at quite different places.
Some providers determine zero-tolerance industries which they exclude completely.
Other providers identify sensitive areas that are not bad enough to be excluded but where they could use voting power or expertise to encourage positive change.
Financial products and services require fair trading and cannot be misleading or deceptive as stated in the FMA Act. However, the Financial Markets Authority (FMA) claims it cannot define ethics because values are subjective and constantly changing. Therefore, it’s difficult to prevent providers from potentially misleading investors.
Ethical Investing Case Study
A case study by Dr Robert Howell offered an interesting example where an ethical provider may hold another index, such as Vanguard Ethically Conscious International Shares Index Fund, to diversify at a low cost. On the surface, this seems to be in line with their stated values of excluding businesses involved in fossil fuel exploration and refining. However, a top 10 holding in that index fund is JP Morgan Chase, a bank that loans billions of dollars to fossil fuel exploration and refining companies.
It is fair to say that a company that is big and critical, particularly in the finance sector, will have positive and negative characteristics, which must be weighed, and it won’t make for an easy decision on whether to include them or not. Many funds don’t even release their full list of holdings publicly.
Another example mentioned harm to animals, where abuse would obviously be immoral. But if a fund does not exclude the eating of animals, is it ethical? In today’s world, many people sit on either side of that fence.
What about waterways? We know that overfishing and pollution can cause serious harm.
While standards may exist around specific contaminants, there are a lot of factors that don’t have adequate standards.
The murkiness continues, where to put a consistent bar regarding paying a living wage, adequate health and safety, ecological footprints, protecting trees on cultural/historic grounds, chemical harm, air quality and greenhouse gas.
The aforementioned study suggests that if providers wish to engage with sensitive industries, then, for now, the best practice will mean clearly defining their values (perhaps setting a specific % of revenue acceptable from certain activities), disclosing the engagements taken and measuring progress with relevant metrics, to be held to account if breached or not working as intended.
There is little guidance or consistency on these thresholds and what label can then be applied. So, it is up to each KiwiSaver investor and their financial advisers to research and decide whether the investment meets the ethical guidelines they have set for themselves.
Clive Fernandes is an Authorised Financial Adviser and the director of National Capital, a financial advisory firm that provides personalised investment advice, with a primary focus on KiwiSaver.
Disclaimer: The above article is not intended to be personalised advice. It is general and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. A copy of Clive Fernandes’ disclosure statement is available on request and free of charge.
