Investment avoidance not good enough says Pathfinder

Pathfinder executives say KiwiSaver managers must do more to prove their ethical investment policies and products are making the difference they say they are.

In what is understood to be a first for KiwiSaver management firms, Pathfinder KiwiSaver has released a detailed Sustainability Report that shows investors how and why it makes sure its investments hit ESG (Environmental, Social and Governance) targets and is encouraging other managers to step up disclosure around how they invest ethically or responsibly.

"Promises of no fossil fuels, renewable energy investment and emission reductions need to be matched with easy-to-understand reporting," says Pathfinder chief executive John Berry.

“KiwiSaver managers disclose financial returns from their investments. Now KiwiSaver managers, especially those claiming ethical or responsible credentials, need to also disclose non-financial metrics.”

Berry says good ethics are critical to financial success and investors and investment companies all have a role to play to "…help fund the lasting transformation to a more ethical world".

"At Pathfinder we are on a mission to raise awareness that the impact of how we invest our dollar is as impactful as how we spend our dollar or spend our time."

He says the report details how Pathfinder decides what it means by ethical investment and how it applies this framework to its investment decisions.

It also shows Pathfinder's voting and engagement activities as a shareholder and the results of its social enterprise model where it provides long-term and passive income for 18 Kiwi charities.

Pathfinder’s chief investment officer Paul Brownsey says investors have a right to know what the carbon footprint of a KiwiSaver investment is along with the extent of its renewable energy exposure and the company's voting record.

"It’s not enough to say you’re avoiding investment in tobacco, gambling, weapons and other harmful activities. The bigger question is, after avoiding the negative, where do you invest to generate positive benefits?”

He says the impact of Covid-19 on sharemarkets has been extraordinary and has hurt families and economies around the world.

"Our strong ethical policy has been tested but has ultimately proved very resilient.

"It is also an effective risk management tool. Measuring the way a company behaves, and how clearly it thinks about Environmental, Social and Governance issues is another dimension of risk management – some of these risks are not captured by traditional accounting metrics."

The report also covers Pathfinder's concerns regarding climate change and how it plans to improve its work in that sector.

"Climate change is a clear danger to the future of society, and companies that invest in long term projects dependent upon fossil fuel are not thinking clearly about risk.

"Other industries we avoid include airlines, cruise ships, gambling, etcetera – all sectors that suffered tremendously as the world went through lockdowns."

Pathfinder's position:

• to avoid animal testing and factory farming
• to not invest in an NZX company without at least one female board member
• have no tolerance for companies with exploitative behaviour in supply chains
• to invest in no companies involved in the exploration, extraction and distribution of fossil fuels
• to invest in no companies that mine or use thermal coal (this includes utilities that generate 5% or more electricity from this source)
• avoid companies with revenue (at a 5% threshold) from adult entertainment, alcohol, or gambling

Brownsey says four of Pathfinder's funds are carbon negative and this year will be extending this to more of its funds.

"We are investing more in systems to measure more company risks around the environmental, social and governance behaviour of the companies we invest in…it is blindingly obvious that companies that manage these risks are likely to be better-managed companies with better than average prospects."

"We encourage you to consider the kind of world you want, because collectively as investors, we can have incredible influence," says Berry.

"Over time we want to go deeper with measuring and reporting what we do and the difference we make through investing and engaging."

Key statistics from Pathfinder’s Sustainability Report:

 Its KiwiSaver portfolio has 65% less carbon emitted than a key global equity market index.
 Pathfinder’s KiwiSaver has 3.7 times the exposure to renewable energy and 13 times the exposure to electric vehicles compared to the key global equity market index.
 In the year to 31 March 2021 Pathfinder KiwiSaver voted as a shareholder nearly 5,000 times, and of these 282 votes were against the recommendations of management of the company invested in.
 It has no fossil fuel exposure and its KiwiSaver is invested in only two of the top 20 banks that lend to fossil fuel companies and is committed to divesting these during the current financial year.
 Pathfinder tracks the number of companies it invests in that have emissions reductions targets.

First adviser-led KiwiSaver scheme

Low profile adviser group Aurora Financial has establised a new firm with its own KiwiSaver scheme with a strong ESG focus.

New investment manager, Aurora Capital, is delighted to announce the launch of the Aurora KiwiSaver Scheme. The Aurora KiwiSaver Scheme offers a range of funds that apply environmental, social and governance (ESG) principles, with a specific focus on investments that can improve the health of our planet, such as reducing the impact of climate change.

The initial core offering of the Aurora KiwiSaver Scheme, which is issued and hosted by Wellington-based company Implemented Investment Solutions, is comprised of three funds: the Aurora Conservative Fund, the Aurora Growth Fund, and the Aurora Future Focused Fund. The Aurora KiwiSaver Scheme also offers a lifecycle option, Aurora RetirementPlus, which blends the fund options to provide a targeted level of risk based on age.

The Aurora Conservative Fund and Aurora Growth Fund currently invest into underlying funds managed by Mint Asset Management. The Future Focused Fund invests in BlackRock ETFs, selected by Aurora Capital, that are comprised of companies with high ESG ratings and exposure to specific climate change themes.

Commenting on the launch, CEO and co-founder, Simon Rolland, said “Aurora Capital was created to provide KiwiSaver investors with an opportunity to use investment for good, and all the funds in the Aurora KiwiSaver Scheme are oriented around ESG principles. We are especially thrilled to bring a climate change focused fund to KiwiSaver investors because we believe that solving climate change is one of the greatest challenges we face today.”

Aurora Capital’s co-founder and Chief Investment Officer is Sean Henaghan, a financial services veteran who worked previously at AMP Capital (Australia) where he managed more than A$100 billion in multi-asset portfolios. Henaghan said “KiwiSaver is a long-term investment vehicle – clients that invest with us can create personal financial wealth while also leaving the planet in better shape for future generations. We are proud to be accessing the investment expertise of Mint Asset Management, whom we regard as a high-calibre active investment manager that has integrated ESG considerations into its investment process as well as being a signatory to the UN-supported Principles for Responsible Investment”.

“We are excited to be investing in innovative technologies and solutions that can create positive change for people and help address climate change issues. We have specifically appointed BlackRock for the Future Focused Fund, as their ETFs are best-in-class and are aligned to the climate focus of the Fund,” Mr Henaghan said.

As part of Aurora Capital’s commitment to making a positive impact on the planet, it is proud to support CarbonClick, an Auckland-based technology company that provides individuals and businesses the tools to calculate and offset their carbon emissions. Together with CarbonClick, Aurora Capital will measure, track and offset its own carbon footprint, and will encourage its staff, as well as clients, to consider offsetting their individual carbon footprints, reducing their environmental impact. Aurora Capital and CarbonClick will work together to not just offset emissions, but to educate Aurora Capital’s staff and clients on sustainability and how they can reduce their overall emissions wherever possible. In addition to offsetting, the overarching goal is to reduce gross emissions. Aurora Capital believes this approach is consistent with the goal for the planet, which is to actively reduce the overall carbon footprint.

The Aurora KiwiSaver Scheme offerings will be distributed by financial advice provider, Aurora Financial, which means that all members of the Aurora KiwiSaver Scheme will have access to financial advice through an adviser.

Implemented Investment Solutions Limited is the issuer and manager of the Aurora KiwiSaver Scheme. Aurora Capital Limited is the investment manager of the Aurora KiwiSaver Scheme. A product disclose statement for the Aurora KiwiSaver Scheme can be obtained from the manager at www.iisolutions.co.nz, from the investment manager at www.aurora.co.nz, and via the offer register at https://disclose-register.companiesoffice.govt.nz.

ANZ scales up, drops membership fees

ANZ New Zealand Investments has dropped its annual membership fee from all its managed KiwiSaver schemes.

ANZ Investments will remove the $18 annual membership fee from its ANZ KiwiSaver Scheme, ANZ Default KiwiSaver Scheme and its OneAnswer KiwiSaver Scheme.

It will also reduce management fees of its Conservative Funds (excluding the Default Fund) and Conservative Balanced Funds by 0.22% and 0.15% respectively.

Under the new structure, a person with $20,000 invested in the ANZ KiwiSaver Scheme Conservative Fund would have their fees reduced from $192 to $130 a year.

"These fees will ensure a simpler fee structure and provide greater value for money for our more than 650,000 KiwiSaver members, said ANZ’s acting managing director of funds management Stewart Taylor.

“We regularly review fees as we achieve greater economies of scale. This latest change particularly benefits members with lower balances or those just starting out,” Taylor says.

ANZ Investments has reduced the total fund fee for the ANZ KiwiSaver Scheme by approximately 25% since 2009.

In 2019 it removed the $24 membership fee for members aged under 18 and reduced it to $18 (from $24) for all other members.

The membership fee for over 65s was removed in 2020.

“Through its active management approach, ANZ Investments has delivered strong returns over the long run for our members and this with the reduction in fees is another step to helping our members grow their retirement savings,” Taylor says.

ANZ Investments is the largest private-sector funds management and KiwiSaver provider in the country with more than 650,000 customers and $35 billion under management.

KiwiSaver funds soar, non-contributors still a worry

More than 1.2 million KiwiSaver members did not invest in the scheme in the year to March 31, showing that while KiwiSaver has hit new heights in funds under management, there are big opportunities for providers and advisers.

The Financial Markets Authority (FMA) has just released its KiwiSaver Annual Report for the year ended March 2021, which shows total funds under management reached $81.6 billion, or double the $40.8 billion held in 2017 (see table below).

Overall membership increased 2.1% to 3,090,631 and the number of members who contributed to their accounts increased 3.9% to 1,883,118.

However, those in the scheme not contributing totalled 1,207,513, or 37%, and fees collected by providers cracked the $650 million mark.

Compared to last year, where KiwiSaver made an $820 million loss due to a market downturn around Covid-19 concerns, this year's results show a sharp rise with investment returns skyrocketing to $13.2 billion – a staggering 1708% increase.

FMA director of investment management Paul Gregory says the last year was momentous for KiwiSaver, with unprecedented growth after weathering market difficulties.

Combined fees revenue was $650.3 million, up 20.7% from last year while funds under management increased by 31.7% to $81.6 billion.

Gregory says the rate of growth in fee revenue was a function of the percentage-based investment management fees that providers take as a cut of their members’ balances, not a sign that fees charged were increasing.

“Our focus on value for money over several years has been based on providers generally not passing on the benefits of KiwiSaver’s growing scale."

But Gregory says there are some encouraging signs with several managers reducing their investment management percentage fees to increase the value provided to their investors.

"Over time we are looking to see this approach to value for money to continue, so the current trend of KiwiSaver managers as a whole earning strongly increasing income from fees should slow and stabilise.”

He says that trend was evident with fixed fees, or administration fees, which decreased by 4.8% to almost $80.8 million, as a number of KiwiSaver schemes reduced them or changed their structure.

“This is appropriate, as these fees were only intended to help providers cover costs in KiwiSaver’s early stages,” Gregory says.

Gregory says the year also saw significant shifts in the FMA's regulatory focus for KiwiSaver providers with two important pieces of guidance for fund managers being released – one focused on the accurate labelling of funds' ethical and responsible investment claims, the second focusing on value for money.

“Reflecting on our guidance and the Government’s changes to the default providers coming into effect in December, we believe both will improve outcomes for investors, impacts which will play out over the long term.”

The report shows only a small minority of investors are choosing funds explicitly labelled as responsible or ethical, however, a broad range of research shows that many investors are increasingly expecting that their provider will be taking a responsible approach to investing their money.

FMA’s research has shown that 31 of 37 schemes claim that they consider aspects of responsible, ethical or ESG investment in their decision-making.

KiwiSaver Annual Report by the numbers:

Total membership: 3,090,631 up 2.1%

Average (mean) balance: $26,410 up 29%

Total funds under management: $81.6 billion up 31.7%

Investment returns: $13.2 billion up 1708%

Members contributing: 1,883,118 up 3.9%

Members not contributing: 1,207,513

Members in default funds: 356,021 down 6.6%

Total member withdrawals: $3.05 billion up 7%

First home buyer withdrawals: $1.4 billion up 18.8%

Combined fees revenue: $650.3 million up 20.7%

Members salary/wages contributions: $4.8 billion up 16.3%

Government contributions: $891 million up 6.1%

Employers contributions: $2.7 billion up 19.5%