Fund managers failing to provide accurate or high-quality information for ethical funds, FMA says

This article was originally featured on NZ Herald and was written by Tamsyn Parker. 

Investment managers are not doing enough to make it easy for Kiwi investors to compare and choose ethical funds, research by the Financial Markets Authority has revealed.

The regulator undertook both consumer research and a survey of 14 KiwiSaver and other managed funds to get an understanding of how well the industry was meeting guidance it issued in December 2020.

It found that despite a strong desire by Kiwis to invest ethically those it questioned found it hard to navigate the sector and were not confident of what to look for.

Investors said they were overwhelmed by the technical jargon and often relied on a leap of faith in choosing an ethical investment while others abandoned the search as it was deemed too hard.

When it came to the investment managers the FMA found a lack of maturity in what they disclosed across the industry with a lot of vagueness and imprecision in the information provided.

Paul Gregory, FMA director of investment management, said ethical investing needed to be made a lot easier.

"Because otherwise people make a leap of faith, they don't do any further due diligence on something which of course can change...and they don't change once they have chosen.

"It is important that it is made easy for people because we have talked a lot about being in a situation where you can have harm done unbeknownst to you over a long time by being in the wrong risk profile or paying too much, but this introduces a whole other dimension that your values haven't been served when you thought that they were."

Gregory said its analysis of the investment funds found a lot of vagueness and imprecision and things that were difficult to pin down to anything.

"And you need to do that to connect with that investor problem that due diligence is hard with any aspect of investor selection and it is the same here."

He said investment managers needed to do a better job of knitting together their narrative across both formal and informal disclosures to the public.

"From your PDS [product disclosure statement] to your advertising and marketing you need to make it easy for people to understand what you mean by any of these terms when you use them and how you substantiate it."

Gregory said fund managers also needed to show how they justified their investment decisions, how they measured it and what the consequences of not doing it properly were as well as the risks introduced by doing it including that it may cost more to get information from companies about their environmental, social and governance practices.

He said investment managers also needed to be clear how they were governing the investment and making the decisions.

"The Russia sanctions was a good example of that."

Audit and assurance was important to show independent verification that the fund was being ethical and in the future meeting new climate change risk disclosures.

"In terms of direction of travel there is plenty of signals from investors, from policy, from the regulator that this needs to be done right."

Gregory said the FMA had made a number of recommendations to the providers it had sampled about how they could improve and by and large that had been welcomed.

"I think everybody knows this isn't going away. It is not just a trend that will disappear. They know they need to do a better job of it."

Advice for consumers

Gregory said part of the problem was that some investors were not clear on what they wanted in terms of their values.

"What is it the investor means for themselves by ethics? What do they actually care about. What do they not want to invest in?"

He said the first step was to figure out what you cared about. "You do have to take an interest in your investment and your values."

Gregory urged people to ask questions of their provider and try to compare the investment funds as well.

But alongside that it wanted providers to make it easy for investors to support that research and due diligence, "because it is not currently".

Mindful Money, set up by former Green MP Barry Coates, allows people to search for funds that exclude investments they don't want like munitions or tobacco and compare funds.

Gregory said the site was helpful because it offered a way to make comparisons but ran a certain business model which it disclosed.

"I think we are going to see more of that and that can only be helpful because it really does need to be easy to see so you can get a fairly absorbable picture of what it is you are in for from a values perspective when you are investing in a particular fund compared to another fund."

Gregory said he expected to see providers taking action quickly.

"We put this guidance out a while ago. We have now done the work that you have seen today on the fact the maturity is not really there yet."

He said the consumer research was also a strong reminder that change was needed.

"These are your existing or potential customers talking to you, it's not just about the regulator. If that is not enough of a signal that you need to do something then there are other ways to make people pay attention," Gregory said, pointing to action it had taken on misleading advertising and marketing in the past.

John Berry, chief executive of ethical investment manager Pathfinder said it was supportive of the FMA's consumer focus.

"It's really important for managers to have clarity on the product they are offering so investors can understand what the different products are and also be able to compare products across managers."

Berry said there are a range of ethical investment products on offer which would suit different values of different investors.

"The key thing is managers need to have clarity on what they are offering."

He said part of the problem was that terminology differed across the industry and could be confusing and then there needed to be clarity around not just why you were doing it but how.

"The market in New Zealand does need to mature in this space. There is no switch you can flick as a manager to go 'oh we are now sorted' it's a journey and a process. It is no surprise there is more maturity needed but we do need that to happen quickly so consumers can have confidence."

But he said New Zealand needed to be careful not to go down the route of Europe which had produced a 300 to 400 page document to define what ethical investment was.

"What we don't want is a rule book on being ethical. New Zealand has had a really good approach of being principles based. We need to agree on definitions and then people need to implement them in a really fair and consistent way."