Barry Coates: Investing smart, investing ethicallyBarry Coates: Investing smart, investing ethically

In Part 1 of the series, Barry gives an introduction to ethical investing, including the history of ethical investing, different ethical investment strategies, and how to choose a more ethical fund. In Part 2, he dives into the difference between ESG risk management and impact investing.

Most Kiwis want to do the right thing. There are ways that we can all act to contribute towards lower emissions, a healthy environment, and a fairer society. We recycle, fly less, maybe drive an electric vehicle, and take bags to go shopping. When we do, we also start to change the economic system.

But not enough of us use our financial choices to take action. There are real world consequences from our KiwiSaver or other investments. Our money can be used to do harm, or it can be used to do good—it’s our choice.

Investing is not only about financial returns, but it’s also about providing capital (money) for the issues that matter, such as climate change, the environment, and social equity. For too long, the finance system has regarded impacts on the real world as irrelevant, and allowed finance to flow freely into tax havens, weapons, pollution, and exploitation.

It doesn’t have to be like that. There are now options and tools to help you avoid companies that do harm, and invest in companies with higher standards and positive impacts. In recent years, there’s been huge international growth in ethical investing. There’s also growing evidence suggesting that historical returns from well-managed ethical investments have been, on average, at least as high as from conventional investing.

Where did ethical investing come from?

Ethical investing isn’t new. It’s been around for centuries, driven primarily by religious faiths that avoided investing in companies acting against their beliefs, such as the boycott of companies involved in the slave trade. In the last century, divestment (avoiding or withdrawing investment) was used strategically against companies invested in South Africa as part of the anti-apartheid movement.

More recently, we’ve seen $15 trillion of assets divested from fossil fuel producers, as well as campaigns to avoid investing in tobacco, nuclear weapons, and cluster munitions. These divestment campaigns have been effective in de-legitimising companies and achieving change, as well as allowing investors to avoid harm by excluding companies that do not align with their values.

Strategies for ethical investing

There are many different terms used for the spectrum of ethical investing approaches; green, socially responsible, responsible, ESG, sustainable. The definitions aren’t consistent, and the public generally understands the term “ethical investment” to mean a range of approaches. In Mindful Money’s inaugural Ethical Investment awards, we saw that best practice is for funds to adopt a number of these strategies in a coordinated way.

In recent decades, fund managers have recognised the importance of climate change, the environment, and social issues as potential risks that influence financial returns. Tools have been developed to help funds manage Environmental, Social and Governance (ESG) risks, such as pollution, high climate emissions, and child labour in supply chains. Companies can incur financial costs such as a loss of reputation and brand value, employee dissatisfaction, and lawsuits.

Increasingly, fund managers are playing a more active role as owners of companies, raising ESG risks at company AGMs and meetings. This engagement is becoming a more powerful approach. Some large passive funds are now using their huge voting power to influence companies, as shown recently at Exxon’s AGM. A coalition of investors forced Exxon to move faster on a transition away from fossil fuels and replaced three of their directors.

Many of the actively managed investment funds also invest more of their portfolio in companies with better standards—those that have higher ESG scores and a more positive impact. This can have a significant effect on demand for higher impact companies, as has been seen in the rapid share price increases for renewable energy producers.

Funds that intentionally invest most of their portfolio in companies that create positive social and environmental benefits are part of the category of impact investing. The impact investing category is still small and generally high risk, but has had high impact and rapid growth.

Choosing an ethical fund

Annual surveys show that around three quarters of the surveyed New Zealand public believe that their fund provider should act ethically, and almost all of those who don’t have an ethical fund intend to get one.

When it comes to issues that the public are concerned about in their investments, labour rights and human rights issues are highest on the list, followed by environmental damage (e.g. palm oil, deforestation), animal welfare, weapons, tobacco, gambling, and fossil fuels. At least three quarters of the public want to avoid these issues.

Despite these concerns, only a small number of KiwiSaver and investment funds exclude a broad range of these companies. Only 19% of funds have a policy to avoid investing in fossil fuels, and many of those have some continuing investments. Only 5% are fully fossil-free funds. $6 billion of KiwiSaver funds are invested in companies that New Zealanders most want to avoid.

So as an investor, how do you find and choose a more ethical fund?

Do your research

With most companies and funds now positioning themselves as ethical, it can be difficult to separate out the credible claims from the greenwash (making misleading claims about being green or sustainable).

Although there are research providers (such as MSCI, Sustainalytics, and ISS) that rate individual companies, their subscription rates can be high. For funds, the Responsible Investment Association of Australasia (RIAA) is a credible certification scheme.

Use the tools available to you

You can go to Mindful Money’s website to find the list of companies that are held by any KiwiSaver or investment fund. These not only include direct company investments, but also the companies in funds that the provider invests in. This radical transparency and information is now available to every investor.

Mindful Money uses RIAA’s certification, coupled with direct analysis of the portfolio of funds in its Fund Finder tool for KiwiSaver and investment funds to help you find a fund aligned with your values. Everyone has different preferences when it comes to ethical investing, so it’s important to think about what matters most to you in choosing a KiwiSaver or investment fund.

On the Fund Finder, users are asked to complete three short questions to define their criteria:

• the issues they want to avoid (e.g. fossil fuels, human rights violations)

• their preferred investment approach (e.g. avoidance, engagement, low fees, or high past returns)

• their risk profile.

They’re then shown a shortlist of screened ‘Mindful Funds’ that most closely match those criteria. It’s free to use the Fund Finder and free to switch KiwiSaver providers.

Wrapping up

As the saying goes, “money makes the world go round”, and the investment choices we make can play an important role in addressing the challenges of climate change, biodiversity loss, and social inequity. With ethical investing, you have the potential to do good and do well.

Mindful Money is a charitable social enterprise that aims to make investment a force for good. Offering free tools on its website, Mindful Money educates and empowers the public to learn more about their KiwiSaver and investment funds, and find funds that fit their values and criteria.