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Choosing the Fund that Fits

Wed Feb. 3rd 2021


Choosing the Fund that fits

Mindful Money’s Methodology

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 will be supported and empowered to direct their investment towards credible forms of responsible investment and impact investment.

Many investors will invest directly with Ethical/Responsible Investment (RI) fund providers. Others will invest through this online platform. This 'Choosing the Fund that fits' paper sets out how Mindful Money has selected investment funds to participate on the platform, and how the platform will help investors to find the fund that fits their values and preferences. This paper builds on the shorter overview of the Mindful Money methodology.

Ethical Investment principles

Leaders in the investment community, notably Larry Fink in his annual letter, are calling on corporations and investment managers to make a positive contribution to society. Much of the investment community has recognised they have a responsibility to avoid harm and contribute to positive outcomes, as shown by membership of the Principles of Responsible Investment (PRI), which has reached US$120 trillion of assets under management.

Even so, there is 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). 

There are core principles at the heart of the notion of responsible investment 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; and 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:

  • Prominently display their responsible investment policies and approaches, and regularly report on ESG issues
  • Seek to understand their clients’ preferences, including their ethical preferences, and how those are changing over time
  • Act in ways that benefit their clients’ financial and ESG interests
  • Market 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:

  • 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 it should be 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:

  • 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 will prioritise 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, 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 analyses the full portfolios of NZ KiwiSaver and managed fund providers, including the indirect investments in funds, and publishes the proportion of funding in sectors and companies of most concern to investors. See details of the methodology in Avoiding Concerns.

Mindful Money encourages fund managers to understand the concerns of investors over damaging investments, and to exclude investments in those companies.

2.   Investing in high ESG companies

        Portfolios should include a high proportion of companies that operate to high ESG standards. This can be achieved through active ESG management, or 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 is reflected in portfolio choice or ESG outcomes. Mindful Money will develop information on its platform to highlight documented and verified engagement by funds to raise corporate ESG standards.

        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 certified on the Mindful Money platform with a double tick. Those that claim to use ESG management in their fund management are identified with a single tick, and those that do not use ESG management are designated with a cross on the summary page.

        3.   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.

            While the impact investment movement is growing internationally, there are currently no Kiwisaver options and few options available to New Zealand retail investors. There are opportunities, often highly risky, available for qualifying investors in private equity, venture capital and crowdfunding. Investors seeking diversified impact investment funds can invest overseas but are required to undertake a more complex form of tax reporting if their investments total over $50,000. Mindful Money will also encourage overseas impact funds to register as PIE funds in New Zealand so they are more readily available to retail investors.

            Given the lack of domestic impact funds available to retail investors, Mindful Money is encouraging the development of new sustainably-themed funds and impact funds, and the inclusion of investments in impact companies in mainstream KiwiSaver or investment funds. 

            Mindful Money is planning to develop a directory to highlight impact investment opportunities, including seed funding, venture capital, crowdfunding, private equity funds with a strong impact component, selected overseas funds and other impact investments. There will be separate categories for investments available only to professional or wholesale investors, and those available to the public.

            4.   Improving Corporate Governance

                Engagement with companies to improve ESG performance should be part of corporate governance responsibility, especially since institutional investors are significant shareholders in most listed companies. Fund managers should engage, directly or through a governance service provider, and governance should be part of the mandate for contracting investment managers. Most funds hold a relatively small proportion of company shares, so collaboration with other institutional investors is typically necessary to leverage change.

                Investment managers should report on their corporate governance engagement and its impact in terms of improvements to company policies or practices. Active governance is potentially a way to achieve improvements in ESG, but showing engagement is not sufficient - there needs to be credible evidence that engagement is resulting in positive business change, particularly for the companies that are subject to controversy or operate in controversial sectors.

                Mindful Money expects all investment managers to engage with companies as part of their corporate governance responsibilities, to report publicly on their engagement activities, and identify cases where engagement has led to improvement. 

                Mindful Money plans to develop a programme, working with fund managers, the Shareholders Association and the Corporate Governance Forum, to strengthen governance of New Zealand companies and raise corporate standards for social and environmental disclosure, policies and performance.

                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 will profile the fund providers that exemplify best practice, and will work 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 will continue to support a framework that encourages investment with positive 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 build an inclusive sustainable finance strategy for New Zealand.

                      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
                      • Credible ESG practice verified by RIAA certification, or other verified evidence of high ESG standards
                      • Evidence of effective engagement and verifiable outcomes from that engagement
                      • Investment in sustainably-themed sectors or 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 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.

                      Helping investors find the fund that fits

                      Mindful Money’s online platform helps users to ‘find a fund that fits’. This reflects the inherent complexity of matching diverse preferences of investors with different strategies of providers. There is no credible way to recommend a fund according to a single measure of ethics or responsibility.

                      Based on investor preferences and objective data on providers, Mindful Money uses a multi-criteria approach to recommend funds to the user that meet our high ethical standards and verification credentials. This is supported by key measures such as RI policies, past returns and risk. The user can then choose the fund that fits.

                      Mindful Money’s approach recognises that each investor has a different set of values, preferred investment approach and risk preference. These three factors – values, preferred investment approach and risk preference – are at the heart of the 3-step approach on Mindful Money’s online platform.

                      1. Values: It is important that the values are determined by the user. These may be sectors (eg. gambling, pornography, fossil fuels) or issues related to controversies (eg. human rights, animal welfare). In future, when the broader range of investments is added, the platform will include the positive choices that investors can make. The criteria will also specify what investors want to include (eg. renewable energy, affordable housing, etc).

                      2. Preferred approach: The preferred approach of the investor is determined through their choices of which is most important amongst the most common RI strategies (sectoral exclusions, ESG management and impact investing (when available)), past returns and fees.

                      3. The risk preference is selected by the investor, through a combination of their time horizon for investing and the attitude of the investor towards risk and return. The categorisation of those preferences into different risk categories is based on the criteria used on the government’s Sorted website.

                      Investors are encouraged to seek the guidance of a certified Financial Adviser if they are unsure or if they have questions on the right fund for their personal circumstances. The Mindful Money platform includes a list of the registered financial advisers who are PRI members, RIAA members and RIAA-certified.

                      Identifying funds that fit users' criteria

                      Information from fund providers is primarily drawn from quarterly filings on the Disclose database. This provides a short fund description and information on fund performance, as well as information about their responsible investment approach in the Statement of Investment Policy and Objectives and the Product Disclosure Statement (PDS). Further information is drawn from the fund’s website and, for those certified by RIAA, from the Responsible Returns section of RIAA’s website.

                      Sectors excluded by funds are verified through checking the lists of current securities in their portfolios. The analysis will also deconstruct the portfolio of indirect investments, where a fund invests in another fund as part of its portfolio. Mindful Money’s analysis checks the content of these indirect investments for consistency with investment policy wherever there is data available (currently around 98% of indirect investments). This can show if a fund has stated an exclusion for gambling, for example, but has gambling companies in their current portfolio. Further information is included in Avoiding Issues of Concern.

                      The integrity of ESG management used by a fund is more difficult to verify. Some funds have commissioned an external agency to rate their portfolios, based on the ESG scores of companies within the portfolio. Mindful Money considers this is good practice and is encouraging all funds on the Mindful Money platform to undertake an ESG rating of their portfolio to build confidence in the integrity of their ESG management. There are still few funds that have published this information.

                      Verification can also be provided through credible certification processes, such as RIAA’s process. Mindful Money has worked with RIAA on a recent review of that process. As noted above, the RIAA certification process is currently the most robust way to verify that funds are using a high standard of ESG management.

                      On the platform, the criteria specified by investors will be compared with the attributes of different investment funds, and a short list of Mindful Funds recommended to users. They will be provided with information on fund attributes, such as past returns, fees, investment approach and the latest PDS, with comparative tables.

                      When investors are ready to make a decision, they will be linked to the fund provider to invest, with an API to identify Mindful Money as the source of the lead. Providers will contribute a small fee to help pay for Mindful Money’s costs of social marketing of RI and operation of the platform. There is clear messaging on the platform explaining that investments through the platform will result in a financial contribution to Mindful Money and allow the platform to remain free for users.

                      Income from donations or contributions from fund providers will initially be used for platform operating costs and the promotion of ethical investment. In the future, any additional income will be used to fund charitable work on issues such as financial inclusion, environmental improvement and sustainability.

                      Use the Mindful Money website to find a KiwiSaver fund or investment fund that fits your values.

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