It's about time we all start acting on climate change. How can our KiwiSaver investments play a role in this fight?

November started on a positive note with the government passing the Zero Carbon Bill. There has been growing public pressure in the form of campaigning by organisations like Generation Zero and the consultation process for this bill attracted over 10,000 submissions from the general public. It’s clear that the conversation is switching (finally) from “should we act on climate change?” to “how do we act on climate change”.

What does Zero Carbon Bill Do?

The bill sets up a framework by which New Zealand's policy climate change will be developed to achieve the target of the 2015 Paris Agreement which seeks to limit the global average temperature increase to 1.5 degrees Celcius above pre-industrial levels.

To achieve this, the bill sets two targets for New Zealand:

• Reduce emissions of all greenhouse gases except biogenic methane, to net-zero by 2050;
• Reduce gross emissions of biogenic methane within the range of 24 per cent to 47 per cent by 2050

The Bill also sets up an independent Climate Change Commission to advise governments on how to meet these emission reduction targets set in law. We agree with Climate Change Minister James Shaw who said, “This is a historic piece of legislation and is the centrepiece for meaningful climate change action in New Zealand.”

What does this mean for KiwiSaver?

You may be wondering why a KiwiSaver provider is busy talking about climate change bills. When KiwiSaver launched, it was almost entirely unshackled by any need to consider the ethics of "socially responsible investment", and most KiwiSaver providers gave only a token nod to environmental, social and governance factors as part of their investment decision-making process. Since 2016, public awareness of what KiwiSaver was invested in has risen. Now, with the Climate Change bill coming into action and the ongoing public outcry around KiwiSaver funds having exposure to nuclear weapons it is clear that KiwiSaver providers must invest in reflecting the moral values of their 3 million investors.

In real talk, this means not investing in companies that supply weapons, tobacco, fossil fuels or gambling. But is this really happening?

In November, Kiwi ethical research charity Mindful Money revealed which KiwiSaver funds have the highest exposure to these fossil fuel producers. It found $502.3m was invested via KiwiSaver funds in those companies with $344m of that invested via just 20 funds including big names like ASB, Superlife and KiwiWealth.

Internationally, in 2018, 985 institutional investors, with $6.24 trillion AUM committed to divest from fossil fuels (Divest Invest, 2018).  Large institutional investors recognise that the impacts of greenhouse gas-induced climate change pose an existential threat to the financial sector.

Yes, KiwiSaver providers have a fiduciary duty to provide good risk-adjusted returns and balancing this duty while also being environmentally responsible can be tough. But, research commissioned by RIAA and Mindful Money in 2018 suggests that 72% of Kiwis expect their investments to be made responsibly and ethically with a vast majority wanting their savings invested in companies that deliver positive outcomes, notably renewable energy and sustainable water solutions.

It’s therefore not just a sound moral decision to help stop greenhouse gas emissions but also a sound financial decision.

How can passive investors like Kōura play a part?

Responsible investment strategies have traditionally been associated with active management as they can pick and choose the companies they invest in (Dale, 2017). In contrast, passive KiwiSaver providers primarily invest in index-tracking funds.

How can such providers then balance their ESG responsibilities? The answer is they can. Globally there has been a push by the large index providers to produce Indices that reflect investors increasing desire for green products. The first ESG ETF was launched in 2005, and today, there are an estimated 120 ESG ETFs globally (Harvard Business Review, 2019).

For example, take the iShares ESG US ESG Leaders Index, a product that Kōura purchases for it’s US fund. This fund is composed of US large and mid-cap stock in a variety of sectors including IT, Health Care and Finance. This index excludes securities of companies involved in the business of tobacco, alcohol, gambling, nuclear power, weapons as well as companies in severe business controversies. It was launched in May 2019 and despite all its’ exclusions has grown to US$1.6bn in a mere six months.

The growth of these indexes has been mirrored by the growth of research companies like MSCI and Sustainalytics that provide ESG data. Constantly improving ESG analytics capabilities has also seen a more systematic, quantitative and financially relevant approach to ESG investing globally which is critical to allowing passive funds to invest along ESG lines  (Tidd & Subramanian, 2019).

An important component of ESG investing is holding companies to account publicly for their actions. As previously mentioned, passive investors invest according to an index while active investors make their investments following lengthy company research, including management meetings. As a result of this, if a passive investor has concerns around the sustainability of a company that’s on an index, they can talk to their index provider or choose a new index. Passive managers are also able to take public positions and be critical of management on behalf of their investors.

In contrast, an active manager needs to remain onside with management, and they will be unwilling to publicly criticise a company on its ESG policies unless its’ absolutely imperative.

Conclusion 

As ‘climate change’ evolves from a phenomenon that people could choose to believe into ground reality, there is going to be increased pressure on companies and financial markets alike to be accountable for how their decisions impact both profitabilities as well as the world around us. Investors want to put their money where their mouth is. Earlier this was small steps like composting and selling off a car. Today, it’s about ensuring that our money is invested in companies that are in line with our morals and what’s good for planet earth.

The Kōura Difference

At Kōura, we only invest in the things we believe in. This means we don’t invest in companies that supply weapons, tobacco or gambling products. We’ll always do our best to invest in the best set of funds – best in all senses of the word. Kōura offers investors six different funds, which we combine to develop your personalised portfolio. All our funds are passive, meaning you are investing in the broader markets and are not relying on Kōura to pick individual stocks for you.

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References:

Dale, C. (2017, March 24). Responsible investment: the new standard in KiwiSaver? Pension Commentary.
Divest Invest. (2018). The Global Fossil Fuel Divestment and Clean Energy Investment Movement: 2018 Report. Divest Invest.
Harvard Business Review. (2019, January). Retrieved from The State of Socially Responsible Investing: https://hbr.org/2019/01/the-state-of-socially-responsible-investing
RIAA. (2018). Responsible Investment Benchmark Report New Zealand. Responsible Investment Association Australasia.
Tidd, D., & Subramanian, R. (2019, February 12). ESG investing is here to stay. Retrieved from MSCI: https://www.msci.com/www/blogposts/esg-investing-is-here-to-stay/01251377498