Methodology

Comparing Ethical Investments

Mindful Money aims to change the ways that New Zealanders think about their KiwiSaver and investment funds, and to help them invest in line with their values. We use radical transparency to inform investors about portfolio holdings , provide education and capability building on ethical investing, and we analyse the policies and practices of KiwiSaver and investment funds. Our objective is to be a catalyst for changing company practices and shifting funds  from exploitation and pollution towards better outcomes for people and our planet.  

Our platform enables users to take an informed choice about the impact of their KiwiSaver and investment funds:

  • We show users what companies are in their current portfolio, categorised into issues that are of concern to New Zealanders
  • We provide information on ethical policies, past financial returns, fees and other measures for all current KiwiSaver and investment funds
  • We identify Mindful Funds that meet our ethical standards, supported by verification
  • We provide information that helps investors to align their investments with their values, through switching their KiwiSaver account or opening a new KiwiSaver or investment account

In addition, this platform provides research, education, opinion, events, videos, podcasts and news on investing responsibly.

This Methodology sets out how Mindful Money has documented issues of concern to New Zealand savers and investors, analysed KiwiSaver and investment fund portfolios against those issues, selected 'Mindful Funds' to participate on this platform, and identified the funds that most closely match investors' criteria. 

A more comprehensive version of this paper is available and there is further information on ethical investment under the Learn More section of the website and in the Blogs, including the methodology for avoiding concerns.

Analysis of issues of concern in KiwiSaver portfolios

The starting point for concerns is the consumer research undertaken by Mindful Money together with the Responsible Investment Association of Australasia (RIAA). Our baseline survey in 2018 identified the main areas of concern for New Zealand investors.

issues of concern, consumer survey 2018

Mindful Money has compiled research on the companies in each of ten issues of concern, drawing on published and unpublished sources, including lists of exclusions from the NZ Super Fund and the Norwegian Super Fund, ratings agencies such as Sustainalytics, specialist research groups and financial services companies. As well as sectors, the issues of concern relate to company practices, such as human rights violations or testing on animals for non-pharmaceutical products. 

The resulting research provides a comprehensive global listing of the companies that operate in each sector. In most cases, a threshold of 10% shareholding in the sector has been used for materiality. This means that a company is deemed to be active in a sector (such as gambling or weapons) if at least 10% of their revenues come from that sector. A lower level of 'any involvement' is used to identify companies engaged in pornography, tobacco production, assault weapons and controversial weapons (such as landmines, cluster bombs and nuclear weapons) and a 5% level for fossil fuels. Companies are included in the Human Rights and Environmental Violations category if the violations cause significant impacts on the environment and/or society, and in the Animal Testing category if the company is engaged in testing on animals for non-pharmaceutical products. Further detail is in the blog Avoiding Concerns.


Analysis of fund portfolios

A listing of the companies held within each portfolio is filed six-monthly to the Ministry of Business, Innovation and Employment (MBIE) and posted on the Disclose Register, along with quarterly financial updates. This is the primary source data for the analysis of portfolios and performance of those portfolios.

Most funds invest in other funds for at least part of their portfolio. Mindful Money has undertaken research to map the companies in over 99% of relevant portfolios. Portfolio data from fund providers is updated twice a year following the filings on 31st March and 30th September, and the Fund summary page and Detail page for each fund shows the date of the portfolio.

A raw list of company names by itself is difficult or impossible for most investors to interpret. Researching what each company does, and its track record on issues like human rights, would take a very long time. Therefore, Mindful Money's research has mapped the companies in each portfolio against the major issues of concern to New Zealand savers and investors. This is described more fully in our blog on Avoiding Concerns.


Strategies for ethical investment

There has been a huge rise in the practice of ethical investing, and most funds now practice some form of ethical investing. There are different strategies to invest ethically, and these suit the preferences of a broad range of investors. They fall into three major approaches:

  • Avoiding sectors and/or company practices that are inherently damaging (Exclusions)
  • Engaging with companies in the portfolio to improve their standards, and/or choosing the companies with higher standards (Environmental, Social and Governance ESG)
  • Investing in companies that are focused on positive social and environmental impacts (Impact Investing).

There are active debates on which of the ethical investment approaches is the most effective strategy, particularly whether it is better to avoid harmful companies or engage with them to improve their practices. Mindful Money's position is that both strategies are required. For example, after there were concerns in 2016 over tobacco and cluster bombs in KiwiSaver portfolios, most fund managers put in place exclusions to avoid tobacco and 'controversial weapons' (landmines, cluster munitions and nuclear weapons), even if their main approach was ESG management through engagement. However, most funds didn't go further and use ESG analysis to exclude other sectors and companies that are of concern to Kiwis. ESG analysis of companies should be used to exclude those where change is not possible or too slow. Similarly, funds that rely solely on exclusions without active ESG management are not undertaking their corporate governance responsibilities for the rest of their portfolio.

Mindful Money's view is that best practice requires a combination of exclusions and ESG strategies, as shown in Mindful Money's annual Ethical and Impact Investment Awards.

Selection of Mindful Funds for the Platform

Most investment funds claim to be responsibly managed. However, there is a huge range in practice, from a superficial analysis through to strong ethics. Responsible or ethical standards are not clearly defined and there is extensive 'greenwashing'. Therefore, Mindful Money's approach is to define a high standard for ethical investment and to require verification of any claims. The funds that meet these criteria and agree to be a part of the Mindful Money platform are designated as Mindful Funds. 

KiwiSaver or investment funds can become Mindful Funds by fulfilling three key criteria that align with the strategies above:

  1. Broad-based exclusions on the issues that concern most New Zealanders 
  2. ESG management of portfolios: 
    1. Evidence that fund managers are exercising their corporate governance responsibilities to influence companies to adopt higher standards. The extent of engagement should be disclosed and evidence provided on the degree to which engagement results in improved ESG practices; and/or
    2. Evidence that ESG approaches are being used to invest in better companies. This should be verified by evidence that fund portfolios are over-weighted in companies with higher social and environmental standards
  3. Evidence of strong commitment to ethical/responsible investing, including through policy documentation, a high level of transparency, prominent messaging about ethical investment on the fund provider's website and in external communications, and strong ethical practices as an organisation.

Exclusions to avoid harmful companies are verified by Mindful Money's analysis of the full portfolio, including the indirect investments in other investment funds. Verification of ESG practices is crucial and Mindful Money regards certification by RIAA is an important verification tool. Mindful Money will also take into account other forms of verification, including direct analysis.

Funds that meet these criteria are invited onto Mindful Money's platform as Mindful Funds - Mindful KiwiSaver Funds or Mindful Investment Funds.

Impact Investment

There is growing interest in impact investing and some options are available for investors in New Zealand. Mindful Money is planning to include a directory that will help investors to understand what options are available for impact investing (ie. investments that do good in terms of creating social, environment or climate benefit), as well as ethical and responsible investment (ie. investment that is more oriented towards reducing risk and avoiding harm). 

Currently there are no KiwiSaver or retail investment funds focused on impact investing, but new offerings are being developed. In addition, there are options currently available through investing in overseas funds or individual companies, and a wider range of options available to wholesale and professional investors.

Matching funds with investors' criteria

Mindful Money’s online platform helps users to ‘find a fund that fits’. This matches the criteria of investors with the different strategies of providers. These are general criteria that should not be interpreted as individual financial advice. Mindful Money's platform calls for users to consult a registered financial advisor if they have questions about their personal circumstances.

The approach is more user-oriented than scoring systems that try to rank funds according to a single measure of responsibility. The Mindful Money approach is not about identifying the best or worst funds, but those that best match the criteria of investors.

There are three steps in the Mindful Money fund finder approach - the investor's values, preferred investment approach and risk preference. The investor's selection of an ethical fund will be guided by these criteria. 

  • Values - users are invited to use a sliding scale to indicate which issues are of most concern. These are then matched with the strategies of the funds
  • Approach - users are asked to rank their preferred investment approach according to the importance of avoiding sectors and companies, engaging with companies to raise standards (ESG management), past returns (recognising that past returns are not necessarily a good guide for future returns) and the level of fees.
  • Risk preference - users define their risk category through a combination of their time horizon for investing and their choice of different trade-offs between risk and return. The categorisation of those preferences into different risk categories is based on the criteria used on the Commission for Financial Capability's Sorted website.

Investors are encouraged to seek the guidance of a certified Financial Advisor 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 advisors who are certified by RIAAmembers of RIAA or members of the Principles for Responsible Investment (PRI).  

The Mindful Money platform provides extensive information on each fund to enable the user to find out what companies the fund invests in, and to make an informed decision about investing in a Mindful Ethical fund. Most information is drawn from quarterly filings by the fund providers on the Companies Office Disclose register. Further information is drawn from the fund’s website and Mindful Money analysis of fund policies.

Users on the Mindful Money website can then find a KiwiSaver fund or investment fund that fits their values. When they are ready to make a decision, they will be linked to the Mindful Fund provider's application form via the Mindful Money Referral page. 

When they do so, Mindful Money will receive a contribution towards the costs of undertaking research, running the website and promoting responsible investment. This funding currently only provides a small contribution to ongoing costs. The balance of funding is contributed through individual donations, charitable grants and sponsorship of events. 

Mindful Money is committed to providing free and easily accessible information to the public. Transparency in investment decisions is crucial and this even more so for the vast majority of investors who want ethical standards in their investment choices. 

Mindful Money is a programme of a registered charity - Sustainable Initiatives Aotearoa (CC51919). All funds are used in pursuit of our mission to improve social and environmental outcomes through education and action for ethical investment.

A more comprehensive version of this paper is available and there is further information on ethical investment under the Learn More section of the website and in the Blogs, including the methodology for avoiding concerns.

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