Ethical investing: What's negative screening and how does it work? –

OPINION: Ethical investing has moved from being fringe a decade ago to mainstream today.
With ethical investing there are different approaches and different terms used, leaving many investors not knowing where to turn.
In this column we want to demystify things by answer reader’s queries.
This week’s questions come from Josh.
* Monday thoughts: Investing responsibly and for returns
* Does your KiwiSaver contain alcohol?
* KiwiSaver funds dump $331 million of fossil fuel investments

Negative screening is an approach of avoiding harmful industries or harmful business practices.
This came to prominence for KiwiSaver funds in 2016 when it became known that many of the main KiwiSaver providers had investments in cluster munitions, nuclear weapons manufacturers and tobacco stocks. Now alcohol, gambling and adult entertainment are also widely excluded.
Some funds can go further excluding industries connected to fossil fuels, palm oil, factory farming and GMOs.
Other exclusions relate to harmful business practices such as human rights violations and environmental degradation.
A good resource to find what is screened out of your KiwiSaver fund is This website, run by a charity, details each KiwiSaver provider’s approach to negative screening and what stocks are not screened out.
It is a personal decision for each investor regarding what companies they feel comfortable investing in, there’s no single right answer. The important point is to find a KiwiSaver provider whose negative screens (or “exclusions”) match your values.
It is also worth noting that negative screens only tell you what a KiwiSaver is not invested in. They do not answer another key question – how positive, beneficial or ethical are the investments that are actually made?
Because there is no single right answer, negative screens are different for each KiwiSaver manager.
The minimum baseline is that (obviously) anything that is illegal in New Zealand must be excluded. New Zealand law can extend to funding activities offshore like investments in nuclear weapons or cluster bombs. It is not illegal to invest in tobacco or gambling stocks.
However, many people don’t want to be invested in activities causing social or environmental harm. A fund manager could look to international conventions that New Zealand has signed or government policy for direction. That would lead you to exclusions like whaling and nuclear power.
A fund manager could go further and survey its KiwiSaver members on what they want excluded. Of course polling and implementing exclusions on that basis may keep most members happy most of the time, but won’t please all. In this case investors may need to compromise.
Fund managers may also exclude some industries because they see too much financial risk. For example, tobacco and coal are industries in long term decline. It makes sense on financial grounds (aside from health or climate change implications) to exclude tobacco and coal.
Other fund managers may just incorporate a value-set in the way they invest. That may lead to exclusions like animal testing or civilian weapons.
The key thing is for KiwiSaver managers to be fully transparent about what they exclude. That way investors are free to find a fund manager whose thinking aligns with their personal values.
John Berry is co-founder and Chief Executive of ethical fund manager and KiwiSaver provider Pathfinder Asset Management, the first B Corp certified fund manager in New Zealand.
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