Russia's aggression was a 'litmus test' for KiwiSaver funds' responsible investing claims - they failed

4th March 2022

Russia’s invasion of Ukraine has provided a litmus test for New Zealand funds' responsible investment credentials, and they’ve been found wanting.

This article originally appeared in Stuff and was written by Barry Coates. 

Barry Coates is chief executive of Mindful Money www.mindfulmoney.nz, a charity which researches the responsible investment credentials of KiwiSaver schemes, and helps people choose funds that match their personal ethical beliefs.

OPINION: Russia’s invasion of Ukraine has provided a litmus test for New Zealand funds' responsible investment credentials, and they’ve been found wanting.

When they invest KiwiSaver funds or other investments funds, people don't expect their hard-earned savings to be invested in government bonds issued by the Putin regime.

Nor do they expect it to be invested in Russian state-owned enterprises that channel their funds to the government, or in major Russian companies that have close links with the Kremlin.

Kiwis have been shocked to see Mindful Money’s analysis showing that hundreds of KiwiSaver and investment funds have been invested in the Russian government and major companies, even after the build-up to the invasion.

Many have sold their investments after public concern, but many funds still have not.

The reality is that selling the shares and bonds (divesting) won’t directly make much difference to the companies or the Russian government.

But members of the public are part of a worldwide movement of people who want to send a message of opposition to the Kremlin against the Russian invasion.

Collective action on a massive scale has started.

Major global funds are responding to public pressure to sell investments in Russian companies, and BP has announced it will sell its share in a major Russian oil producer.

We can all contribute to actions to de-legitimise Russia’s regime, lower share and bond prices and reduce the value of the Russian rouble.

Worldwide condemnation can increase the pressure to stop the invasion and build support for regime change in Russia.

It’s clear that most Kiwis do not want to see their funds invested in the Russian Government and the major companies that are complicit in that regime.

Surveys have repeatedly shown that around three quarters of New Zealanders want their funds to be invested ethically.

The irony is that most investment funds in New Zealand claim to manage their funds responsibly.

Most use ESG (environmental social and governance) analysis to manage financial risks from the practices of companies or governments.

The concept is sound. Managing these risks is good financial risk management for all investment, not just by those claiming to be responsible.

But if all these funds are using ESG analysis, why were they still invested in Russian bonds and major companies in the months, weeks and days before the invasion of Ukraine?

Fund managers often claim that, rather than selling investments in companies that create financial risks, they engage with them to improve their practices.

But engagement with the Russian Government hasn’t been going well for Joe Biden and world leaders, let alone New Zealand fund managers.

Nor have major Russian companies ceased paying dividends, taxes and royalties to the Putin regime to finance their invasion and the killing of civilians in Ukraine.

As well as social, economic and humanitarian costs, there are financial costs to ignoring ESG issues.

The value of equity investments in Russian companies have dropped by 50 per cent to 99 per cent since the start of the conflict.

Those New Zealanders in KiwiSaver or investment funds that have been slow to divest, or have still not divested, have made losses on part of their investments.

Given the number of investment funds that have been slow to act, it is little wonder that there is growing concern that ESG is all too often used as an empty slogan to claim ethical credentials.

This applies to other issues of public concern as well as war.

Engagement has not worked for oil, gas and coal producers that are locked into a fossil fuel business model, nuclear weapons producers that have no intention of converting their production systems to peaceful uses, and companies with a record of repeated violations of human rights.

If ESG is to have credibility, fund managers need to go beyond saying they undertake engagement with companies and tell their investors whether that engagement is making a difference to reduce emissions and improve social and environmental outcomes.

The war in Russia is a litmus test for ESG claims.

It should be a wake-up call for all those funds that didn’t divest well before the build up to the invasion.

They need to walk the talk on their ESG claims or risk being called out for greenwash.