When it comes to investments, we all have choices. And more and more Kiwis are choosing to put their money into responsible and ethical investments. But what ethical investing means can be confusing and unclear. In simple terms, ethical investing is an approach that takes into consideration environmental, social, and governance (ESG) factors when selecting investments. This allows fund managers to contribute to positive social and environmental outcomes, while also potentially delivering strong financial returns back to their investors. It also allows managers to lower the risk of negative events that can arise from investing in companies that do not adhere to ethical standards.

Investing ethically as a passive investment manager 

So how does an index-based fund manager invest ethically? When you track the index, as Simplicity does, you don't choose to invest in particular companies, rather you invest in a vast number of companies that are listed on indexes around the world (for example the S&P 500, Dow Jones Industrial Average or Nasdaq). Simplicity’s diversified funds, both within KiwiSaver and via our investment funds, have more than 3,000 investments spread across 20 countries.

The broad exposure to a range of global “asset” types is a key advantage of this passive investment style. It provides diversification, considered one of the best forms of protection against stock market volatility (just look at market ups and downs over the last 12 months!). The argument against passive investing, typically made by active fund managers, is that you don’t have as much influence over the types of companies in which you’ve invested. They also claim they aim to generate higher returns by hand-selecting companies they believe will do well in a given year. Passive managers (and supporting global research from SPIVA) argue that they don’t generate higher returns - at least not over the long-term*. 

Simplicity’s ethical investment approach

Despite following various market indexes, Simplicity has strict rules in place to avoid investing in companies in certain sectors where there is a “significant exposure.” We do this by following what is called a "responsibly screened index", which applies negative screens for a range of investment types we want to avoid. They include:

Tobacco

Alcohol

Gambling

Adult Entertainment

Fossil Fuels

Civilian Arms

Military Weapons

Nuclear Power

Whether they meet or fail the "significant exposure" test, is based on specific revenue thresholds. The thresholds are set out Simplicity's Responsible Investment Policy, which also explains our ethical investment strategy in greater detail. In addition to the exclusions above, we don’t invest in companies that have breached the Principles of the United Nations Global Compact. Those red flags involve violations involving Human Rights, Anti-Corruption, Labour and Environment. To put it plainly, Simplicity uses an exclusion-based approach to ethical investing where we don't actively choose what to invest in, but do choose what not to invest in. 

Chief Investment Officer Andrew Lance characterises Simplicity’s approach as one of “not doing harm,” in contrast to some active fund managers who purport to “Do Good.” Lance says it's a complicated subject. While active fund managers with a staunch ESG policy may be able to claim a higher level of purity or ‘goodness’, passive fund managers can still apply leverage in this regard. That’s because as significant shareholders, they can apply pressure to companies who may be dropping below the threshold to make them change for the better. “We believe in social responsibility and actively seek areas where we can be constructive,” said Lance. “We do this by being an active shareholder advocate, as well as through the 15% of our fees that we donate towards Kiwi charities via the Simplicity Foundation.”

An ethical approach to business operations

Simplicity’s ethical (or “green”) investing philosophy also runs through its business operations. This takes many forms, including being an online and predominantly paperless business, by funding public transportation for all of its employees, through a diverse and inclusive workforce, by planting a native tree for every member (see our Trees that Count profile here) and through social community investments and initiatives.

Simplicity is also big on transparency. That means clear, concise communications and investor education. Our Where in the World is My Money tool, which shows a breakdown of where and with whom all your money is invested, is a testament to the importance of transparency and full disclosure.

*The SPIVA Institutional Scorecard Year-End 2021 showed underperformance rates of 83% of both large-cap institutional accounts and mutual fund managers compared to the S&P 500 after deducting fees, over the 10-year period ending Dec. 31, 2021. For the full report go to www.spglobal.com/spdji/en/spiva/article/institutional-spiva-scorecard


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The information provided and opinions expressed in this post are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. This post is not intended to convey any guarantees as to the future performance of any of the investment products, asset classes, or capital markets mentioned. Past performance is no guarantee of future performance. Information is current at the time of posting, and subject to change without notice. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit our website simplicity.kiwi