Virtually all KiwiSaver funds have a portion of their pot invested in shares, and the over-riding objective of most KiwiSaver fund managers is to make money. In the 21st century, this means that some of the fund’s investments are almost certainly in industries that don’t align with your values and principles.
There are alternatives, however, although they may be few and far between. Five KiwiSaver managers have “responsible” KiwiSaver fund options and they argue your money is invested just as effectively as it would be with a KiwiSaver manager investing in “sin stocks”. For example, SuperLife’s Ethical KiwiSaver product gets a five star rating from CANSTAR in 2016.
Reasons you might want to choose a socially and environmentally responsible KiwiSaver fund include:
According to the Financial Market Authority’s 2015 annual KiwiSaver report, in 2014-2015 there were 7,193 Kiwis enrolled in a Socially Responsible KiwiSaver fund. That’s more than $52.7 million in funds being invested in ethical places.
The many flavours of responsible KiwiSaver
Putting your money where your principles are comes under a lot of different names. It can be called socially responsible investment, green investment, ethical investment, sustainable investment, or even religious investment.
These names are not just about semantics, and there is no such thing as a one-size-fits-all responsible KiwiSaver fund. Although they all take into account social or environmental good, each type of fund has a different way of going about it.
KiwiSaver fund managers use either “negative” or “positive” screening when choosing the underlying investments in responsible funds. They talk about “environmental, social and governance” (ESG) factors in their decision making.
Perhaps the most important concept to grasp before choosing the correct responsible KiwiSaver fund for you is the difference between negative and positive screening.
Negative screening is the most common method, and it involves avoiding companies or industries that are considered to be harmful to society or the environment. Sin stocks include stock in companies involved in gambling, alcohol, weapons, nuclear power, fossil fuel exploration, adult entertainment, and research into and the production of genetically modified (GMO) crops.
KiwiSaver funds that negatively screen simply exclude these types of industries from their pool of possible investments. They don’t actively look to invest in companies and industries that do social or environmental good – they just avoid the ones that are socially or environmentally harmful.
Positively screened funds go one step further and invest in companies and industries that have a positive social or environmental impact, i.e. sustainable industries. The theory is that these industries will do well for people and the planet in the long term, because of their long-term potential to compete and succeed in terms of fund performance.
Both negative and positive KiwiSaver investment managers also consider ESG factors in choosing their funds. And many go on to engage with the companies they invest in, to put pressure on them to behave as good corporate citizens. They do this by starting discussions with the companies, filing resolutions to be voted on at annual general meetings, educating the public, and attracting media attention.
Are you limiting your returns?
Managers of both negative and positively screened funds say their investments should eventually outperform those that include sin stocks. This is because the environmental, social and governance factors assessed in choosing responsible stocks tends to result in investments that outperform in the long run. This has already been proven in Australia by responsible superannuation funds and managed funds, and more research will clarify whether the same is true in New Zealand.
Organisations such as The Responsible Investment Association of Australasia (RIAA), Morgan Stanley and others have done research showing that performance doesn’t need to be adversely affected by responsible investing choices.
Responsible investing gurus such as Dr Rodger Spiller explain that no KiwiSaver manager invests in all of the companies and industries available to them, choosing instead a subset of all that is available to them.
Responsible funds still have hundreds, if not thousands, of investment choices available after screening – and as a result the manager can diversify a fund’s investments to ensure it does just as well as ordinary funds.
If you’re still worried about the effect of responsible investing on your long term investment outcomes, then bear in mind that New Zealand’s largest investor, the Guardians of the New Zealand Super Fund, which invests the money destined to fund your NZ Super, is a responsible investor.
Finding a responsible KiwiSaver fund that meets your criteria may not be easy.How many responsible investment options are there?
At the time of writing, the main responsible KiwiSaver funds were:
With so few funds available, the problem for KiwiSavers is that even if the fund meets their principles, it may not be suitable in other ways. For example, SuperLife’s Ethica fund is a Balanced type fund, which means it has an investment mix of conservative and growth assets. Depending on your life stage and risk profile, you may not want to invest in a balanced fund.
Some KiwiSavers choose “life stages” funds, which transition their investments from Growth to Balanced to Conservative investments automatically as they age. But to date, no responsible KiwiSaver scheme offers a life stages fund.
Conversely, if you find a fund with an appropriate level of risk and return for you, it may not employ the investing philosophy you desire. If thanks to your personal beliefs, you want a “deep green” fund that concentrates on environmentally friendly investments, a general socially responsible fund may not provide what you want. Or if you want a positively screened growth fund rather than a negatively screened one, you may be out of luck.
The more people who put their money where their morals are, however, the greater the competition that will arise.
Eventually, investors who are in less than perfect funds may find new options that suit them better. In the meantime, something is better than nothing if you’re motivated by responsible investing.
Advice thin on the ground
For those advisers who do advise on KiwiSaver, there are a number of advisers who do specialise in socially responsible funds, but they may be more interested in investors who have $100,000 or more to their name. Many other financial advisers shy away from recommending responsible funds.
If you’re just starting out and can’t get a commission-based financial adviser to take you on, you could choose a fee-based adviser. Fee-based advisers charge you on an hourly basis rather than taking a commission on products they sell or the amount of money you have invested.
A list of RIAA certified responsible investment advisers can be found here.