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Are ethical KiwiSaver funds all they’re made out to be?

ESG is turning into an empty buzzword that lacks backing by any solid regulation. That means when it comes to KiwiSaver providers marketing their ESG investing policy, the wool can…

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06 August 2021

Are ethical KiwiSaver funds all they’re made out to be?

‘ESG’ is turning into an empty buzzword

‘ESG’ is the finance industry's new favourite term. If you haven’t heard of it, it stands for ‘Environmental, Social, and Governance’, or in other words, ethical and sustainable investing practices.

The idea behind ESG investing is that certain companies or industries are excluded from investment portfolios so that your money isn’t going towards things that you don’t morally agree with (like weapons, tobacco, and gambling).

And while it’s amazing to see an old, dinosaur of an industry that at times has lacked a moral compass start to stand for something, we should hold off on celebrating just yet.

The emerging issue with ‘ESG’ is that it’s turning into an empty buzzword that lacks backing by any solid regulation. That means when it comes to KiwiSaver providers (and other investing institutions) marketing their ESG investing policy, the wool can well and truly be pulled over the eyes of consumers – and that’s exactly what’s already happening.

The marketing of ESG policies is a complete regulatory grey area

Here’s an example scenario:

One KiwiSaver provider advertises that you can ‘invest your money and do good for the world’  because they follow an ESG investing strategy. Their ESG policy is quite extensive and so their investments exclude weapons, gambling, tobacco, whaling, fossil fuels, and companies that are in breach of human rights.

Another provider advertises the exact same claim as the provider above. Except this provider’s ESG policy is less extensive. They only exclude weapons and fossil fuels.

In a 15 second ad, these two KiwiSaver providers look and sound like they have the same thing going for them. But in reality, it’s not the case, and the second provider is arguably engaging in a whole lot of greenwashing.

It’s almost impossible for consumers to easily do their own ESG research on individual providers

But surely if you head to a KiwiSaver providers website you’ll be able to find some clear answers? The short answer is no, not easily.

You'd have to have a lot of time and energy to find and check what each KiwiSaver provider is invested in in all of their individual funds. Not to mention the average consumer probably doesn’t know where to find this information (most of the time it's not even on their websites) or have the financial knowledge to easily make sense of everything.

Most KiwiSaver providers now have a section on their website that mentions they follow an ESG investing policy, but most lack depth and clear information as to what funds (all, some or only one!?) that the policy applies to.

To make matters even more confusing, there are some providers that have ESG policies that only apply to the investments that they make directly, meaning their ESG policy doesn’t apply to underlying funds that they invest in. One fund that we recently reviewed claims they have the most extensive ESG policy in the market, though when we looked at their investments, over 50% of the fund was invested in funds that did not have matching ESG criteria.

However, there is one place of refuge consumers can take when trying to vet KiwiSaver ESG policies, and that’s the online comparison platform Mindful Money – where you can see an overall rating of each provider’s investment holdings.

Okay great, so consumers DO have one source of the truth when it comes to ESG policies? Well… as with any platform where money is exchanged in order to be on a ratings/rankings list, we recommend viewing everything with a pinch of salt and a small grain of cynicism.

For example, we would argue that Generate’s Growth fund should be on the Mindful KiwiSaver list (with only 1.7% of the fund's investments being in areas of concern) instead of Kiwi Wealth’s Growth Fund which IS on the list yet holds 12.97% of its investments in areas of concern. Consumers should also remember that the Mindful KiwiSaver list isn’t comprehensive and ‘Other funds also meet the threshold of Mindful Money's criteria for responsible investment but have not yet joined the platform.”

We’re selling ourselves short if we let ‘ESG’ become an empty term

ESG investing could be a powerful force. It’s a way for consumers to literally vote with their dollar and have their ethics and morals match up with their actions. The more consumers who chose ESG investing, the more likely we are to drive positive change in industries that cause a lot of harm. But with ESG being thrown around as an empty buzz term, not only are consumers being duped, so are future generations that have to live in the world we’re busy funding.

So, what needs to happen to protect the consumer and the integrity of ESG investing? While we’re usually the bureaucracy police and dislike regulation for the sake of regulation, we think the rising misuse of ‘ESG’ warrants more rules and guidelines when advertising it. And at the very least, clearer, and more readily available information to consumers around what a KiwiSaver providers ESG policy ACTUALLY entails (and not just the fluffy webpage description).

Who’s morals should we all be following when investing?

The unsavoury truth is that it’s hard for KiwiSaver schemes (or any other investment company) to exclude absolutely everything that might be ethically or sustainably questionable. Who’s ethics would we all be following? However, there are definitely a few key industries that the majority of us can agree to rule as ‘harmful’.

At the end of the day, the choice to invest ethically or not is up to the individual investor. Introducing new policies around the advertising of ESG investing doesn’t mean someone’s morals are forced on another, it simply allows consumers to make better-informed decisions.

So, where does kōura’s ESG policy fit within all of this?

Well, we’ll be the first to say we aren’t perfect. Our holdings reports aren’t yet downloadable on our website (they’re coming!), our website has fluffy marketing material about our ESG exclusions, and we’re adding to the noise when it comes to advertising our ESG investing stance.

However, we’re proud of our ESG policy and think we have one of the best in the industry. We employ a two-step process for choosing investments, we avoid the nastiest industries in totality and then we only pick the most sustainable and ethical of the remaining companies based on extensive MSCI research.

Is there room for us to improve? Yes, and we’ll continue to raise the bar for ourselves. Could we provide more information to consumers? Yes, and it’s in the pipeline. As one of the newest KiwiSaver providers in the market, can we be the ones to drive positive industry changes? Maybe not, but that won’t stop us from trying.