KiwiSaver funds touting themselves as ethical are falling short of their claims, FMA says

This article was originally published by Daniel Smith on Stuff. 

Every KiwiSaver and investment fund that labels itself green, climate friendly or ethical is falling short on its promises, the Financial Markets Authority says.

A review of 14 KiwiSaver and other managed funds by the industry regulator revealed “laziness” and a “lack of maturity” in the vast majority of investment funds claiming “ethical” status.

FMA director of investment management Paul Gregory​ said the current state of the industry was “not good enough”.

“Fund managers need to do a lot better in explaining what they mean by these terms, and more importantly how they prove them,” Gregory​ said.

Gregory said research had found retail investors found it difficult to make informed decisions about ethical investing.

The review highlighted a clear gap between the language used by funds in marketing material, and the understanding of investors, making it difficult, or in some cases impossible, for an investor to fully understand the nature of the investment they were making, he said.

“Investors were overwhelmed by technical jargon and often relied on a leap of faith in choosing an ethical investment. Others abandoned the search as ‘too hard’ and did not choose an investment at all,” Gregory said.

“These funds need to be absolutely crystal clear what exactly they mean by these words. If you says it is a climate-friendly fund, it needs to say how it is, and what are the consequences for failure.”

A fund that said it was climate-friendly, but its only mechanism to achieve this was a tilt towards technology companies would be found to have misled the investor, he said.

“If we find something to be misleading we will act in the same way when we find people deliberately misleading investors in other areas of the market.”

The increasing popularity of ethical investing funds had led to a huge number of funds promoting themselves as ethical, without significant changes to how they operate, Gregory said.

This risked creating a “race to the bottom”, where minimal effort was applied and the distinction between truly ethical funds and generic managed funds disappeared, he said.

Barry Coates​ is the chief executive of Mindful Money a charity which researches the responsible investment credentials of KiwiSaver schemes.

He said while almost every fund on the market used the language of ethical investment, very few actually earned the titled they had bestowed on themselves.

“While 100% of funds are doing something, a very, very small percentage are doing enough,” Coates​ said.

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act, which next year will require managed funds and businesses worth over $1 billion to report on emissions and climate action, needed to go further, Coates said.

“If you are required to report on climate, why not human rights? There are a number of gaps in the disclosure framework, the main one being that most of these disclosures are voluntary. Well, voluntary isn’t good enough.”

If funds were required to disclose all of their investments, it would quickly reveal which funds had lived up to its ethical claims, and which ones were not, he said.

Pathfinder chief investment officer Paul Brownsey​ said different fund managers took the same words to mean different things.

How ethical is your KiwiSaver?PlayUnmuteCurrent Time 0:00/Duration 0:37Loaded: 100.00% Fullscreen

“We are very clear what the word ‘ethical’ means to us. It is a common stance our firm stands behind, and a measure of real world impact for our investments. But not all fund managers have a clear outline, and meanings can become quite subjective,” Brownsey​ said.

The waters had been muddied by a heavy reliance on the term ESG (environmental, social, and governance), he said.

ESG is often used by fund managers as a shorthand for the fund having an ethical framework

But Brownsey​ said the term confused investors, and did not actually mean anything.

“ESG is just a data set, it doesn’t actually say anything about a company. Both Shell and British American Tobacco could be called ESG companies because they treat their staff well and have a diversity policy, but it won’t tell you anything about the impact of their business on the world.”

Replacing terms like ESG with simpler language that accurately reflected the nature of investment was a crucial part of creating clarity for consumers, he said.