More KiwiSaver enters sin stocks through passive investing

This article originally appeared on Good Returns, written by Andrea Malcolm  

Of the $98 billion in KiwiSaver, $8.6 billion (8.9%) is invested in unethical stocks, according to new analysis from Mindful Money. This has risen from 7.2% in 2019 when Mindful Money began collecting the data.

Coates says while the surge in fossil fuel prices caused by Russia’s war against Ukraine has seen KiwiSaver money pour into those stocks, passive investment and greater use of external index funds was also responsible. In particular, many passive funds invested in oil and gas companies expanding fossil fuel exploration and production.

Mindful Money divided fossil fuel companies into those transitioning to renewables, those expanding and those doing nothing. Investment in companies transitioning to renewable energy was flat and hasn’t increased as a percentage of KiwiSaver.

“One of the biggest investments in this area is Contact Energy but for other companies on a renewable pathway it is not big. Meanwhile, investment in companies that are expanding – Exxon, Chevron, BP and Shell –  is now $3.2 billion having more than doubled over the eighteen months to March 2023.”

Coates says many funds claim that stewardship and shareholder voting power will encourage companies to change, but over time this approach has been shown to lack credibility.

“There are still only a few fund managers who can show significant results from their engagement activity, and few have a credible pathway to sell their shares if harmful impacts continue.”

He acknowledges that putting more work into screening and engagement might be cause for higher fees.

“There are funds that have good processes to avoid the companies that members of the public are really concerned about. They have to work, and some managers actually are active managers globally.

“I think there's been kind of almost a glorification of low fees but the drive for lower fees is a drive for lower value. That being said, to run now, some index funds that do exclude a lot more than they used to.”

However the issue is not just about active versus passive management, says Coates.

“What kind of passive are we talking about? Are we talking about passive with very few overlays on ethical grounds or the funds that are strongly oriented towards responsible and ethical investment.

“There are now some index providers that provide stronger exclusions; fund managers should be looking at them. For example Beta Shares are passive funds and have a very strong overlay to exclude companies that are problematic.”

Animal harm and human harm

While fossil fuels companies accounted for more than $3 billion of KiwiSaver, $2 billion is invested in those that test products on animals for reasons other than human health.

Meanwhile companies which have or are breaching human rights, including labour rights, trafficking and violence against civilians, are the third biggest recipients. MIndful Money says a total of $1.4 billion is invested in companies such as Meta (digital harm and breaches of privacy), mining company Rio Tinto (environmental and community harm) and Johnson & Johnson which Sustainalytics rates as having a high level of controversy for quality and safety of several products across all three of its business segments — drugs, devices, and consumer products.

Just over $1 billion of KiwiSaver money is invested in companies that cause social harm, including alcohol companies such as Diageo, pornography, gambling and tobacco.

“It is now eight years since there was a public outcry over the amount of KiwiSaver funds in tobacco. The latest data shows an annual growth of 50% in investments in tobacco companies such as Philip Morris, British American Tobacco and Imperial Brands, to more than $21 million.”

Another $292 million is invested in weapons companies, including nuclear weapons producers, such as BAE and Lockheed Martin, and handgun producers and retailers, says the report.

Coates wants more transparency in KiwiSaver schemes. “Few KiwiSaver providers reveal the full list of companies they invest in and none identify the companies that are likely to be of concern to the public. Many people using the Mindful Money website are shocked to find out what companies they are invested in.”

He says the investment sector appears to be an outlier. “Retailers of most consumer products are acutely aware of their customers’ concerns.”

Earlier this year the annual Mindful Money and the Responsible Investment Association of Australasia consumer survey found 74% New Zealanders expect their money to be managed ethically and responsibly.

“The issue for financial advisers and fund managers is who’s going to listen to the clients? There is evidence that clients don’t always raise it proactively in meetings with their advisers but if and when it is raised they have very strong views. It’s an age of climate change and investment has a huge role to play but somehow advisers and fund managers are carrying on as if there is no link.”