Thursday, 25 August 2016

This is something I wrote for on the state of the socially responsible and ethical funds in KiwiSaver.

By Craig Simpson
I don't for one second condone investing in cluster bomb or weapons of mass destruction makers via KiwiSaver funds, but I do think some people are over-reacting to what the media is calling KiwiSaver's dirty little secret.
Let's be perfectly clear, KiwiSaver managers are not deliberately investing in "unethical" investments. Rather they are gaining exposures via their investments in third party manager's funds, or exchange traded index funds.
When investing into another fund manager's fund or into an index fund you can not generally control what investments are held at any point in time, unless of course you have a separate mandate or are following and ethical index.
For many mainstream investors with no particular bias or religious beliefs, there has to be a general level of acceptance, that when you invest into another pooled investment vehicle or index fund, there may be some holdings that you do not agree with, or for personal reasons, would prefer the manager did not hold.
If investors feel so strongly about following an ethical or socially responsible path, there are options available to them within KiwiSaver.
What the current ethical or socially responsible options are
The options for ethical or socially responsible funds within KiwiSaver are small, although the sector is growing slowly. The KiwiSaver funds available at present include:
Media hype forces reviews
Many of the existing managers who have named and shamed across various publications have announced reviews of their manager selection criteria and investment approaches.
We should also keep in mind that many of the investments in some of the companies such as Honeywell International and Northrop Grumman, for example, are as a result of investments into other fund managers who have exposures to these types of companies.
Although exposure to some of the companies is not ideal, in order to gain global exposure to a wide range of companies that represent the market, there will be some collateral damage. If as an investor you wanted to take a pragmatic approach and looked at the bigger picture, the actual dollar exposure to undesirable companies is actually microscopic. But for some even a few cents or a couple of dollars is too much.
Grosvenor has announced they are switching managers in order to tidy up their portfolios and no doubt to distance themselves from any unwanted attention.
New entrant Simplicity is taking a different approach and is in discussions with Vanguard, who provides their international share exposure, to design a product that is suitable for the NZ market (and presumably beyond), that takes into account the ethical and responsible investment approach adopted by the NZ Super Fund. If enough KiwiSaver managers can join together as a united voice and tackle the issue with managers like Vanguard, change is more likely to occur.
How do I know where my KiwiSaver fund is invested?
Each March, KiwiSaver managers are required to disclose their entire portfolio in an excel file and these will be found on the various websites alongside the quarterly disclosure statements.
You can also ring your current manager and ask them directly what holdings they have. For commercial reasons they may not be willing to provide their most up to date information, but should still be able to put your mind at ease that they are not invested into certain types of investments.
Top 10 holdings are disclosed every quarter too as part of the KiwiSaver managers' regular reporting requirements. Some managers also release monthly commentary and fund updates, and these can also be useful resources.
How green is green?
There are many shades of green when it comes to socially responsible and ethical investing. Even if a fund says it's socially responsible or is included in a socially responsible index, it may still have exposure to some companies that you as an investor may find offensive.
Take for example BP. The oil giant is included in the MSCI EAFE ESG etf which invests in securities outside the US and Canada that have positive environmental, social and governance (ESG) characteristics. That's even though BP's Deepwater Horizon oil leak in the Gulf of Mexico remains fresh in the memory. The clean up costs and subsequent settlements were in the tens of billions of US dollars.
In another example, the ishares MSCI KLD 400 Social Index includes sportswear giant Nike, a company that in the past has been linked to child labour and sweatshop allegations. Alongside Nike is cosmetic company Estee Lauder. The cosmetics industry has long been associated with animal testing in the process of manufacturing their products.
These are just some brief examples of companies that could appear in socially responsible or ethical funds.
A recent article by Mark Lister of Craigs Investment Partners further highlights some of the dilemmas investors face when considering ethical or socially responsible investing. His article is here.
Another piece worth reading is this from Massey University's Claire Matthews here.
A final word
Ethical investing is a personal choice first and foremost.
If you are concerned about how your manager is investing your funds, don't be afraid to ask your KiwiSaver manager what they are doing to minimise their exposure to certain types of investments.
Also check out your current managers Responsible Investment Policy on their website.
If you are not satisfied with your manager's response or their investment strategy/investments they hold, then you should seriously consider switching to a fund where the investment strategy is more palatable and in line with your preferences.

*Craig Simpson is a shareholder in the management company that runs the Amanah Ethical KiwiSaver Fund. The opinions expressed in this article are his own.

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