'Ethical investing', 'responsible investing', 'green finance', 'sustainable investing', 'social investing', 'ESG'. Whatever you call it, many of us are keen to align our investment choices to our values. But before you jump in because an investment claims to be 'ethical', take a deeper look at what you’re investing in and other factors you may need to consider.
FMA research in 2022 found that ‘ethical investing’ is the term that most people use to define the category.
You might see funds advertised as ‘sustainable’ or ‘ethical’, or your KiwiSaver provider making claims about not investing in certain things. You may also see ‘green’ or ‘sustainability’ bonds or, increasingly financial products badged as ‘social’ or ‘impact’ investments.
The FMA calls these products "integrated financial products" to reflect that there are non-financial considerations added, which sets them apart from a standard financial product.
Broadly speaking, ethical investing is when you choose investments based on your personal values on the expectation that your money will help or not harm industries you care about.
To cater for this, many investment providers offer products that seek to match investor values. There are a number of ways that providers do this:
The table below shows some of the common ESG concerns for investors. ESG concerns are often interrelated and can exist across all three categories. This is not an exhaustive list – there may be other concerns that are important to you.
Many factors determine what approach is right for you. As with any investment, the most important are your investment objectives and personal values. Ask yourself:
Values differ from person to person, and what is important to you may be different to someone else.
Tobacco, alcohol, animal testing and weapons are just a few things that can polarise opinion and be perfectly acceptable to one person while unacceptable to someone else. Take time to identify some of the values most important to you.
Researching an investment can feel daunting. It’s tempting to seek out opinions from friends and family and on social media, and take advertising and information from providers at face value. But it’s important to look a little deeper to make sure your money is invested exactly where you want it to be.
You can either do this research yourself (DIY), or enlist the help of a licensed financial advice provider. Read more below about these two approaches.
Taking a DIY approach
Ethical investments may (or may not) have additional risks or costs. See more below.
Enlist the help of a licensed financial advice provider
Some investors use financial advisers who focus on ESG and are able to offer investment options that match their clients' investing goals and ethical concerns.
Financial advice can help you identify what you need, what’s right for you, and make sure you’re aware of the risks of certain investments.
There are financial advice providers who are qualified experts that can:
Financial advice can also be provided digitally at a lower cost. Digital or 'robo-advice' is automated advice generated by a computer program using algorithms, based on the information you provide.
Managed funds must have a Statement of Investment Policy and Objectives (SIPO) that sets out what the fund is trying to achieve and the rules about what the fund can and cannot invest in. They often also have a responsible investment policy. If you cannot find these documents on your provider’s website ask them for a copy.
If you want to check whether your KiwiSaver fund or managed fund invests in a specific company, you can download a full list of assets from Sorted’s Smart Investor tool. Smart Investor will also link you to key documents for the fund, such as the SIPO.
Learn more and know how to check the impact of your investments in the delivery of fair treatment of workers and ethical and sustainable work practices
All investment products have risks. These should be clearly explained in the investor materials. Some integrated financial products have additional risks. The investment materials should explain whether there are any:
Providers offering any form of integrated financial product must clearly explain and substantiate the non-financial features.
For example, if a fund excludes certain types of investments, the fund manager should explain how they decide what they won’t invest in. They should also explain any exceptions to the criteria, such as a certain percentage of the portfolio being allowed to fail the eligibility criteria.
If it’s a more proactive impact approach, for example, making investments that will help reduce CO2 emissions, the disclosure and investor materials should explain how the provider will achieve this, give a date by which they are aiming to achieve their goal and explain how they’ll measure against it.
Providers of integrated financial products must let you know how they’ll ensure any non-financial objectives are being achieved. This might include regular reporting, which may include review by an external expert. They should also explain the consequences if they don’t achieve their objectives.
Some providers state they’ve used an external organisation to validate their claims. You should check who the organisation is, and be confident in their assessment. Look at their methodology and process for the assessment, and their track record of assessing similar products in New Zealand?
If a company overstates the green features of product, or mislabels a product as 'green', this is known as 'green-washing'.
Many companies understand consumers want to make more ethical or 'green' choices, and advertise to appeal to those desires. Always look for evidence to substantiate their claims.
It’s illegal to mislead or confuse investors by suggesting or omitting certain information. The FMA can take action to stop or prevent this behaviour. Contact us if you think a company is 'green-washing' and can’t back up their claims.
Some funds exclude certain industries, activities or types of investments. For example most KiwiSaver and other managed funds exclude investments in companies that produce nuclear weapons.
Another approach is funds specifically investing in sectors or companies that have positive (or not negative) impacts, such as investments which are ‘green’. They can even directly fund social impact projects, like building social housing.
Fund managers may also actively engage with companies they invest in to encourage improved non-financial outcomes such as a reduction in carbon emissions.
What makes the bond 'green'? When you invest in bonds, you are lending money (see more about bonds in our Bond Voyage guide). What will your money be used for? Is it to fund a specific asset or project like a windfarm or green building?
How do you know the bond will actually be green? What measures will be used and how often will they be reported?
Is there any independent assurance of the green claim and/or the reporting of its results? Does the offer include reference to external green standards? What are they and do they appear credible?
Can the green status be lost? Can the money invested in the bond be reallocated to projects that are not green? If so, how and under what conditions?
Even if the bond is genuinely green, is it really having a positive impact? For example, if an energy company that mostly uses coal generation sets up a green bond to refinance a hydro-electric generation asset, this will not negate the impacts of coal generation. The difference might not matter to you, but you should be aware of it before you invest.
If you’re wanting to make sure your investments reflects your values, there’s a few steps you can take.
Our latest ESG research identified three main types of ethical investors: those who prioritise returns, those who don't want to invest in certain industries, and those who want their money to make a positive impact.