'Ethical investing', 'responsible investing', 'green finance', 'sustainable investing', 'social investing', 'ESG'. Whatever you call it, many of us are keen to align our investment choices to our values. But before you jump in because an investment claims to be 'ethical', take a deeper look at what you’re investing in and other factors you may need to consider.
Integrated financial products have many names
The FMA uses the term ‘integrated financial product’ to describe any financial product incorporating non-financial considerations.
You’re unlikely to see them marketed that way. Instead you might see funds advertised as ‘sustainable’ or ‘ethical’, or your KiwiSaver provider making claims about not investing in certain things. You may also see ‘green bonds’ or, increasingly financial products badged as ‘social’ or ‘impact’ investments.
Most KiwiSaver funds are integrated financial products to some extent
The majority of KiwiSaver funds are integrated financial products to some extent.
Some funds exclude certain industries, activities or types of investments. For example most KiwiSaver and other managed funds exclude investments in companies that produce nuclear weapons.
Another approach is funds specifically investing in sectors or companies that have positive (or not negative) impacts, such as investments which are ‘green’. They can even directly fund social impact projects, like building social housing.
Fund managers may also actively engage with companies they invest in to encourage improved non-financial outcomes such as a reduction in carbon emissions.
Some bonds are integrated financial products
Green bonds typically finance or refinance green assets or projects such as wind farms or certified green commercial property. Others might finance assets or projects that are expected to have a positive social impact.
'Green-washing' is illegal
If a company overstates the green features of product, or mislabels a product as 'green', this is known as 'green-washing'.
Many companies understand consumers want to make more ethical or 'green' choices, and advertise to appeal to those desires. Always look for evidence to substantiate their claims.
It’s illegal to mislead or confuse investors by suggesting or omitting certain information. The FMA can take action to stop or prevent this behaviour. contact us if you think a company is 'green-washing' and can’t back up their claims.
Providers must clearly explain and substantiate how they are ethical
Providers offering any form of integrated financial product must clearly explain and substantiate the non-financial features.
For example, if a fund excludes certain types of investments, the fund manager should explain how they decide what they won’t invest in. They should also explain any exceptions to the criteria, such as a certain percentage of the portfolio being allowed to fail the eligibility criteria.
If it’s a more proactive impact approach, for example, making investments that will help reduce CO2 emissions, the disclosure and investor materials should explain how the provider will achieve this, give a date by which they are aiming to achieve their goal and explain how they’ll measure against it.
Providers must explain how they’ll monitor their progress
Providers of integrated financial products must let you know how they’ll ensure any non-financial objectives are being achieved. This might include regular reporting, which may include review by an external expert. They should also explain the consequences if they don’t achieve their objectives.
Some providers state they’ve used an external organisation to validate their claims. You should check who the organisation is, and be confident in their assessment. Look at their methodology and process for the assessment, and their track record of assessing similar products in New Zealand?
Consider what’s most important to you?
Many factors determine what approach is right for you. As with any investment, most important are your investment objectives and personal values. Ask yourself:
- Will the projected returns and level of risk, align with my investment objectives?
- What does being 'green' or 'socially responsible' mean to me? Are there particular sectors I want to exclude – or include?
Are there additional risks or costs?
All investment products have risks. These should be clearly explained in the investor materials. Some integrated financial products have additional risks. The investment materials should explain whether there are any:
- Risks to not achieving the non-financial goals, and if so, what these are.
- Risks to not achieving the non-financial goals, and if so, what these are.
- Financial performance implications. For example, could investment options be limited by the criteria applied to the product?
- Fee implications, for example because of costs related to external assurance, operations or non-financial analysis.
- Risks of the policies being breached and therefore investor funds not being allocated as intended or expected, and the implications of that.
Tips on making an ethical investment decision in your KiwiSaver investment or other managed fund
- Managed funds must have a Statement of Investment Policy and Objectives (SIPO) that sets what the fund is trying to achieve and the rules about what the fund can and cannot invest in. They often also have a responsible investment policy. If you cannot find these documents on your provider’s website ask them for a copy.
- Think about not only what these documents say, but what they do not say. For example if these documents are silent on investing in assets linked to fossil fuels, there is likely no restriction on the fund investing in that industry.
- Read the fine print and ask the provider if something is unclear. For example, if there is an exclusion on investment in fossil fuels, what does this actually mean?
- It may only apply to investments in companies that are involved in fossil fuel extraction or production, but not those involved in distribution.
- How is ‘involved’ defined? The fund’s policy may include a threshold for percentage of revenue earned from fossil fuels or assets that are oil/gas/coal reserves, below which a company is not classed as ‘involved’.
- It may only apply to equity investments the fund makes and not, for example, fixed interest investments such as bonds (which are still a form of financing for fossil fuel companies).
- Even the equity investment exclusion may be qualified – it may only apply to equity investments made directly by the fund rather than indirectly by investing in another fund (which is a common strategy used by fund managers).
- If you want to check whether your KiwiSaver fund or managed fund invests in a specific company, you can download a full list of assets from Sorted’s Smart Investor tool. Smart Investor will also link you to key documents for the fund, such as the SIPO.
- If you want to learn more and know how to check the impact of your investments in the delivery of fair treatment of workers and ethical and sustainable work practices you can find out more about this here.
Tips on making a decision on a 'green bond'
- What makes the bond 'green'? When you invest in bonds, you are lending money (see more about bonds in our Bond Voyage guide). What will your money be used for? Is it to fund a specific asset or project like a windfarm or green building?
- How do you know the bond will actually be green? What measures will be used and how often will they be reported?
- Is there any independent assurance of the green claim and/or the reporting of its results? Does the offer include reference to external green standards? What are they and do they appear credible?
- Can the green status be lost? Can the money invested in the bond be reallocated to projects that are not green? If so, how and under what conditions?
- Even if the bond is genuinely green, is it really having a positive impact? For example, if an energy company that mostly uses coal generation sets up a green bond to refinance a hydro-electric generation asset, this will not negate the impacts of coal generation. The difference might not matter to you, but you should be aware of it before you invest.