What does it really mean to be a socially responsible investor, and what does a socially responsible investment fund include or exclude? With climate change bearing pressure on Mother Earth and all its inhabitants, it is a question that even basic investors are asking these days. 

A few years ago, the issue blew up when it emerged that thousands of KiwiSaver members were inadvertently exposed to nasty weapons manufacturers. Some specialised in making cluster bombs and anti-personnel mines, banned by international convention. Read more here by Radio NZ. When you are invested in thousands of stocks worldwide these things can go undetected. Most of us assume we’re protected by the Government and the financial watchdogs overseeing KiwiSaver providers.

Fortunately, once this glaring omission became publicly known, it led to swift action by most fund managers, who quickly purged the offending companies from their portfolios. You can read more about Simplicity’s actions here. It was a pivotal moment in KiwiSaver because it triggered a greater level of questioning among investors and cast off some of the national apathy that plagued KiwiSaver.

It is worth noting that KiwiSaver, back in 2016, was only nine years old. That’s relatively young for a national savings scheme that, even now, is not that well understood, despite its healthy uptake of more than 3 million Kiwis.

Investors learned from the cluster bomb ‘incident’ that not all KiwiSaver funds are created equal, particularly when it comes to their composition. Among the 25-plus different providers offering 300-plus different funds, there is a vast range of investment options containing various combinations of assets and allocations. 

So what makes one fund more socially responsible than another?

While there is a lot of virtue signaling, there is no universally accepted definition of socially responsible or ethical investing. Are the two synonymous? And what about impact investing and ESG (Environmental Social and Governance)? It all gets a little murky, but there’s a good breakdown on Investopedia here.

Broadly, socially responsible funds adhere to a set of rules and principles which have a higher standard and consideration toward humans and the planet. Many fund managers now label themselves as ethical or socially responsible and point to their adherence to the United Nation’s Principles of Responsible Investing (UNPRI) as proof. 

There are six principles ascribed by the UNPRI, all aimed at making investments more sustainable and responsible:

• Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
• Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
• Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
• Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
• Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
• Principle 6: We will each report on our activities and progress towards implementing the Principles.

ESG covers three areas of business that can encompass the worst and/or best of a company’s character and practice. We could spend a lot of time delving into ESG more closely but it’s suffice to say that these three areas, once footnotes, are now headlines in the investment world. 

ESG profiling typically includes reporting and progress on how many women and minorities are represented on boards, carbon emissions,  and how companies treat their employees. That’s fairly broad brush, but you get the point.

Back to fund managers and how they qualify and quantify their socially responsible positions when it comes to their investment choices. Very crudely, you can break them into two camps: active or exclusionary. Index fund managers, like Simplicity, are mostly exclusionary. Through its international equities and bonds manager, Vanguard, Simplicity eschews sectors and companies that aren’t so virtuous. That means excluding the companies with significant exposure to fossil fuel extraction, tobacco, weapons, landmines, alcohol, nuclear energy, adult entertainment and gambling. You can learn more about Simplicity’s investment approach here. 

Active fund managers, because they hand-pick the companies they want to invest in, may choose companies that quantify their ESG commitments to a higher standard. There is debate about which is more effective in terms of leveraging better outcomes societally and environmentally. Check out this fascinating podcast “Can Investors Effect Social Change?” produced by the Stanford Graduate School of Business. 

On the one hand, those companies operating at a perceived or defined higher standard are rewarded by active managers. Conversely, those companies that could stand to improve can equally be held to account by their shareholders who have a seat at the table and more importantly, voting rights.

Confused? Fair enough. It is easy to get lost in the weeds. 

If you want to understand your investment better, an excellent place to start is your specific fund update. You’ll need to know which fund you’re invested in first and search for the latest one. 

It contains a report on the top 10 holdings, a breakdown of your asset allocation, and returns. 

Level up and read the Product Disclosure Statement and/or the Statement of Investment policies and Objectives. The PDS is mandatory reading for KiwiSaver investors, so you should have already read it %). Unfortunately, many skip this step and simply tick the box instead. 

Another amazing resource that was developed in-house is Where in the World is My Money. This tool, which you can access from the Simplicity member app (and/or the website here), shows a breakdown by continent, country and company, dollar for dollar what you are invested in.

Finally, if you want to take your knowledge a little further, we’ve developed an Ethical Investing Classroom. This includes a series of emails that provide in-depth discussion of socially responsible investing and socially responsible investment funds. 

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, are not financial advice or a recommendation. This post is not intended to convey any guarantees as to the future performance of any 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.