Mindful Money’s Ethical Investment Principles

Mindful Money’s Ethical Investment Principles

Introduction

Mindful Money aims to change the ways that New Zealanders think about their investments, so that they give greater priority to directing their funds towards social and environmentally beneficial outcomes. Investors are supported and empowered to direct their investment towards credible forms of responsible investment and impact investment.

Mindful Money’s Ethical Investment Principles sets out how Mindful Money has selected investment funds to participate on the platform as Mindful Funds. 

Defining ethical investment principles

Aspects of the ethical investment agenda have gone mainstream. Leaders in the investment community, notably Larry Fink in his annual letter, are calling on corporations and investment managers to have a business purpose and to take non-financial issues into account. Much of the investment community has recognised they have a responsibility to reduce financial risks from environmental, social and governance (ESG) factors, as shown by membership of the Principles of Responsible Investment (PRI), which has reached US$120 trillion of assets under management (March 2021).

Despite being mainstream, there is debate in the financial sector and confusion amongst the public about the meaning of terms such as ‘responsible’, ‘sustainable’ or ‘impact’ when applied to investment, and widespread concern over greenwashing. This is reflected in guidance from New Zealand's Financial Markets Authority (FMA) and survey data that show more than half of the New Zealand public are concerned about greenwashing.

While the reduction of financial risk through ESG management is an important part of the duty of investors, Mindful Money considers that the notion of ethical investment goes further. The core principles at the heart of the notion of ethical or responsible investment management go beyond ESG risk management:

• fund managers should ensure the funds they manage are not invested in companies that have socially and environmentally destructive impacts
• they should use their influence as institutional shareholders to improve practices; 
• they should increase the proportion of their investments in companies that are managed to high Environmental, Social and Governance (ESG) standards
• leading members of the responsible investment sector will also invest at least part of their portfolio in companies that contribute to social and/or environmental benefit.

Mindful Money considers the core principles for credible RI are:

Fund services should meet their clients’ needs, including their values and ethical preferences by:

• Prominently displaying their responsible investment policies and approaches, and regularly reporting on ESG issues
• Seeking to understand their clients’ preferences, including their ethical preferences, and how those are changing over time
• Acting in ways that benefit their clients’ financial and ESG interests
• Marketing their products and services accurately and honestly

Investment managers should exercise corporate governance through:

• Active engagement with management and the Board of companies they invest in (either directly or as part of a coordinated group), especially where there is poor ESG performance, high ESG risk or controversy
• Formal voting and participation in governance processes, in collaboration with like-minded investors, to improve ESG policy and performance

Investment strategies should encourage a socially-beneficial purpose, including:

• A long term approach to investment, risk and return
• A holistic framework for assessing social and environmental impacts
• Improving ESG performance over time, recognising some ethical compromise is inevitable, but making it defensible and reduced wherever possible
• Achieving social and/or environmental benefits as well as financial return - international targets like the Sustainable Development Goals or the Paris Agreement on climate change can be useful to align investment with business purpose

Investment funds should be transparent and disclose material information, including:

• Impacts of investments on climate change, as well as positive or negative impacts on society and the environment
• Investment choices that may give rise to investor concerns or entail compromises with ethical policies
• Full holdings in investment portfolios

Putting ethical investment principles into practice

As a charity promoting responsible investing practice, Mindful Money prioritises working with investment funds that follow these principles and put them into practice.

For managed funds, a positive social and environmental impact can be achieved through one or several of the following approaches:

1. Avoiding investments in companies with harmful impacts

• What a business does is often more important than how they do it. For example, Mindful Money considers that a socially responsible tobacco company is an oxymoron. Sectoral exclusions are a useful tool in sectors where the business model is inherently damaging to people or the environment.
• Excluding ‘sin stocks’ and other damaging sectors provides assurances to investors that their funds are not invested in businesses that are inconsistent with their values.
• Exclusions of specific companies through ESG management avoids investing in companies with adverse social and environmental impacts, beyond sectoral exclusions.

Mindful Money uses the term 'broad exclusions' to define those funds that provide sectoral or ESG screening to avoid investments that would concern most investors (see priority sectors and issues in our annual consumer surveys undertaken jointly with the Responsible Investment Association of Australasia). The funds that use a more limited coverage of companies of concern are designated as having 'some exclusions', and the few funds that use no exclusions are designated as 'no exclusions'.

Mindful Money encourages fund managers to understand investor concerns around damaging investments, and to either exclude investments in those companies or to provide information to investors on how their engagement activities are making tangible and significant changes to those companies.

2.   Investing in companies with high social and environmental standards

Portfolios should include a high proportion of companies that operate to leading social and environmental standards. This can be achieved through active ESG screening and portfolio selection or by investing in high ESG passive funds. The use of ESG analysis is now common in the investment sector, but there is less information on how ESG management leads to higher standards in portfolios or improved social and environmental outcomes. In the absence of clear standards across the sector, there have been widespread concerns over greenwashing, as is evidenced by concerns expressed by the Financial Markets Authority (FMA).

Membership of international bodies such as the Principles for Responsible Investment (PRI) and the Responsible Investment Association of Australasia (RIAA) provide ways for fund managers to engage with RI practices, but membership in itself does not require achievement of a high standard.

RIAA certification sets an objective standard for ESG management systems and practices, and analyses applicants to assess whether they achieve the standard. This represents the only credible certification scheme in Australasia. The funds with RIAA certification are designated as “Applies Higher Standards: RIAA certified" on the Mindful Money website’s Fund Checker and Fund Finder.

3.   Stewardship and engagement

Active ownership is part of the responsibilities of responsible corporate government. Mindful Money strongly supports the principles outlined in the New Zealand Stewardship Code and encourages fund providers to sign up. The key elements for stewardship, as outlined in the code are: 

• Playing an active governance role, including voting on shareholder resolutions, especially those addressing ESG issues, and publishing their voting record
• Actively engaging with companies in the investment portfolio and others on ESG issues, and publishing information on engagement activities, including leadership roles where applicable. Most funds hold a relatively small proportion of company shares, so collaboration with other institutional investors is typically necessary to leverage change. 
• Providing information on the outcomes of engagement, particularly where there is public concern over the harm caused by the company, including the extent of change and contribution from engagement

4.  Investing to create positive impact (Impact investing)

Impact investments generate measurable social and environmental impact alongside a financial return. The associated financial returns can vary from a fully commercial return through to a low or zero return. It is the sweet spot for a growing number of investors. However, despite rapid growth overseas, there are still few opportunities for New Zealanders to put their money into impact funds.

The widely-accepted definition is that Impact investing has the explicit intention of generating positive social and/or environmental impact alongside a financial return, with measurement of this impact. Impact investment should provide additionality, meaning there are benefits that would not have occurred without the investment. Most examples of direct impact from the investment process itself are found in early stage investing and unlisted companies. This aspect of additionality is important and is recognised as a priority by Mindful Money.

Mindful Money also welcomes investment that has an indirect impact, such as through investment in listed companies that generate positive social and environmental benefits. This is important for many investors, and when investments take place at scale (as is occurring in sectors such as renewable energy) the aggregate effect is to reduce the cost of capital and encourage scale up.

Over recent years, the first dedicated investment funds have been developed with a focus on making a positive impact, as well as making financial returns. Mindful Money has produced the first directory of New Zealand impact investment funds. Most of the offerings currently available are restricted to wholesale investors, and there are still few funds available to retail investors. The good news is that this is a fast moving area of investment and new funds are currently being developed. Over time, Mindful Money will add more funds that meet the criteria. 

Mindful Money is also working with fund managers to increase the proportion of impact investment in mainstream funds, and publicising examples, such as in the social housing sector.

5.   Strengthening the RI Framework

Through its outreach and public engagement, Mindful Money is building a movement of educated and active investors who want to invest ethically and responsibly. We will advocate strongly through all available channels, including social media, to raise public awareness about the benefits of investing ethically. Mindful Money profiles the fund providers that exemplify best practice, and works collaboratively with others in the investment sector to raise standards and grow the ethical investment movement.

Mindful Money seeks to strengthen standards and the credibility of RI, working with RIAA, FMA, Consumer NZ, Commission for Financial Capability (CFFC) and others to counter greenwashing and misleading claims.

Mindful Money also seeks to improve the policy and regulatory framework for investment and finance. Mindful Money has been an active contributor to the development of a Sustainable Finance roadmap, through the Sustainable Finance Forum, and the Centre for Sustainable Finance. Mindful Money advocates for a policy and regulatory framework that promotes investment with positive climate, social and environmental impacts. 

Mindful Money seeks to collaborate with others to build a public awareness campaign for RI and significantly increase demand; develop clearer standards and stronger forms of certification for RI; and implement an inclusive sustainable finance strategy for New Zealand.

Applying ethical investment principles to the Mindful Money Platform

As a result of the above principles, the funds that qualify for inclusion on Mindful Money’s online platform as Mindful Funds need to include one of the following characteristics (and ideally more than one):

• Broad exclusions of companies that are of concern to most New Zealanders
• Evidence of stewardship through effective engagement and outcomes from that engagement
• Investment in sustainably-themed sectors and companies that generate social and/or environmental benefits
• Contributions towards raising standards in the sector and improving the framework for ethical investment

The selection of Mindful Funds draws on the information and analysis on the Mindful Money website, further research, requests for information from providers and, where appropriate, third party reports. Applications for inclusion as a Mindful Fund are considered by the Mindful Money Investment Committee which meets quarterly.

More information about how Mindful Money’s comprehensive research results in the fund information on the platform can be found in the Mindful Money Methodology.