The New Zealand Superannuation Fund says it has reviewed its shareholding in Israel Chemicals - a manufacturer of a controversial product called white phosphorus - and will not remove the company from its portfolio.
Labour defence spokesman David Shearer told Fairfax this month that fund should "immediately divest" its holding in the Tel Aviv-based firm.
White phosphorus has reportedly been used in a number of recent conflicts as a smokescreen and causes severe burns when it comes into contact with people.
NZ Super Fund - I'm invested in what?
But the Super Fund, which has a $900,000 "passive investment" in Israel Chemicals, said white phosphorus had "many beneficial uses".
"It is also has legal, and widespread, military use as a smoke screen," the fund said. "However, its use as a weapon against civilians is illegal.
Israel Chemicals is a supplier of white phosphorus to the United States Defence Force, and to many commercial customers. The United States supplies arms to the Israel Defence Force."
The fund said Israel had indicated last year that it would find alternatives to white phosphorus following condemnation of its use on civilians during the 2008 to 2009 Gaza conflict.
"We have no evidence that Israel Chemicals' product - or any white phosphorus - has been used against civilians in the recent Gaza conflict," said Super Fund chief executive Adrian Orr. "Our analysis suggests Israel Chemicals operates within national and international laws, and conventions New Zealand has signed."
He said the fund would reassess its decision if evidence emerged to the contrary.
"We continue to follow the United Nations investigation into this distressing conflict."
The Super Fund has more than 6000 global equity stocks in its portfolio.