Five years ago, KiwiSaver investors were shocked to find their retirement savings were propping up companies involved in cluster bombs, landmines and tobacco.
Fund managers pulled out of the investments, black-listing a range of companies in those sectors and building "exclusion lists" to make sure they kept onside with members.
Now a new group of exclusions are set to be added to the list of companies that KiwiSaver providers will either have to avoid, or make an active decision to include or exclude.
The Government is just weeks away from naming the new default KiwiSaver scheme providers - and with the seven-year appointment come specific requirements for those schemes: a ban on fossil fuel investments and illegal weapons makers.
Until now, KiwiSaver schemes have only been required to provide a statement setting out their position on responsible investment.
But the default provider schemes will now face the Government-specified restrictions.
Just over three million people are in KiwiSaver of which 381,034 were in the nine default schemes as of March 31, 2020. Back then about $4 billion was invested via these default members out of $62b. Total KiwiSaver investment hit $76 billion at the end of 2020.
It's not the only place where the Government is weighing in on fossil fuel investment.
Finance Minister and Deputy Prime Minister Grant Robertson recently wrote to the ACC, telling the organisation he was not happy with its level of fossil fuel investment and telling it to pull out of those holdings sooner than it had planned.
Not everyone is happy with the Government's approach.
George Carter, chief executive of Nikko Asset Management NZ, which runs a small KiwiSaver scheme, says if the Government was to make any form of fossil fuel extraction and use illegal, then it would be entirely appropriate to impose such a condition on investment funds.
"But imposing a prohibition on investors in default funds from participating in an activity which is legal, supported by the state and which is currently essential for the operation of the country is in my view inappropriate and outside the scope of government's involvement in private citizens' affairs."
Carter believes it will also set a risky precedent for the rest of the investment industry.
"I think the ban is not only ill-considered, but risks setting a dangerous precedent of where a government may decide to impose restrictions on private investors' legal activities."
Carter says while no Kiwi wants their money to be used to support companies or activities they find objectionable or abhorrent, it's not always clear-cut.
"I personally think we're getting into dangerous territory when we choose to view complex investment decisions as if the issues are black/white. A particular challenge with having blanket exclusions is how far that exclusion should be pursued."
One example is the company Airbus. Its main activity is making aeroplanes, but it also has a shareholding in a subsidiary that assists with the production of launch technology for the French Government's defence programme.
"Philosophically, I think we need to be really careful as to where we draw the line here," says Carter. "If we're seeking an absolute zero tolerance approach, then as a minimum you would need to screen out government debt from any country which has a nuclear arms programme - so this would mean no government debt from the US, UK, Russia, France, China: debt which we'd find in just about every global bond portfolio."
Barry Coates, a former Green Party MP and founder of the Mindful Money website, which allows people to search out funds which exclude companies they are not ethically comfortable investing in, says in the same way that people want to feel good about the clothing brands they buy, they want to feel good about the things they invest in.
"They don't want to invest in companies that they think are doing bad things.
"That is a preference issue rather than a legal issue."
Coates says the 2016 revelations showed people were upset about investing in tobacco companies even though it's legal to sell tobacco.
Asked why people should avoid fossil fuel investments when they still drive petrol-driven cars, Coates compares it to alcohol investment.
"It's a little bit like alcohol ... I enjoy a glass of wine; why would I want to exclude alcohol companies from my portfolio? Aren't I being hypocritical?"
But he says people can drink alcohol responsibly themselves and still recognise that there are serious public health issues with the alcohol industry, with some companies pushing alcopops to children and targeting low-income and Māori communities.
"Alcohol does a significant amount of harm in society.
"I think a lot of people use that same rationale. I can't afford to buy an electric car, it's too far to walk, so I have to use my car. But it doesn't necessarily mean I support fossil fuel companies or that I like the industry."
Coates says some KiwiSaver providers like Westpac and Mercer have already decided to exclude fossil fuel investments across their funds whether they keep the default scheme status or not.
"There is some quite major changes in the structure of funds that will result from that."
He says some providers have been heading in that direction anyway, but the default fund requirement just gave it another push.
"We are seeing many funds now going fossil fuel free and the abysmal returns for the fossil fuel sector over the past seven years means they are not going to lose anything."
That is one of the many mindset changes that have happened in the past 10 years - the realisation that investors don't have to choose between considering environmental and social good factors, and the financial returns on their investments.
"People have discovered there is no financial penalty to investing ethically and far from it. Actually, there is now considerable evidence to say the returns are higher and risk is lowered."
Coates also points to a broader wake-up on sustainability issues.
"This is not only about investing; people are starting to put two and two together and say ... how can I be sustainable, how can I honour my values through my investment? And I think that has grown massively as that broader attitude has changed across society."
It's a shift that has been noticed by Dr Rodger Spiller, a financial adviser who specialises in responsible investment.
"It certainly has become mainstream."
Spiller says it has become more common than not for investment managers to say they take environmental, social and governance (ESG) factors into account when investing.
"That's a pretty big shift from when I reflect back over 30 years ago when I first started in the industry, or even 20 years ago when you would actually get the opposite. You would get fund managers who would proudly state that they don't take into account ethical investment considerations."
Spiller says a range of factors have driven the shift, but probably the biggest and most recent catalyst was investigations carried out by the Herald and RNZ, focusing on KiwiSaver and revelations that New Zealanders had millions of dollars invested in tobacco and controversial weapons makers through their KiwiSaver funds.
"That was a pretty monumental turning point."
Spiller has also seen increasing interest among his wealthy clients wanting to make an impact with their money, whether it's through helping to reduce poverty, invest in renewable energy or new technologies.
"Whilst it is easy to have negative screening, now we have got this increasing demand, for example, my client base, I have very high net worth people who want to have a significant impact with their money.
"So we are talking about three-dimensional investing now. 2D is risk and return, 3D is risk, return and impact."
That demand means those investors can get access to specialist investment funds, and those funds can then go onto platforms used by investment advisers, making them more widely available to other investors.
"They get sufficient critical mass, so then other advisers can start to access them. They get on platforms and we break through that chicken and egg thing."
Some KiwiSaver providers have also embraced "impact investing", which aims to improve positive social or environmental change. Fund manager Generate, for example, has invested in the Salvation Army's housing bond, which is for social housing, and Simplicity recently committed $20 million to the Aotearoa Pledge, which aims to raise $100m to address New Zealand's housing shortage.
Generate and Pathfinder have also committed $10m each to the Aotearoa Pledge.
Beyond KiwiSaver, fund managers and mainstream brokers are also paying much more attention to what individual companies are doing before they invest in them.
Recently, Craigs Investment Partners, one of the country's largest financial advice and broking networks, launched a rating system covering environmental, social and governance factors for the stocks most widely invested in by its clients.
The rating gives an equal weighting to the three categories and then brings them together to give an overall score out of five.
Roy Davidson, a research analyst at Craigs who undertook the report with colleague Vanessa Stevens, says ESG is a massive growth area for the investment industry.
"More and more of our clients are asking for it. So in one way it is to meet that demand. We want to use this as a tool to improve the practices of some businesses. To help show to them what areas investors, particularly our investors, see as important."
Davidson says ESG investing has been gaining in popularity each year, but Covid experience played a big part in speeding that up.
"You have seen interest in renewable energy just grow and grow. People in New Zealand were locked away for a month and had a chance to reassess priorities."
And he says what is also interesting is how the areas of interest have changed.
"Sustainable investing is nothing new, it goes back hundreds of years, but for us it has always been about the environmental side of the coin. That is still the thing that most people care about. But we are getting more and more concerned about the supplier side of things - employment rights - that is flaring up for Amazon at the moment, supplier relationships or codes of conduct, so you have Air New Zealand's [Saudi issue] that was in their supply chain.
"All of that is just becoming more and more important. Covid was a big boost and it has also pivoted it into new areas as well, which is good because companies - the disclosure around social factors lag the environmental factors by and large. We are seeing that improve and we think that can only be good."
So far, Craigs has rated 50 companies but plans to extend that to over 200 in time
"Quite a large proportion of our clients want it and hopefully some who haven't thought about it will see it and think about it."
Davidson says the research could also be used to provide backing to explain why a company might be better than the public perception.
He says an example of that might be Adidas or Nike.
"Nike especially has had historic supply chain issues with outsourced manufacturing in Asia. Whereas we have done the work, we have gone through Nike and seen the controls they have in place around their supply chain. They are not perfect yet obviously, but we can answer that question when we get it now."
Shane Solly, a portfolio manager at Harbour Asset Management, has been taking ESG into account for about 10 years now.
He says it involves asking more than 80 questions of every company they invest in. Solly says historically, many professional investors have cared more about the G side of ESG - who is on the board and how the executive is paid.
But now the sustainability and environmental sides have caught up to become just as important.
"It is everything from where you source your products from, to your workforce. One of the really important contentious things at the moment is modern slavery and if a company has contingent workers - contractors like Uber drivers.
"New Zealand companies, you can observe in the last five years there is a real awakening of their understanding of the importance of ESG. Some companies are a long way down the path, others have got work to do. But what we can say is companies are now recognising the need to get their standards up and that is a good thing.
"It has been an interesting process and it is continually evolving."
As well as looking for problematic areas, Solly says this sort of investing is also about pushing for positive change.
"Screening and excluding is one way to do it, but we are a believer in this integrated approach. This is one of the problems when you talk about ESG investing; it is not one approach, there is multiple approaches."
Coates says he hears a lot of people who argue in favour of either exclusions or engaging with companies to try making positive changes, but he believes leading providers do both.
"I don't think it is a surprise the best practice ones are excluding the things the public don't want to see in their portfolios while they are taking on their responsibility to do engagement. It is not an either or."
But he admits it is hard for the public to know which investment managers are doing a good job.
"It is one of the reasons certification is important." At the moment he relies on the Responsible Investment Association of Australasia's certification but is looking to add more information to the Mindful Money website about ESG management.
So far just four KiwiSaver schemes have RIAA certification: Pathfinder, Booster, Mercer and KiwiWealth, plus one AMP fund.
Coates believes over time it will become clearer who is doing it properly.
"There will be a greater degree of calling out those who are greenwashing, who say they are doing it but aren't really doing it."
Better financial disclosures are being required under European Union regulations and Coates says that will eventually come here too.
The New Zealand Superannuation Fund already invests in a social bond which helps prevent youth reoffending in Auckland and is looking to do more of this positive impact type of investment.
That is one of three areas the $57 billion fund is looking at as part of a review of its responsible investment strategy.
Anne-Maree O'Connor, head of responsible investment, said 10 years ago many saw the fund as an outlier for its RI policies and exclusions and were less convinced of the benefits on the investment front.
It was one of the first asset managers in New Zealand to become a signatory on the UN principles for responsible investment but now O'Connor says those who are not signed up are more the outliers.
Since then the world's view on responsible investment has shifted a lot and a year ago the UNPRI also changed its focus to encourage its signatories to focus their investment on achieving environmental and social outcomes.
O'Connor says its own review was prompted by its chief executive Matt Whineray's involvement in New Zealand's sustainable finance forum.
The forum was set up in 2019 and involves a group of New Zealand banks, insurance companies, industry, Māori businesses and iwi, professional services, civil society, academia, and Government coming together to set a roadmap for building a sustainable financial system by 2030.
"We were looking out at that 2030 sustainable development goal and we were looking at the growing stakeholder interest in investment in KiwiSaver and in our portfolio the way we integrate our RI and the sustainable finance forum and we set a goal of looking ahead to 2030 and saying what will our social license to operate look like in 2030? And what does one need to prepare for that now."
The fund already has a strong focus on climate change and has had a focus on renewable energy investment since 2015. In 2017 it hit a goal of 40 per cent of the fund being invested in low-carbon investments.
The review will focus on three areas - looking at global trends and stakeholders, ESG performance across the portfolio and its positive impact investing.
The fund is regularly challenged over its investments with recent media coverage questioning its investments in two Chinese companies black-listed by the US for their role in human right violations and an investment in an Indian company with links to the Myanmar military.
O'Connor says it has a very large portfolio to manage -and even with its ESG overlay there will always be some companies with problems.
"It is up to the company and board - it is their responsibility to manage those issues but shareholders can be a voice and try and be on the right side of encouraging change."
O'Connor said there were companies that were not in the press that it was constantly monitoring and joining up with other shareholders to engage with.
"It is better that the company improves than that all the investors that care about this exit. Even with our low carbon shift we recognise that as reducing climate change risk to ourselves but many investors say that is not reducing the emissions of the company which is actually essential to reducing climate change. We need to have both.
"With the breadth of the companies in our portfolio we can't engage with every single one of them. You do need to put that process in place. Once we have gone through that process we may decide to exclude a company, but generally we think we need to be part of trying to make change happen."