Ethical KiwiSaver funds – what the labels actually mean

“Ethical” is not a defined term in New Zealand fund law. Two KiwiSaver funds can both use it while holding very different things, and both can be telling the truth. That is not a scandal – it is what happens when a word does the work of a rule – but it does mean the label alone tells you almost nothing. Here is what does.

What every KiwiSaver fund already excludes

Some exclusions are not a selling point, they are the law. Investments in weapons that are illegal in New Zealand are off the table for everyone: cluster munitions under the Cluster Munitions Prohibition Act 2009, anti-personnel mines under the Anti-Personnel Mines Prohibition Act 1998, and nuclear explosive devices under the New Zealand Nuclear Free Zone, Disarmament, and Arms Control Act 1987.

Default funds go further by mandate. Since the 2021 settings, a KiwiSaver default fund must exclude both illegal weapons and fossil fuel production.

So if a fund’s ethical pitch amounts to “we don’t invest in landmines”, it is describing New Zealand law rather than a policy. Worth knowing before you pay extra for it.

Ethical, responsible, sustainable, impact

The words are used loosely, but they usually point at four different approaches:

Negative screening (exclusions). The fund refuses to hold certain industries – tobacco, weapons, gambling, fossil fuel production, adult entertainment. Simple to describe and easy to verify, and it is what most people picture when they hear “ethical fund”.

Positive screening or tilting. The fund still holds a broad market, but weights toward companies scoring better on environmental, social and governance measures and away from the worst. Your money is still in the market; it is distributed differently within it.

Engagement and stewardship. The fund deliberately keeps holdings in imperfect companies so it can vote its shares and press for change. This is the approach that most confuses people, because a fund with a serious stewardship policy may hold companies an exclusion-based fund would not touch – and will argue, not unreasonably, that selling to someone who does not care changes nothing.

Impact investing. The fund seeks a measurable outcome alongside a return, such as social housing or renewable generation. Rare as a whole-of-fund approach in KiwiSaver; more common as a slice.

None of these is the correct one. They are different answers to the question of what your money should be doing, and the useful question is which one you actually meant.

The greenwashing problem, and what is being done about it

The Financial Markets Authority issued guidance in December 2020 on disclosure for what it calls integrated financial products – funds sold on non-financial factors as well as returns – and has since reviewed KiwiSaver and non-KiwiSaver funds making ethical, responsible or sustainable claims to see how well managers were applying it. The concern it is regulating is straightforward: that investors are protected from poor product design and misleading promotion, including greenwashing.

The practical consequence for you is that the claim on the front page has to be supported by what is in the documents. So read the documents.

The five questions worth asking

1. What exactly is excluded, and at what threshold? “No fossil fuels” can mean no producers, or it can mean nothing deriving more than 10% of revenue from them. Both are defensible. Only one matches what most people assume.
2. Does the policy apply to the whole fund? Exclusions sometimes apply to directly held shares but not to the index funds or external managers the fund also uses. That is where the awkward holdings live.
3. How do I check? Every KiwiSaver fund publishes a full portfolio holdings disclosure, and every scheme publishes a Statement of Investment Policy and Objectives setting out its responsible investment approach. Both are on the provider’s site and on smartinvestor.sorted.org.nz. You can look up what a fund holds. Very few people do.
4. What does it cost? Ethical funds are not automatically dearer, but some are, and a higher annual fee compounds against you for as long as you hold the fund. Read the fees guide alongside this one.
5. What does giving up part of the market do to the risk? A fund that excludes whole sectors is less diversified than one that does not. That may show up as better performance or worse in any given period, and it is a genuine trade-off rather than a free one.

Where returns come into it

You will find studies arguing ethical funds outperform and studies arguing they lag, and both are usually measuring different funds over different periods. The honest position is that the ethical screen is not the main driver of what you end up with. Your risk category, your contribution rate, the fees you pay and how long you stay invested matter far more, and they are all within your control.

Which is the reassuring part: choosing a fund that matches your values does not have to mean choosing a worse retirement. It means doing the same work you would do anyway – checking the risk category is right for your timeframe, checking the fees are reasonable, checking the returns are competitive against similar funds – and then adding one more filter.

Happy to go through it with you, including pulling up what a specific fund actually holds. It costs you nothing: we are paid by the providers we work with, not by you.