Three questions about the KiwiSaver fossil fuels ban

A Government decision to ban KiwiSaver default providers from investing in fossil fuel production is a bold and unexpected step. But it raises a bunch of questions, says Newsroom’s business editor Nikki Mandow. Not least, who decides what is an investment in fossil fuels and what isn’t? 

Important Government or corporate announcements that land on journalists' desks at 5am on Sunday morning always raise eyebrows. Still, at first sight, this Sunday's press release from Ministers Kris Faafoi (Commerce and Consumer Affairs), Grant Robertson (Finance) and James Shaw (Climate Change) seems innocuous enough - an important positive step. Its opening line: “New Zealanders’ savings in KiwiSaver default funds will soon exclude investment in fossil fuels.” 

From Faafoi: “This reflects the Government’s commitment to addressing the impacts of climate change and transitioning to a low-emissions economy.”.

From Shaw: “No New Zealander should have to worry whether their retirement savings are causing the climate crisis. That’s why our Government is moving default KiwiSaver funds away from fossil fuels, putting people and the planet first.”

From Robertson: The Government wants to ensure people who remain in default funds get the maximum benefit from their investments.

Note Shaw is talking about ethics and sustainability, Robertson is talking about financial return on people’s savings. Faafoi is talking about both. Just what you'd expect.

Faafoi uses the example of the $47 billion NZ Superannuation Fund to justify the fossil fuel KiwiSaver decision, in terms of it being in the best interests of investors’ savings. In 2017, the Super Fund excluded $3 billion in fossil fuel and emissions-related investments from its portfolio “without negatively affecting performance”, Faafoi says.

“So we know that moving away from investments in fossil fuels doesn’t have to mean lower returns.”

Approximately 690,000 people are in a default KiwiSaver fund, of which less than half have made an active choice to stay there. The rest went into a default fund automatically and haven’t bothered to change.

The reason the Government is making its announcement now is the terms of the nine existing default providers expire in June 2021, and the newly-announced rules will apply to anyone wanting to run a default fund after that.

Reaction, as much as anyone was reacting to an announcement timed for 5am on a Sunday morning, was mostly positive. 

“Avoiding fossil fuels is not only good for climate stability, it is also good financially,” says Barry Coates, founder of Mindful Money, a not-for-profit looking to bring transparency to KiwiSaver investors. “The world cannot burn all the fossil fuel reserves without catastrophic climate impacts, and producers will be left with worthless ‘stranded’ assets. This is a serious risk to the world’s financial system as well as to investors. 

“Excluding fossil fuel producers from default funds protects the interests of those who have not made a specific choice of KiwiSaver fund.”

A similar sentiment from John Berry, CEO CareSaver, which promotes itself as New Zealand’s only fossil fuel-free KiwiSaver fund.

“We welcome and are pleasantly surprised by this bold move by the Government ... We believe it is a smart and forward-looking approach for both investors and the planet.

Questions to be answered

It’s early days, the tender process hasn’t even started for the next round of default KiwiSaver providers. But still, the Government’s announcement appears to leave three important questions unanswered.

Question 1: How do you define investment in fossil fuels production? Which companies fall into the category of banned investments?

Some are pretty straightforward. Oil companies Shell, BP and Exxon Mobil are presumably out. But what about NZ petrol distributor and retailer Z Energy?

What about ANZ, BNZ or Westpac, with their huge loans to Australian mining companies? As one commentator put it to Newsroom: “A decent whack of KiwiSaver funds are going to Australia and if you are investing in Australian banks you are knee deep in fossil fuels.”

Then there are the huge international funds. Warren Buffett’s mega-fund management company Berkshire Hathaway has an energy division that owns a number of coal-fired power stations

What about companies that are huge users of (and therefore encouragers of) fossil fuels production? Toyota or Volkswagen, the world’s largest producers of fossil fuel-driven cars; Fonterra, whose coal-fired milk processing plants make it one of the country’s top CO2 emitters; Air NZ, whose search for alternative fuel sources hasn’t come to much so far.

Not a fossil fuels producer, but... Photo: Lynn Grieveson.

It’s a gnarly one. 

There’s no definition of “fossil fuel production” in the Government’s press release. There’s also no information on whether the Government is going to give default KiwiSaver providers guidance on what exactly it means by “excluding investment in fossil fuels”. Will it leave it up to the providers themselves to make that judgment or will there be parameters, even companies to be avoided? 

It’s not just about digging coal out of the ground, but down the chain. Where do you start or stop?

When Newsroom asked  Kris Faafoi’s office for clarification, spokesman Peter Stevens told us only: “The Government will provide more detail on the threshold and definition of the exclusion before calling for tenders, as part of the process to appoint new KiwiSaver default providers.”

“It’s going to be an interesting discussion,” says CareSaver’s John Berry. “It’s not just about digging coal out of the ground, but down the chain. Where do you start or stop? How prescriptive should you make it?”

As one KiwiSaver provider, who didn’t want to be named, told Newsroom. “Is the Government deliberately leaving it open, or are they going to come back later and tell providers they actually had a more specific idea how this is going to be interpreted?”

Defining fossil fuel-free isn’t easy. Berry says that while Mindful Money lists five KiwiSaver providers as fossil fuel-free, the fund analysis section of that same website notes fossil fuel company exposures for four of them. 

CareSaver CEO John Berry. Photo: Supplied.

CareSaver uses two climate change-related measures to judge whether to invest in a company, Berry says. The first is carbon intensity - CO2 produced relative to revenue. But it also looks at carbon risk management - how well a company is addressing its future carbon risk and moving towards carbon neutrality.

Perhaps the highest-profile model - and the one quoted in the Government’s release - is the NZ Super Fund. But that fund, while putting considerable store on its Climate Change Investment Strategy and its carbon exclusion methodology, is proudly not fossil fuel-free.

True, the fund has removed $3 billion worth of stocks “that exceed thresholds for either emissions intensity of fossil fuel reserves”, according to the Faafoi/Robertson/Shaw release. But what the announcement doesn’t mention is the Super Fund has kept the top performing emitters in its portfolio. “Stocks in the top quartile of the “Carbon Emissions” score – reflecting less risk due to better management than their peers with respect to climate issues – have been retained in the portfolio,” Super Fund spokesman Conor Roberts says.

Question 2: What evidence does the Government have that its fossil fuels-free strategy won’t harm the financial performance of New Zealanders’ retirement savings?

Once again, the Government’s statement is unclear. Banning fossil fuel investment “makes sense for the funds themselves given there is a risk of investing in stranded assets as the world moves to reduce emission,” Faafoi says. 

Yes - and no.

Economists estimate there could be $US900m in stranded energy assets worldwide. Photo: Getty Images.

Assets get stranded when a company has invested in them, but before they can realise the full value of that investment, they become worthless. Fossils fuels - oil, coal and gas - that have to stay in the ground forever because governments move to ban them are stranded assets. A Financial Times article estimated there could be $US900 billion of stranded assets in big energy companies if governments got tough on climate change.

But that’s not the same as saying that from 2021, no investment in any fossil fuels company will make financial sense.

Faafoi also uses the argument that the NZ Super Fund’s climate change-related divestment strategy hasn’t negatively affected performance. “So we know moving away from investments in fossil fuels doesn’t have to mean lower returns.” 

Which is only vaguely reassuring, particularly given the fact the Super Fund made a calculated decision not to get out of fossil fuels entirely - see above.

The Government appears to be assuming that it knows better than KiwiSaver fund managers what investment strategy is right for their fund in terms of risks and returns. 

"Through consultation and evidence from the NZ Super Fund and other funds, including KiwiSaver providers that already exclude fossil fuels, we are confident the exclusion won’t adversely risk investors’ returns," Stevens says.

I’m not convinced Government should be the arbiter on where the best returns can be generated in a portfolio.

John Berry says he genuinely believes returns are better in a fund without fossil fuels. Still, being a fund manager is about “trying to balance pragmatism and what you are trying to achieve”. He says being transparent about what you have invested in can be as critical as what you invest in.

”We are proponents of different fund managers having different views, as long as investors know what they are,” he says.

Ah yes, investors - the people whose KiwiSaver money we are talking about. Annual surveys undertaken by Mindful Money show three quarters of New Zealanders do not want their KiwiSaver funds to be invested in fossil fuels, CEO Barry Coates says.

A quarter of Kiwis might put their KiwiSaver returns before the planet. Photo: Lynn Grieveson.

But that presumably means one quarter want some exposure to fossil fuels - or at least don’t mind having their money invested in them, as long as they make a good return. 

“I’m not convinced government should be the arbiter on where the best returns can be generated in a portfolio,” one KiwiSaver manager told Newsroom. “If the objective of KiwiSaver is to make as much return for investors as possible, then fund manager should have freedom where they invest.”

Question 3: Isn’t shareholder activism one way to produce positive change? But that means you have to be a shareholder.

Ah yes. 

In the past, sustainable or ethical investment tended to be purely about getting out of “bad” companies and into “good” ones. 

But these days there’s another argument increasingly being heard in the investment community. It was persuasively put to me last year by Steffan Berridge, head of quantitative investment for Kiwi Invest, which is behind the Kiwi Wealth KiwiSaver scheme.

Why investing in coal mines could (maybe) be ‘responsible investment'.

Berridge argued that investors, particularly large ones, should be engaging actively and openly with companies whose products, activities or business models they are concerned about.

“If you are an investor in a ‘bad’ company and you vote for change, you have a chance to make a difference,” Berridge told me. “But if you invest just in ‘good’ companies, there is an argument your vote makes no difference.

“For an individual looking at a KiwiSaver fund, for example, there is an argument that choosing a provider or a fund which feels good is not helping things. It’s the weakest method of trying to make a difference.”

Increasingly, major investors like pension funds are challenging fossil fuel companies over their lack of progress on climate change.

These days shareholders are joining activists pushing Exxon Mobil to take action. Photo: Getty Images.

Last year, several big funds with a total of $US1.9 trillion of investments in Exxon Mobil attempted to push through a number of proposals around climate change, including trying to force the company to set targets to lower its greenhouse gas emissions.

The shareholders were unsuccessful, but got up to 40 percent shareholder support for one of their proposals. 

The move by the New Zealand Government to ban investments in fossil fuel companies risks being counterproductive, another KiwiSaver manager told Newsroom.

“There is a real danger we are shooting ourselves in the foot here. If our voices aren’t heard at the board table there’s a risk that progress towards emissions reduction goals could be slower.” 

Waters are muddied still further by the fact that some companies that are heavy producers or users of fossil fuels are also putting a lot of money into trying to move towards renewable energy. Majority Finnish government-owned oil company Neste is also one of the largest producers of renewable diesel in the world.

It’s the weakest method of trying to make a difference.

“For an individual looking at a KiwiSaver fund, for example, there is an argument that choosing a provider or a fund which feels good is not helping things. It’s the weakest method of trying to make a difference.”

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