04 October 2023

‘5 mins with the FMA’ podcast #9: Ethical Investing – World Investor Week special

In this episode marking World Investor Week, we take a look at ethical investing, with Paul Gregory, Executive Director, Response & Enforcement at the FMA.

We talk with Paul about the challenges facing investors looking for ethical investments and the role of a regulator in making sure fund managers really are doing what they promise. We also explore the main things that investors should think about when looking at ethical investments.

How do investors go about making these decisions – and is “greenwashing” getting better or worse?


Kia ora everyone, it’s World Investor week this week – a global campaign to raise awareness of investor education and protection. It’s promoted by the International Organisation of Securities Commissions (IOSCO) and hosted in New Zealand by us here at the FMA.

The New Zealand theme for World Investor Week is ethical investing, aiming to empower investors to confidently make investing decisions that are aligned with their values.

We’re joined by Paul Gregory: Executive Director, Response & Enforcement.


Paul, ethical Investing appears to be growing in popularity, with consumers wanting to know their money isn’t being used to do things that don’t match their personal values. What are some of the main things people should consider when looking at ethical investments?

Well you’ve hit on it there with the term personal values. Ethics are personal, so investors need to start off with the really important question about their own their own values - which is: what is it that matters to you? What do you want to support – what are you not prepared to see in your portfolio, what’s a non-negotiable and what trade-offs are you prepared to make?


Q: Are there any rules around how ethical certain investments have to be? What is ethical?

Ethics are personal – so you define what your ethics are.

And regulators don’t - and they shouldn’t - have a view on what investors, and the fund managers they use, should and should not invest in. But there is a regulatory requirement that investors can’t be misled. So if an investment manager uses terms like sustainable or ethical, or responsible or whatever it is - they have to explain what they mean by it – in particular how it shows up in their investment approach and their portfolio – and then prove they deliver on what they say they are doing. So from a regulatory perspective, it’s actually OK for managed funds to do very little in environmental, social and governance (ESG) areas, provided they don’t pretend (or advertise) that they’re doing otherwise.

But for investors, of course, that might not be good enough. They might want to invest in line with their values or at least not get an ethical shock when they see what their money is invested in, and what they’re profiting from. They might be prepared to pay more for that, too.

So what’s valuable for investors in this situation is first - knowing, clearly, that an investment manager is not going to deliver what they want, which means they can make an informed decision not to invest, or two - be confident and have good grounds for that confidence that an investment manager will deliver on the ethical or responsible claims the investor is attracted to, and that they’re relying on.


Q: What are some of the main challenges faced by investors trying to make sure their money is used in an ethical way?

Choosing financial products is hard, building your values into that decision makes it even harder. We know investors get frustrated and bored with in-depth research quickly, particularly if they have to look in 17 different places for it - it isn’t easy to read when they do find it and perhaps it’s too vague.

Plus, investing is an ongoing activity and what your portfolio looks like when you start may not be how it develops over time.

So you need to keep on top of your investments to make sure the companies you don’t want to support, stay out of your portfolio. And that’s why it’s so important that a regulator is in the background – looking at disclosures, looking at what’s in the portfolios – and checking to see if the label on the tin is matched by its content.


Q: There’s billions and trillions of dollars in capital sloshing around world share markets and bond markets – do investing companies really know where it’s all going? And how can they be sure?

That’s their job! It is an investment manager’s job to know where the capital they are entrusted to invest is actually going. Because they choose, they select where it’s going.

Companies can change – with takeovers and the like – but investment managers have to keep track of that. Because again, that’s their job. It's why they are paid. It’s why you use them and don’t do the job yourself.

And if they have attracted investors on the basis that they will, or they won’t, invest in certain types of activities, they must have to deliver on that.


Q: The FMA has looked into how investors choose these kind of products - What did you find?

We researched how easy it is for investors wanting to invest according to their values, to make good decisions. And we found this was complicated by the reason why most investors look in the first place: which is not from a really sophisticated understanding of their own value system

by because they feel a sense of generalised unease or, very commonly, by finding out something about their current investment that shocks them or surprises them – an ethical jump scare.

Many then set off to identify a better fit with their investments for their values, they’re quickly faced with a whole bunch of jargon or they find it difficult to meaningfully compare between different investment products.

Now some rely on advice from friends and family and lots take claims on trust. In the end, virtually all of them end up taking a ‘leap of faith’ that their choice is the right one.

They then assume that their investment will continue to be managed consistent with their values, and they rarely check back to see what may have changed and, critically, they also don’t change product.

So they make a decision, that was enough for them, and they stay.

The decision was hard – much harder than they thought. So once they make it, investors tended to leave at that and not go back to reassess whether the investment was still right for them. 

This is why it matters the industry approach to disclosure is immature: it represents the ingredients of a potential, multi-decade ethical shock for many New Zealand investors.


Q: And do you think greenwashing is getting better or worse?

The FMA is sharpening its focus in this area and there are broader policy and consumer tailwinds for claims to be articulate, accurate and meaningful.

So it might not be that greenwashing is getting better or worse, but the reasons to focus on it are getting more and more important.

For example, mandatory climate-reporting standards are here and broader sustainability standards are in the wings. And consumer expectation is growing. Fund managers can add substance to support their claims and labels and disclose accordingly, or stop using the claims and labels. Because marketing without underlying substance won’t wash, green or otherwise.


Thanks Paul. That’s Paul Gregory and that’s another Five minutes with the FMA. For more about ethical investing go to our website at fma.govt.nz.

We’ll bring you more FMA Insights next month. Until then hei kōnā mai – bye for now.