Ethical Investing - The Definitive New Zealand Guide

Ethical investing is beginning to gain popularity among some New Zealand investors, but misunderstandings remain as to what ‘ethical’ means. A select few KiwiSaver schemes, managed funds and Exchange-Traded Funds (ETFs) promote their ethical nature, but the term can be subjective without definition. 
To help explain what ethical investing is and what options are available, our guide covers:

1. Defining 'Ethical investing' (responsible investing and impact investing)
2. How can I invest ethically?
3. Building an ethical investment portfolio
4. Four Ethical Investment Option (KiwiSaver, Managed Funds, Index Funds, Exchange Traded Funds and Individual Companies)
5. Frequently Asked Questions
6. Is my investment ethical, and how can I find out?​

The Responsible Investment Association of Australasia (RIAA) explains Responsible Investors as those who "understand that companies or assets won’t thrive whilst ignoring:

1. Environmental issues (pollution, climate change, water and other resources scarcity),
2. Social issues (local communities, employees, health and safety),
3. Corporate governance issues (prudent management, business ethics, an experienced board of directors, appropriate executive pay) or Ethical issues”.

Per the RIAA, Responsible Investment is a process that takes into account “environmental, social, governance (ESG) and ethical issues into the investment process of research, analysis, selection and monitoring of investments”. 

There is a broad array of methods that responsible investors use to manage these non-financial risks – from excluding companies involved in controversial industries to supporting the most sustainable companies, to a sharp focus on ESG risks, and using ownership to engage with companies.

The RIAA accepts that the responsible investment sector is diverse and uses many investment approaches and financial analysis techniques, explained further in their guidance. Their suggested investing approach includes Best-In-Class Screening, Corporate Engagement and Shareholder Action, ESG Integration, Impact Investing, Minimum-Standards (Norms-Based) Screening, Negative/Exclusionary Screening, Positive/Inclusionary Screening and ​Sustainability Themed Investing.

The UN Principles of Responsible Investment (UNPRI) are six investment principles for incorporating environmental, social and governance issues into investment practice. UNPRI is a continuation of responsible investment, focusing on ESG management as one of the strategies. Developed by the UN, the principles involve companies:

1. Incorporating ESG issues into investment analysis and decision-making processes,
2. Becoming active owners and incorporating ESG issues into their ownership policies and practices.
3. Seeking appropriate disclosure on ESG issues by the entities in which they invest.
4. Promoting acceptance and implementation of the Principles within the investment industry.
5. Working together to enhance the effectiveness in implementing the Principles.
6. Reporting on their activities and progress towards implementing the Principles.

The PRI directly influence everyday ethical investing, and the importance of fund managers incorporating ESG factors into their investment process is now widely accepted. PRI’s members now manage $110 trillion of funds under management. Investors expect their investment managers to include ESG factors within their funds and investment strategies per this article. Accompanying this trend are law changes in some countries to require investment managers to report on responsible investment practices

Impact investing is a related term that is reserved for investments that provide social and environmental benefits. The widely accepted definition is:

• “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.”
• The key elements are intentionality in terms of business purpose, positive impacts, measurable impacts and impact coupled with financial returns.
• There is widespread interest around impact investing and rapid growth in investment capital, albeit from a low base. There are a number of international funds that have a credible track record of both impact and returns, such as the WHEB Sustainable Impact Fund.
• There are a number of companies that fit this definition in New Zealand, particularly start-ups and SMEs, operating in sectors like renewable energy, health care, affordable housing. There are now and several funds started in New Zealand for wholesale and professional investors, but there are not yet any impact KiwiSaver or investment funds available to the public. 

Defining Ethical Investing Further
Need further clarification? We asked John Berry, CEO & Director of Pathfinder to define the different terms. His response is as followed:

Responsible Investing

• Means taking account of a wide range of risks, and not simply financial risks, when assessing the performance and outlook for a company. For example, environmental risks like climate change and a company's carbon emissions are really important for reviewing the long-term investment potential of a company.
• Other examples are how a company looks after its staff (good working conditions and valuing staff should mean higher engagement, productivity and profitability) and how deeply a company cares about the safety of products it sells (a company that stringently tests products for safety is at lower risk of lawsuits and reputational damage).
• Responsible investing is essentially assessing how non-financial risks impact a company and its potential future investment returns.

Ethical Investing

• Ethical investing is 'responsible investing' combined with a more values-based approach. This means wanting companies to 'do the right thing' and behave ethically not only because it may generate higher investment returns but also because it is better for our planet and people.
• This could include not wanting to invest in companies that test their products on animals, wanting to invest in renewable energy companies to mitigate climate change or wanting to invest in companies that value their local community. Research globally shows you can invest ethically and generate good returns.

Impact Investing

• Impact investing means investing for financial gain but also for a specifically measurable benefit to society or the environment.
• Common examples are investment healthcare, housing or education which provide a quantifiable outcome such as improved literacy levels, specific health outcomes in a community or number of homes provided to vulnerable families.
• Impact investing is a small but growing part of the investment landscape and will generally involve investment into private companies (meaning they are not listed on a stock exchange).

Ethical investing has grown from a niche interest to becoming a mainstream topic, with an increasing number of New Zealanders highly motivated to make financial decisions that fit in with their ethics.

Before, many KiwiSaver funds and fund managers invested in companies profiting from weapons, tobacco and gambling, or other businesses with little regard for climate change, equality and worker rights. Today, ethical investments are on people's radar in a much bigger way with providers fighting over this growing piece of the pie. But what is ethical and how do you know the difference between funds that are legitimately concerned with the environment versus those who just appear to be green?

ESG pioneer, Pathfinder Asset Management (who run the Pathfinder KiwiSaver scheme) is one of a handful that have staked a claim in this space.

Pathfinder has argued its case for ethical authenticity on the basis of positive screens for companies that pass its rigorous tests on environmental, social and governance. Booster has offered SRI funds since 2009 and has returned above-market results in this time. Others, including non-profit index fund manager Simplicity, make the ethical claim on the basis of exclusions; that is they purge those nasty ‘sin stocks’ that you might typically associate with being unethical: tobacco, alcohol, weapons and adult entertainment for example.
 
If you’d like to invest but have some concern around where your money is going (and whether it indirectly supports behaviour and industries you disagree with), ethical investing offers a solution. 
 
Know this: The United Nation Principles for Responsible Investing (UNPRI) promotes the idea that ethical investing supports businesses making a positive change and benefiting society as a whole. However, a fund manager may invest in companies they assess ‘ethical’, even if their products and services aren’t what you’d first associate with being ‘ethical’. For example, the Pathfinder KiwiSaver Growth fund has investments in wind, hydro and solar energy companies, as well as investments in Fisher & Paykel Healthcare, Spark, Pushpay and Nike.

​Please see our favourite ESG Funds list for more details.

In a nutshell, not much. The general idea of creating investment opportunities that are positive for society is shared among all of the different variations of ethical investing. Whether the term is 'green investing', 'impact investing' or 'positive investing', all of these and more encompass the same idea. However, how the different ethical investment strategies achieve that goal varies. 

Some strategies will tilt towards higher standards by including positive-impact investments (i.e. anything in renewable energy or zero-waste), whereas other strategies commit to excluding investments which are seen as having negative impact. Almost all funds use a combination of both approaches.

To invest in industries you’re comfortable with, it’s essential to understand the ethical fund’s methodology for selecting particular investments. By understanding it, you can be fully comfortable with where your money is going. ​

No investment is guaranteed to make money, but the recent performance by New Zealand’s most ethically-focused funds suggests returns can beat traditional funds. For the 12 months ending 30 September 2020, Pathfinder's growth fund was the second-highest performing KiwiSaver growth fund, beating actively managed leaders such as Milford, Fisher and Booster.

Commentary from Morningstar, a fund data reporting company, suggests that ethical investing can beat market returns. The performance of Pathfinder’s funds is a recent example of that. A wider review of the international evidence shows that responsible investment reduces risks, with returns that are, on average, as high or higher than comparable conventional funds.​

If you're ready to take the next step, our three-point list will help your decision-making process.

Our list of ethical options below outlines what's available in New Zealand and what you need to know about the risks.

​Related guides and reviews: 

• Favourite ESG Funds
  
• Pathfinder KiwiSaver
• Booster KiwiSaver
• Simplicity KiwiSaver
• Kernel Review
• Hatch
• Stake
• Sharesies
• Smartshares
• Investing in shares