News & Updates

Mindful Money Methodology: Avoiding Issues of Concern

Thu June 20th 2019


By: Barry Coates, CEO Mindful Money 

For most investors, the most powerful symbol of ethical transparency in investment is finding out your money is being invested in companies that you dislike – maybe because they are a big emitter of greenhouse gases or produce cigarettes that kill people or make weapons that kill and maim people.

Now you can find out whether these companies are in your KiwiSaver portfolio. This transparency is at the heart of Mindful Money’s platform. We’re not only telling you which companies make profits from your investment, but also what sector they are in or whether they breach global norms for issues like animal testing or human rights.

Developing this database is complex, and it has taken over a year of research and analytics. Mindful Money has now developed an integrated list of companies that fall into the categories of issues for concern. These have been drawn from extensive research across a range of proprietary and public research sources.

This paper provides the methodology for the choice of issues of concern, the definitions and materiality, sources of research, analysis of portfolios and matching of companies to portfolios. It should be read in conjunction with the broader Methodology used by Mindful Money in the development of its online platform.

Types of Avoidance

Avoiding investments that are inconsistent with the values of the investor has traditionally been the main strategy for ethical investing. These exclusions can either be on the basis of all companies in a sector (sectoral exclusions, such as tobacco) or on the basis of company practices (company exclusions, such as human rights violations). Mindful Money’s list of exclusions include both categories.

Issues of Concern

As outlined in Mindful Money’s Methodology page, the issues of concern were identified in a 2018 public survey by Mindful Money and the Responsible Investment Association of Australasia (RIAA), with polling undertaken by Colmar Brunton.

The issues of concern that are shown on Mindful Money’s platform are those identified as important by more than 63% of the population. They are (in order of importance):

  • animal testing 
  • human rights & environmental violations
  • tobacco
  • gambling
  • palm oil
  • weapons
  • fossil fuels
  • pornography/adult entertainment
  • GMOs
  • alcohol

Other issues, like junk food that registered a high level of concern, will be tested in successive annual surveys, along with new issues such as predatory lending, diversity on corporate boards, and privacy concerns related to social media.

Definition of the Issues of Concern

The two parameters that are most important to establish are the definition of the issue of concern and the threshold (or level of ‘materiality’). Some issues are complex because of a lack of accepted standards, as well as research on which companies breach those standards.

For example, animal welfare was the highest issue that New Zealanders wanted to avoid in the 2018 survey, but the standards for factory farming and animal cruelty are not widely accepted and there is a lack of available data. Mindful Money is joining with partners to undertake research in order to provide this information in future. The companies identified initially are those using animals to test for non-pharmaceutical products.

There are dilemmas in the choice of each of the definitions. For example, some countries have government regulations that require testing on animals for some kinds of non-pharmaceutical products (e.g. cosmetics). This is used as an argument to argue against this exclusion. However, a number of companies with high standards of animal welfare have made the decision to avoid selling into those markets. On another perspective, some NGOs argue that animal testing is cruel, whether or not the product is used for pharmaceuticals that may have human health benefits.

Invariably the choice of the definition and the level of materiality is a judgement call and there is no ‘right answer’. Mindful Money’s view is that it is better to try to find the level that most of the public would be comfortable with, rather than dismissing the definitions as too difficult and ignore the public concern.

The current definitions and materiality for each of the issues is outlined below:

Issue

Definition

Materiality

Animal welfare

Animal testing for non-pharmaceutical products

Any involvement

Human rights and Environment

Violations of human rights and environmental norms

High impact, severe and/or structural controversies related to violations of global norms

Tobacco

Manufacture, distribution or retail of tobacco products

Any involvement for producers; >10% for retail and distribution

Gambling

Owns or operates gambling establishments or supplies specialised equipment

>10%

Palm Oil

Production of palm oil and ownership of plantations

>10%

Weapons

Manufacture of small arms or controversial weapons (nuclear, landmines or cluster bombs) or military weapons or military equipment

Any involvement in small arms or controversial weapons;

>10% for other categories

Fossil Fuels

Exploration, production, refining, and transport of oil, gas and thermal coal, including ownership of reserves

>10%

Adult Entertainment/Pornography

Production of material or ownership of establishments

Any involvement

GMOs

Development or growing of genetically modified seeds or crops

>10%

Alcohol

Manufacture, distribution or retail of alcoholic beverages

Production >10% revenues: retail/distribution >25%

These definitions will be tested and reviewed on an annual basis, along with the review of whether these are the issues of greatest public concern.

Identifying Companies in each Issue of Concern

The companies in each issue are researched, using a combination of public sources, proprietary research undertaken by ratings services and Mindful Money research. The public sources vary across the different issues and include some specialised agencies. The following sources have been analysed in the preparation of Mindful Money’s company list, and some (but not all) of these sources have been included:

Mindful Money is unable to publish the exclusions lists in their entirety because they include research that has been provided under non-disclosure agreements.

Analysing KiwiSaver portfolios

All KiwiSaver providers are required to submit six monthly listings of the holdings in their portfolio to the Ministry of Business, Innovation and Employment’s Disclose Register. The Mindful Money analysis is based on these returns, along with the quarterly updates in each KiwiSaver fund performance, also submitted to the Disclose Register.

Many of the funds invest in other funds. This is common practice, not only for so-called passive funds that only invest in other funds, but even for active funds. Mindful Money has researched the funds and has downloaded the full portfolio of over 90% of the significant portfolios and the top ten holdings of most of the others.

Matching Companies

The final step is to match the companies in the portfolios with the companies in the issues of concern. This is an iterative process, using automated fuzzy logic matching of company names and manual verification.

The results are displayed on the Mindful Money platform as a percentage of fund value in the issue of concern, and a listing of each of the company names. The data alongside the company name represents the share of its portfolio held in that company. There is a threshold value of 0.01% of the portfolio applied to the company listing.

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