The Ultimate Guide to Ethical Investing

New Zealand has been known for its clean green reputation, so it is only fitting that  Kiwi’s want to see their investments contributing to building a better, greener future. But where do you start with your KiwiSaver and making sure that you are doing your bit to support the companies helping contribute to this goal, and how do you avoid the companies financially supporting products that can be harmful to the environment and humans as well. 

This guide will help you understand Ethical Investing, and which KiwiSaver fund providers are partaking in investing ethically. 

Note: While we have tried to be as comprehensive as possible, this is only a guide for information purposes - and we may not actually cover 'everything'! Please get in touch with us if your question has not been answered. 

• What is Ethical Investing?
• If I invest ethically, am I going to be forfeiting better returns?
• So, why are the returns on Ethical Investments doing so well?
  
• How do I choose an ethical KiwiSaver provider?
• I have heard about companies Greenwashing consumers. How can I avoid this?
• I want to buy a house soon but want to invest ethically until then. Is there an ethical safe fund I can invest in?
• Where do I begin?
• Is your KiwiSaver fund investing ethically?
  
  

There is a common misconception that investing ethically will compromise on investment growth. However, with this being said there isn’t any evidence that ethical funds underperform. Therefore, it is a myth that investing ethically means lower returns. Research has shown that ethical investing earns returns that are in fact as high or higher than general investing over the last 20 years.

The list below shows the best performing funds over the last 5 years. You can use the form to see how your KiwiSaver fund has performed against others.

This could be because the companies that have high sustainability standards are the most trusted. They have loyal customers and motivated employees. People also have an influence on companies as they are telling them the kind of world they want to see with their dollars. They also have lower risks - they’re not at risk to get sued for environmental damage and they don’t operate in declining industries like coal and oil. As a result, their financial returns are high. 

People have lost faith in companies who have behaved badly, and they've suffered financially as a result. For example, BP, VW, Enron and Solid Energy.

This chart shows the value of investments in fossil fuel companies over the past ten years against the S&P 500, which is the stock market index for the top 500 large companies listed on the stock exchange in the United States. In 2015, there were warnings about the high risk of depending on non-reusable oil, gas and coal. The planet would fry if we used them all. Therefore the ‘stranded assets’ are likely to be worthless.

Over the past five years, the average price of shares for S&P 500 has almost doubled while the Oil & Gas Index has halved and the Coal Index has collapsed. Something interesting to note is that more than half of the coal mines in the USA have shut down, with the biggest coal company going bankrupt. In contrast, the cleantech and sustainability sectors have been growing rapidly.

So, if you've been on the fence about ethical investing due to financial factors, that's not something you need to worry about. Not only do you get good financial returns, but the many other benefits from being a responsible investor. You invest in ways that align with your values, shift money away from companies that pollute the environment and exploit people, and create societal benefits. It’s a win-win! Every time you invest money, you are making a vote for the kind of world you want to live in.

KiwiSaver providers have to issue a product disclosure statement (PDS). The PDS explains how the investment works, the investment choices, the risks, the fees, the taxes, who is involved, how you can complain, and how to apply if the investment is something you want to choose.

The following steps should be used to evaluate ethical KiwiSaver schemes when deciding to choose an ethical provider.

• Investment Philosophy and Process

The PDS will explain the company's philosophy and reasons around their investment choices. If the fund manager embraces the socially responsible investing principles, they can often be seen in the reporting. 

The fund provider should at least tell you how environmental, social and governance (ESG) factors are used and how they are embedded in the investment process. It should explain whether it takes an ESG investing approach or a different one. 

• Research and Data

You should look to see whether a fund relies on in-house or third-party ESG research that can tell you a lot about the fund provider. Generally, in-house is better.

• Policies

Fund managers should be voting on crucial issues at the annual meetings held by the companies they invest in.

If a fund manager is prepared to vote against management, this is a good indication of whether they are genuinely aiming to engender change.

Many funds document how they have engaged with investee companies on their websites, providing useful insights into their own culture and view. 

• Transparency

People who want their money invested in a socially responsible way should be able to see a fund’s entire portfolio and not just the top 10 holdings. A few KiwiSaver fund providers include an exclusion list of whom they don’t invest in as well.

• Cost

When looking at potential KiwiSaver fund providers, you will need to consider the fees that the fund managers charge. This is important as fees could take away any potential returns.

• Signatories

Fund managers are choosing to be a part of socially responsible investments may be signatories with the Principles for Responsible Investment (PRI). This signatory is a stand alone, but is supported by the United Nations and countries governments worldwide. When being signed to a signatory, it shows a public commitment to responsible investment. 

What are the Principles of Responsible Investment (PRI)?

• Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
• Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
• Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
• Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
• Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
• Principle 6: We will each report on our activities and progress towards implementing the Principles.

What is the PRI there for? And what is their mission?

The Principles were developed by investors, for investors. They have attracted a global signatory base representing a majority of the world’s professionally managed investments. In implementing them, signatories contribute to developing a more sustainable global financial system. 

They believe that an economically efficient, sustainable global financial system is a necessity for lasting value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. 

The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation.

The PRI was released in 2006 at the New York Stock Exchange. Since then, the signatories have grown to 4,000 companies.

What is Greenwashing? It’s when a company promotes their products or brand to sound as if they are more environmentally friendly than what they actually are. The claims that these companies make are exaggerated, misleading and usually not backed up with any evidence.  There are unclear guidelines about what constitutes 'organic' or 'natural' products, which allows marketers to allege their products being 'greener' then they are

Companies can claim that their products are environmentally friendly and sing praises about themselves and their products, but how do you know if what they’re saying is the truth?

Many companies have recognised the always increasing demand from consumers that are more conscious of the goods and services they’re purchasing. Consumers want to make purchase decisions based on being ethically and environmentally friendly. Unfortunately, due to this increasing trend, that is when we start to see more companies have been greenwashing their consumers, to sell more products. Greenwashing is happening with every retail industry, which can be hard to monitor. Researching the company can always help to understand if what they are saying is true.  

However, with investments this is now illegal. The Financial Markets Authority (FMA) have said that it is unlawful to mislead investors by suggesting or omitting certain information. The FMA can take action to stop or prevent investment companies from greenwashing consumers. 

So, with FMA on board to stop greenwashing, consumers can feel more secure in their choices. When an investment company says they are ethical and environmentally friendly, we can believe it! But there will always be companies out there who are more honest than others.

To help with your selection of what companies to invest with, you may need to check they have received awards for the Most Ethical or Best Ethical Investment Fund. As well as if they explicitly state that they avoid certain investments instead of vague words such as clean investing. Some even may have exclusion lists on whom they don’t do business with, which can give you a clearer picture of what that company's values are.