The minefield of ethical investing
Since 2016, when investigative journalists revealed that at least five of the then nine KiwiSaver default funds were investing in businesses supplying arms and/or tobacco, there has been a growing awareness amongst investors of the ethics of investment.
The response by KiwiSaver providers has been slow, but then the issue of what constitutes ethical or responsible investment is a complex one.
This is more than just a KiwiSaver issue. There are billions of dollars of Kiwi money invested in managed funds and directly held investments such as bonds and shares, which are potentially supporting activities that may collide with our values upon closer investigation.
Sometimes these activities are buried in the detail. A large listed company may have a small subsidiary company involved in the tobacco trade. In other cases, the links to unethical activities may be broader than just the company. A listed company may be involved in the supply of components which are used in the manufacture of cluster munitions.
For investors, investment advisers and fund managers, being able to uncover these unethical connections is not easy. The problem is further complicated by the fact that there are many different approaches to responsible investment.
The number of investors who are concerned about where their money is being invested from an ethical standpoint is growing at a rapid rate. If you are one of them, and wondering where to start, there are three important steps.
Decide what is important to you
Everyone has different values. While tobacco and cluster munitions are on most lists of investments to avoid, there are mixed views about activities such as mining, gambling and the production or sale of alcohol or junk food. Think about how widely your views apply. For example, by investing in US Treasury bonds you are supporting a government that may not align with your values.
Decide what approach you want to take
If there are certain investments you want to avoid, you will need to decide whether you wish to avoid these investments entirely, or allow them to be no more than a very small part of your investment portfolio. Completely excluding certain activities can be difficult to achieve. An alternative approach is to invest in a company which is engaged in unethical activities and to use your influence as a shareholder to change the company. This is not easily done unless you have a significant shareholding or you are part of a group of investors who act together.
Yet another approach is to seek out investments which have a positive impact, for example alternative energy providers or medical research companies.
Find investments that match your values and your approach
This is where things get a bit tougher. It’s not always easy to spot the unethical connections of an investment. There is more transparency with direct investments in shares and bonds than with managed funds, but even so, research is required. Every year, the New Zealand Super Fund publishes a list of its investments and these have been fully researched as being in compliance with the Super Fund’s responsible investment policy. The NZX Corporate Governance Code recommends that NZX issuers disclose and report on potential environmental, economic and social sustainability risks and explain how they plan to manage these risks. None of this is mandatory, however.
For retail investors, one of the best sources of information is the Responsible Investment Association Australasia (RIAA), which provides a certification programme for responsible investment products and an online tool to help you find the products that match your values.
An issue which should be of significant concern to regulators is how fund managers, product providers and issuers promote their investments to the public. There is no standardisation of definitions of responsible investment and it is hard for investors to know whether products are ‘‘true to label’’. There is a case to be made for all product providers and issuers to disclose and report on environmental, economic and social sustainability risks associated with their products and for these to be verified by an independent body in the same way that credit risk is assessed.
There is too much scope here for investors to unwittingly put their money into things that are abhorrent to them and for product providers to make unjustified claims about the nature of their products for marketing purposes.
Liz Koh is an authorised financial adviser and author of Your Money Personality; Unlock the Secret to a
Rich and Happy Life, Awa Press. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.