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Inside New Zealand Investment Funds - Ethical Investment Progress

Tue March 2nd 2021


Inside the Black Box of New Zealand Investment Funds

This research report provides a snapshot of the portfolio holdings of all KiwiSaver and New Zealand retail investment funds, categorised according to issues that the New Zealand public would like to avoid. It forms part of larger report on The State of Ethical Investing in New Zealand to be released later in 2020.

Executive Summary

Mindful Money has brought transparency to investment. For the first time,
New Zealand investors in all forms of managed funds have access to information
about how their money is invested. Mindful Money is unique in providing information
to the public on which companies they invest in, categorised according to the types
of companies they want to avoid.

Across KiwiSaver funds and retail investment funds, greater transparency has
contributed to higher ethical standards applied by managers of KiwiSaver schemes
and retail investment funds. As a result, there has been a significant decrease in the
investments that New Zealand retail investors would like to avoid.

This has been particularly significant in some of the most controversial issues such
as gambling, weapons and fossil fuels. For example, the proportion of KiwiSaver
funds invested in fossil fuels declined by 23% over the past year to end March 2020.
There has been a fall in the proportion of investment across all issues of concern
as more funds have deepened their ethical policies and practices.

Even so, $6.4 billion of retail KiwiSaver and investment funds are still invested in
companies that most New Zealanders would like to avoid. These are particularly
concentrated in Animal Welfare issues (measured by non-pharmaceutical products
tested on animals), Human Rights violations and Fossil Fuels. These issues are
amongst the most serious concerns for investors.

Exclusions are not the only measure of ethical management and the Mindful Funds
include providers that primarily use strategies of managing Environmental, Social
and Governance (ESG) risk. This entails avoiding the worst companies, rather
than excluding the sector, and engaging with other companies to improve their
performance. There has been a huge rise in ESG practices internationally and in
New Zealand, and there are good examples of how New Zealand investment funds
are using engagement to positively influence company practices.

However, analysis of the data shows that claims of ESG management are not always
reflected in the composition of portfolios. Fund providers that claim to use ESG
management often have companies that behave badly and are resistant to change,
as shown by Exxon-Mobil being included in the portfolios of 126 KiwiSaver funds. It is
important that claims of using ESG management are backed up by reporting on the
outcomes of engagement with companies, and externally verified.

The analysis of drivers shows there is a revolution happening in investment. The
traditional approach to balancing risk and returns is being supplanted by the
inclusion of impact as the third axis. The public is demanding that their funds are
invested ethically, and they are now being presented with more choice in the form of
a wider range and a deeper commitment to ethical standards.

This first wave of progress towards a more integrated view of investment in society
is gathering pace in New Zealand. It is primarily focused on avoiding damage from
investment using negative screening and ESG management. Yet to come are viable
options for investment in positive environmental and societal impacts, and a wider
process of integrating social and environmental issues into the core of sustainable
finance. These would contribute towards improved well-being, the Sustainable
Development Goals and a safe climate.

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