While you sleep, your money might be doing evil. But it doesn't have to be that way. Tom McKinlay reports.
Most of us, most of the time, try to do good. We might spend some of our evenings or weekends working in charitable or community enterprises, perhaps helping people with particular needs. We're certainly happy to contribute to the coffers of organisations that fill in the gaps and pick up the pieces. We might coach a junior sports team, and are likely to contribute to our local school's fundraising efforts.
• Monitoring those small deposits
But we're also increasingly likely to have retirement savings in a diversified managed fund, a KiwiSaver account, in which we'll own units, aggregated asset holdings that include shares. As a result, we might well have investments in armaments, rag trade sweat shops, tobacco, gambling and companies involved in animal testing. If we knew, we'd be appalled. But most of us have never bothered to find out.
Indeed, the New Zealand Herald and Radio New Zealand (RNZ) reported this week that hundreds of thousands of KiwiSaver members in default schemes may be investing in companies that make cluster bombs and anti-personnel mines.
``At least five of the nine default KiwiSaver providers invested in these types of companies,'' the RNZ investigation found.
More than 500,000 people are in the schemes, run by ANZ, Westpac, ASB, AMP and Grosvenor, which invest in anti-personnel mine manufacturer Northrop Grumman and nuclear weapon or nuclear base operators Fluor Corp, Honeywell International and Lockheed Martin. Westpac, ASB, BNZ, Grosvenor and AMP are also invested in cluster bomb manufacturers General Dynamics and Textron.
While the investigations have sparked calls for changes to the default schemes, they are not coming from the KiwiSaver members, who for the most part appear happy enough as long as returns track industry benchmarks faithfully enough. But the picture is changing, if slowly. There is a burgeoning minority demanding more of their investments, say those working in the indusry, as evidenced by the increasing number of people choosing ethical investment funds. The numbers are still quite small, but they are growing faster than the market as a whole.
In New Zealand in the 2015 calendar year, investments in ethical funds jumped by 18%, according to the latest report by the Responsible Investment Association of Australasia (RIAA). That follows a rise of similar proportions the year before. In Australia the growth has been stronger still.
RIAA chief executive Simon O'Connor says there is a ``consumer awakening'' as more people question where their money is invested, whether that's a KiwiSaver account or the money they have sitting in a bank. ``There is just an increased expectation that investment providers and banks are managing this stuff.''
So those big funds are regarded as stalwart ``responsible'' investors - junk food notwithstanding - they have broadened their strategies beyond just financial analyses, to include examining ESG factors across their portfolios.
Ethical investing, as it's referred to in the industry, is a subset of the ``responsible'' scene, and it's here where the fabled mum and dad KiwiSaver members, retail investors, come in.
While the NZSF is doing its bit to make the New Zealand investment landscape look eminently principled, just 2.6% of funds lodged by retail investors are in what RIAA calls core responsible, or ethical funds - the terms are used somewhat interchangebly - just $1.6 billion of the $61.3 billion total of professionally managed assets.
Interest is picking up though and in the past two years, fossil fuels and what they are doing to the climate, has jumped to the head of the list of concerns that has more traditionally featured issues such as armaments, alcohol, gambling, pornography, tobacco and animal testing.
It has helped bump that percentage figure up from 2.4% a year earlier.
``There are a lot of people concerned about their savings being invested in coal, mining, coal-powered generation in particular,'' the Australian-based O'Connor says.
In another symptom of the same phenomenon, here in New Zealand branches of the ANZ bank have become accustomed to protestors outside, highlighting the fossil fuel investments of its Australian parent company.
The RIAA calls climate change concerns to do with investing a megatrend ``with broad and wide-ranging investment implications''. The NZSF has been working on a response to climate change, the results of which are expected to be announced later in the year.
While that may well be the case, and may indicate where investing is heading in the future, University of Auckland philosophy lecturer Dr Matheson Russell says there's some distance to travel. The phenomenon of well-intentioned people propping up destructive and unsustainable industries has only deepened in New Zealand with the institution of KiwiSaver, he says.
Before the advent of KiwiSaver, they were investment vehicles for slightly better off folk who wanted some skin in the stockmarket game but preferred to have someone else pick the horses and manage the enterprise. And for all the years they have been operating, turning a dollar has been their overriding and almost exclusive purpose. Wider ethical questions have not traditionally been a significant consideration.
But as KiwiSaver has drawn many thousands more people into their orbit - including those in the default schemes - the funds really should catch up with community expectations around what's acceptable and what's not, Dr Russell says.
``A huge number of New Zealanders have a KiwiSaver account now and for all practical purposes each one of those accounts is going to be in a diversified managed fund,'' he explains. The funds will have a basket of shares; some of which are likely to be fossil fuel companies and others, cluster munitions and mines.
The question is, could KiwiSaver as a system better reflect what New Zealanders stand for by putting a better ethical framework in place? For Dr Russell, a 350.org board member, ideally that would mean taking them fossil free.
``That would mean people who open a KiwiSaver account when they start work can be assured that their own retirement savings are not being invested in deep-sea oil drilling or coal mining.''
There's survey data, he says, that suggests that the average Kiwi on the street wants their money to be invested ethically.
Dr Russell, who has written a research paper on the subject, says there are a couple of things going on that could account for the disconnect between some of the enterprises managed funds invest in and the sorts of values New Zealanders hold dear. Part of it is that when people are investing, they just want the best bang for their buck and the moral side of the brain gets switched off, he says.
But he suspects that's the lesser part of the picture.
``I think the dominant thing that's going on is just that questions such as `where is my KiwiSaver money?' come a long way down people's list of priorities. In terms of actually doing even an hour of research to find out what other funds are available and then to go and fill in the paperwork to transfer the money from one fund to another fund is just more effort than most people put into their KiwiSaver decision making.''
And so the system rolls on, except that some are now asking more questions.
O'Connor says the growing cohort of concerned financial services industry customers can be seen as an extension of conscious or ethical consumption, which has impacted on a raft of industries in recent decades, whether is it concerns about the manufacture of Nike products or where Apple makes phones, or people making the extra effort to seek out organic food, buy fair trade or free range.
``This has now arrived in finance,'' O'Connor says.
In the Australian super industry in the past two years about 35 super funds have divested of tobacco, he says.
``Before two years ago they would all have said, `oh, we don't do that, we don't exclude' ... I guess that's indicative of where the market's moving.''
People simply don't want to profit from some industries, he says, not tobacco and certainly not child labour or cluster bombs.
Which brings us to the heart of the matter: whether there is money to be made, once we've turned our backs on traditional big money spinners such as oil and tobacco, munitions, gambling and assorted vice.
O'Connor and Russell say, yes, there is. Maybe more.
O'Connor says there's a growing base of evidence that highlights that companies that deliver strong financial performance are the ones that are also focused on wider sustainability issues.
The 2016 RIAA report trumpets that core responsible (ethical) investment equities in Australia outperformed the market in Australian equities across one, three, five and 10 years.
O'Connor says those sorts of figures are a big part of the reason investment managers at mainstream financial institutions are adopting ESG integration: as environmental, social and governance issues impact on the value of investments, they are factoring them in when making decisions.
``This is about prudent and sound investment, not just about being ethical.''
The VW emissions scandal is a good example of the failure of internal governance that allowed breaches of environmental control, leading to massive destruction of value for the company, O'Connor says.
``These are things that investors would not have found in the financial statements prior to this occurring but would have found had they been assessing environmental issues, governance issues, conduct and internal ethical issues.''
Another example of a company that failed to take environmental concerns into account is the giant United States coalminer Peabody. It filed for chapter 11 bankruptcy earlier this year after taking a head in the sand approach to global energy trends around decarbonisation.
Dr Russell says he'd like to see ethical as the default for KiwiSaver. So when you start a job and get signed up, the money you invest will go into a ``middle of the road ethical investment fund that is going to be a good safe choice for most people''.
Of the nine government-appointed default providers, only one has an RIAA-certified ethical option and that is not a default account. People assume when they buy a new computer the default will be set up to suit them, Dr Russell says: ``Why not the same for KiwiSaver?''.
It will require something of a cultural shift for investment managers, away from strictly ``we're here to create the most profit at the lowest risk''. But that will just better align them with most New Zealanders' values, Dr Russell says.
O'Connor agrees. ``I think that's a position we will head to over a number of years, that you should be opting out rather than opting in.''
Increasing numbers of investment fund managers are excluding tobacco, including The New Zealand Superannuation Fund. Photo: Reuters
Alphabet soup
Ethical investing is beset by an alphabet soup of terms and acronyms:
ESG INTEGRATION
ESG refers to the practice of including environmental social and governance factors with traditional financial analysis, based on the belief they are a core driver of investment value and risk.
The New Zealand Superannuation Fund is regarded as an ESG investor, despite also ‘‘negatively screening’’ various industries to exclude them from investment. ESG is regarded as its primary responsible investment approach.
CORE RESPONSIBLE INVESTMENT
Commonly referred to as ethical investment, CRI involves screening out categories of investment (such as cluster munitions or fossil fuels) or screening them in (picking categories for their positive characteristics).
SRI
Used interchangeably with ‘‘core responsible’’ or ‘‘ethical’’, it again involves ESG integration combined with a values-based approach or screening.
SCREENING
The NZSF employs negative screening to exclude:
- the manufacture of cluster munitions
- the manufacture or testing of nuclear explosive devices (NEDs)
- the manufacture of anti-personnel mines
- the manufacture of tobacco products
- the processing of whale meat.
Making a change
You can change your KiwiSaver scheme provider at any time by applying to the provider of the scheme you want to join. They will then arrange for your savings to be transferred from your old scheme. Your old scheme provider may charge a transfer fee.
According to last year’s KiwiSaver annual report, more than 265,000 members transferred $2.5 billion between schemes during the 12 months.
The nine default schemes’ share of total assets fell from 17% to 14%, and their share of total membership fell from 20% to 18%.
