Can KiwiSaver investments influence how companies behave? Two fund managers say they can

KiwiSaver fund managers say they can influence “harmful” companies through investing, but one is cautioning that influence only extends as far as New Zealand’s borders.

Charity Mindful Money has released new analysis which it says shows KiwiSaver funds invested into companies causing harm had hit a record, with $8.6 billion invested into firms that harm the climate, the environment and society.

Mindful Money’s Founder and Chief Executive Officer (CEO) Barry Coates said only a few KiwiSaver funds were “comprehensively” avoiding harmful companies, including fossil fuel firms and those that commit human rights violations.

Coates said ethical investing had been shown to provide similar returns to funds that invest in fossil fuels, and as an investment fossil fuel companies face higher risks such as being stuck with so-called stranded assets as countries transition to net zero decarbonised economies.

He pointed to New Zealand’s Super Fund and its shift to a “fossil fuel light” portfolio.

In 2022 the Fund shifted its benchmark Reference Portfolio to market indices that aligned with the 2016 Paris Agreement.

"[NZ Super Fund's CEO] said it not only did this for the climate, it also made $800 million in terms of higher value, and Simplicity has done the same thing … It doesn't necessarily cost you more and in fact, it may be a better financial option, particularly stuff like fossil fuels. You can understand that the risks of your portfolio are considerably lower. And if you're looking at a risk-return ratio, it's not a bad decision.”

Can KiwiSaver make a difference?

Milford KiwiSaver manager Murray Harris said while the Mindful Money research showed so-called harmful investments reaching new levels, it was the overall value of those investments that had increased  — not that there were new investments.

He said while the fund manager doesn’t have blanket exclusions in investing in fossil fuel companies, it could influence how those firms operate and encourage them to adopt new technologies.

For the year to June 2023, Milford had undertaken 174 engagements with companies, and Harris said the firm could also vote for or against company proposals through proxy votes. Milford had proxy voted 2400 times in the year.

Harris said, for example, after mining giant Rio Tinto destroyed ancient caves in Australia Milford had “provided some very strong feedback” to Rio Tinto, along with other investors.

This feedback meant the miner apologised, tried to put it right “and obviously will take a much much more careful approach going forward around what they do with indigenous art, artefacts and land where they've got projects operating nearby”.

Harris said closer to home, Milford had invested in Contact Energy. Because Milford was invested it was able to promote and encourage green energy projects for the benefit of New Zealand, whereas an international investor may not take that view.

“We don't want to exclude investment in that company, we want to help that company in two ways. One, by providing them the capital that they can invest in new tech, but also by being a major shareholder in the company we — along with other institutional investors — can be working with the boards, the management teams and other shareholders to engender that change, or to encourage the change and to keep them honest, and to keep them on track to doing the things that they say they're going to do.”

Harris said there were other examples where Milford had weighed in on how a business was operating, including to improve diversity or confront unacceptable behaviour.

For example, chemical company DGL’s Founder Simon Henry stoked anger when he publicly criticised My Food Bag Co-Founder Nadia Lim.

Harris said Milford had immediately engaged with DGL as an investor when Henry’s comments came to light, and had told the company the behaviour was not OK. Ultimately, Harris said, Milford divested its investment in DGL.

“Through the process, actually, we were able to provide quite a bit of education to the business around what is kind of acceptable behaviour, and that institutional investors expect their companies to be acting in a way which is from a human rights point of view and discrimination, acceptable in this day and age.” 

Paul Brownsey, Chief Investment Officer at ethical KiwiSaver fund manager Pathfinder, said KiwiSaver funds could encourage businesses to be better but that influence was limited when it came to global firms such as Meta, which Mindful Money has on its harmful list.

“It's pretty hard to argue that minority investors have managed to change the thinking of large companies easily. We're all for engagement, don’t get me wrong, and we spend a lot of time engaging with companies particularly in New Zealand where we can have more of an impact. But if we rocked up to knock on the door of Exxon Mobil or something, what impact can we have on them? You just can't, and it's kind of facile to suggest that a small New Zealand investor engaging with a close to a trillion-dollar company is going to have any sort of impact.”

However, like Milford, Brownsey said Pathfinder had been able to talk to New Zealand firms about diversity on their boards for example, and promote change.

It could also influence what businesses invested in themselves. Browsey said for example a company it invested in was looking to buy into the wine sector. That would have been a dealbreaker for Pathfinder, so the firm didn't go ahead.

"The good thing about New Zealand is that every time we have engaged with senior management or board members the companies reciprocate. They don't just have a narrow view on 'let's just make as much money as we can'. They also know they operate with a social licence, and they do have to reflect the thinking of society."

What a KiwiSaver member wants

Both Milford and Pathfinder said they have engaged clients who give them regular feedback about investments, encouraging or discouraging which firms they may want to support.

Browsey said Pathfinder "often gets challenged, and we don't see that as a threat".

He said the KiwiSaver manager had been introduced to potential new investments by some members, and they were adding to the work its analysts do.

Harris and Brownsey said their KiwiSavers embedded environmental, social, and governance (EGS) aims throughout their investing teams.

"As part of the research process with any company we're either looking to invest in or are invested in our analysts have a series of ESG and sustainable investing questions that they'll put to the business, and we expect a response to those," Harris said.

Milford didn't have a standalone ESG fund.

"What we're doing and our philosophy and sustainable investing strategy, spans all of our funds."

KiwiSaver members can check out how Mindful Money rates their fund's exposure to harmful companies here.