The world seems more politically polarized than ever. Ethical funds in major markets recorded record outflows earlier this year. Amid rhetoric about woke capitalism, rapidly rising defense spending has some reconsidering companies that were once too hot to touch. At the same time, some are taking an even longer view and doubling down on sustainability, calling out asset managers that don't vote with environmental concerns in mind. So, if funds are being forced to choose, how might your money be
taking sides too? This week, we're talking with a fund manager taking the high road with key We say the contributions and managed assets before we hear more of that. Some important information you should always consider when investing.
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Time of recording.
Welcome John Berry.
Thank you, great to be here.
Yeah, great to have you here.
Look, the world seems very divided right now. Is money taking sides as well?
Yeah? Look, you're right, we're in a really complex polarized world at the moment. And I think historically people saw money just as an investing is just money is a store of value, money is a medium of exchange. But now people are coming to realize, actually, how you invest your money as well will real world impacts and it really matters for the choices you make and where you invest or where you don't invest.
Right, quick reminder, what is EESG ESG?
ESG is an acronym that stands for environmental, social and governance, and so we can take these factors into account with how we invest. Historically, it's sort of conventional thinking around ESG is, how is it going to impact the future cash flows of a company company has governed well or governed poorly? What does that mean for the future value of the company. What does it mean for future cash flow? Am I going to make more money out of the company?
Am I going to manage risk by taking ESG into account? And that's kind of different to ethical investing. Ethel Investing says, yes, that's true, you've got to take this into account to manage risk and make more money. But ethical investing is also let's put a values overlay on it, and what are values we want to take into account with investing around environmental issues or social issues, regardless of the cash flow impact on a company.
Right, So, when mornings Star reported last year that there was a net drop in ESG funds, that there have been a client and just the number of funds operating out there from I think six hundred and forty six to five hundred and eighty seven. Does that suggest that there's some natural attrition going on, that these funds are just simply expiring or changing their shape or whatever, or that there's been some kind of political climate change around how appealing they are.
Yeah, I think there's a few things going on there. One is around labeling, particularly in Europe, where some managers may have been using the sustainable label and perhaps when so sustainable so they were under the rules in the EU have relabeled them. So a lot of the disappeared because of the labeling issue. In part, Yes, there are very complex geopolitical factors at play in and that is
influencing investment thinking. But the key thing I think is which also comes out of morning Star data, is New Zealand is unique in that every quarter for the last three years we've had positive inflows and sustainable funds. That's quite unique in the world. Even Europe is happening. It ab outflows one quarter, but there is. You know, this is more than a fad, It is actually a real thing. This moved towards sustainable investing or ethical investing.
Are we late to the party? Are we mad?
Are we just doing it in our own ways? What's the explanation for that?
I think it's in my mind it's because New Zealanders are really starting to understand and here deeply about environmental and social issues. So when you look at what New Zealanders want or don't want in their investing, the research done by Mindful Money says that more than eighty percent of Newsealanders don't want environmental degradation, don't want human rights abuses, weapons, or factory farming, for example, a whole collection of issues.
More than eighty percent of New Zealanders don't want them, and they're investing. And that number has been very high for for the last few years. So I think New Zealanders. New Zealanders care quite deeply about how the money is invested.
If we took a bit about Pathfinder, and for those that haven't heard of it, don't know it, what exactly are you and how do you stand out from the rest of the crowd.
So, Pathfinder, we're a fund manager, we have a key saver, we have managed funds, and our mission as a business is to generate individual wealth and collective well being by investing ethically. So we believe in this idea of ruality. This is not philanthropy, ethical investing. We had to make money for our investors. We believe you can do it in a way that not only avoids harm but also
as positive benefits of the world. And I suppose that's probably you know, we've been doing this for over a decade, and that probably is what differentiates us from other managers, is that deep belief in purpose and trying to bring that investment process into life.
If you look at your phone, a TV screen, anything like that, at the moment, the pictures we're seeing are pretty horrific. We're seeing what feels like nightly reports on conflicts from two extremely volatile regions in the world, and the feeling that goodness, it's all just getting.
Worse and worse.
How on earth does a fund manager like yourselves a pathwind to try and navigate that?
Yeah, look, You're right, it is tough, and for many people there's a sensitive spare and a loss of hope and seeing the conflict is very personal seeing it. And for us we don't focus on a particular conflict and the to sides of the conflict and the politics of the conflict. We just focus on the use of weapons, and we want to avoid weapons. And you mentioned Gaza and Ukraine. You know, there's also Democratic Republic of Congo, there's Saddan, there's Momar. Weapons are being used all around
the globe and tragically, it's not a new thing. If we look at the last thousand years of human history, there haven't been very long periods of peace in the world in this conflict. At the moment, the challenge is technology is getting cheaper and more novel and its use as a weapon. It's more accessible, and so as a fund manager, we need to think deeply about avoiding weapons and not being part of the economy of war.
But it's getting harder to do that surely. And at the same time some are saying, well, you need to balance this argument, you know, obviously between responsible portfolios and delivering strong returns, but also the importance of defense and the challenge is posed by the ways that you defend yourself.
Yeah, yeah, so the challenges you don't get to choose of the weapons used for defense, and for that reason, we'd rather not invest in weapons companies that make weapons if they can be used for offense or defense. And what I'd say around the returns is, yes, weapons companies have had strong returns in the last twelve months. Weapons companies in the S and P five hundred, they are
part of the industrial sector. They make up two percent of the market, so it's a roundly small part of the market, and an investor is happy having weapons probably also has fossil fuels in their portfolio. Fossil fuels are almost three percent of the S and B five hundred. Fossil fuels have done terribly in the last twelve months. So yes, weapons have done well in the last twelve months. You've probably also got fossil fuels in the portfolio that haven't.
They do kind of balance each other out. But you know, for us, we can't mitigate the fact when we don't have weapons companies, we've missed out on that return from the weapons companies. But that is our choice as an ethical investor, is not to have thosempanies in there.
How then do you price or look at a company that's got mixed imperatives, A company like Boeing, for example, that has an entire defense component to its earnings and yet also handles a lot of civilian aviation, provides humanitarian support.
I suppose if you look at the kind of the uses that some of the technologies put to, I mean, there'll be lots of other examples that you could probably potentially open a rocket lab or you know, even companies like Ventia or Downers that are supplying they're contracting to defense services to provide you know, base support, but at the same time they're also possibly taking care of your.
Local public park. Where do you try to do you try and draw the line there?
It's complex and so on the controversial weapons side, land mines, cluster munitions, zero tolerance, one of the best that all conventional military weapons. The challenge there is you're not just talking about a Lockheed Martin that designs and as symbols ware. You're actually talking about hundreds of not thousands, of companies and behind them that provide individual components that go into
the weapon. It's what we say, is any company that generates more than five percent of revenue from selling into weapon systems, we won't invest in. So that if they're part of the componentry of building a weapon. Then on top of that, you've got companies that provide services to military as well. So we found we were invested in a company that trained pilots not only for civilian purposes, but train military pilots, not a weapon, but they're getting
revenue from military. We wouldn't invest in a military plane. Why would we invest in the company that trains build a flight. So we set a limit of fifty percent there, and we said, okay, if they're providing services to military, if the core business is built around that, so more than fifty percent revenue, we won't invest. So it's sort of a scale of what the company is doing and how much revenue they're running from that activity.
Is a lot of that freely available for the information to make those decisions.
Obviously enormous amounts of data. So we actually subscribe to data from a couple of offshore providers that will draw down into listed companies and where does the revenue come from? And so yes, I mean you can find articles on companies all over the place. But you know, you can't individually search each company. You need aggregated data, and.
I guess sort of really drilling, and particularly I suppose I'm just thinking, because we're still talking about the defense sector, a lot of that is inherently protected. It's kept confidential for various reasons. It's quite opaque to try and get
your head around. So I imagine that that's another potential has it if you're considering investing in it, even if you think it's worthwhile, right that it's very difficult to get a clear picture sometimes of what that company is doing, who its customers are, what its prospects are.
Yeah, that's true of a lot of companies that are if you think of global corporates, they've got operations all over the place, they have different business divisions, you know, things like weapons or animal testing. They're often not really forthcoming on explaining it and making and making it the information really really available. So we're relying on specialist data sources to help us with that.
Okay, it sounds like quite a journey that you have to go on to really get it right and make sure that whatever is in your portfolio meets those meets that labeling you.
Yeah, and we're not saying we're perfect all the time and the other challenges. The world is changing at a really fast paced and the question of what is a weapon is actually quite a hard one to answer because traditionally you just think of a weapon as a tank and or a jet fighter or a gun, but now it's also AI and data centers and data processing are being weaponized. You know, is that a weapon? And you know, so the boundaries are getting much more complicated.
I guess if you're looking at some of the more kind of hope graphic companies like Palenteer, I don't know if I'm going to get in a lot of grief here with the people naming names, but there are companies that obviously have defense applications that are in the intellect in the IT space, you know, but also have tremendous cybersecurity applications that're they're there to protect people in lots of different ways. How do you make a decision about that kind of thing, that simple five.
Percent sound of the five percent revenue threshold. And then you've got other companies as well that may produce something for civilian purposes and that gets repurposed or weaponized and you know, good example is Caterpillar bulldozers. The Norwegian Sovereign Wealth Fund, the largest sovereign wealth funder the world are ustollar two billion, two trillion, sorry, two trillion dollar fund.
Massive fund divested from Caterpillar a week ago on the basis that their equipment was being used in Gaza for demolition effect being weaponized and the company was not doing enough to stop that. You know, pathfinder, We actually divested Caterpillar in November twenty twenty three, but large investors like in norwayia going down that pathway as well.
I guess if we look at a different kind of conflict in the political climate, literally around climate, you're seeing a lot of talk about countries looking at the Paris Accord and whether they want to renegotiate.
That or out of it.
The US has I think maybe Eritrea and Yemen and a couple of others have too. New Zealand's discussing this now. I don't know how seriously it's being raised in the political debate. What sort of uncertainty does that create?
Yeah, you're right, it has been floated recently. Should New Zealand renegotiate to withdraw? You know what I've seen is and again we need certainty of the rules on what is applying it into the future so businesses can plan can plan around that. I've seen farmers advocates and our Prime minister say we'd be mad to pull out of Paris. And the reason for that are on economic grounds is there would be retaliation against New Zealand. It has baked
into our trade agreements with the European Union. There would be problems for US selling product in the European Union if we pulled out. It makes no economic sense to do that, let alone putting aside the climate argument. Just on economic grounds, it would not be good for New Zealand.
But again, you've seen a lot of this kind of sovereign risk effect I suppose. I mean here they're talking about it with regards to whether or not some of those big power generating companies that are on a renewables path but also are still using a bit of coal may or may not be broken up. You look in the States, all kinds of measures to support green technology and solar and so on were sort of pushed aside.
And that one big, beautiful built act makes it really complicated to make a decision about what is actually a safe investment, even if you're trying to invest sustainably, responsibly, ethically, however you want to put it.
Yeah, look on that front of you, right, the one big beautiful act. You know, it was hard on renewables companies, the renewable sector, but the reality is the world is transitioning to a lower carbon future. And so you know, we can't turn off fossil fuels today and expect civilization to function. But we have to recognize we are transitioning, and we have to realicate cap all to renewables in lower carbon future, and those companies are going to thrive
long term. That's where the money's going to be made. There is investment going into fossil fuels globally. You know, I would question the sanity of a lot of that investment given on a ten twenty year horizon. A lot of those assets may have no value as we decarbonize, They may not be as useful as they are now. They may have a short time horizon.
So is that the sort of a time horizon that pathfinder uses ten twenty years?
Well with our setting our vision for the future. So our vision is to fund the transformation to a better world. We were thinking one hundred years future when we describe the world, and one hundred years we want and what that means for distribution of wealth, what it means for ecosystems. How fast that transition had happened. Well, it needs to happen faster, run and slower to keep within the boundaries that the planet can cope with. But you know, it's
not going to happen within years. It's going to be within decades.
There's also been some researcher I think recently around people's appetite for this kind of thing. Something like forty nine percent of investors that mindful money we're talking to saying, hey, look, we would consider a switch to ethical in five years.
What does that even mean?
I mean, like, surely if you think something is worthwhile, you're going to get into it now.
And if you're saying in.
Five years that's like we should catch up for a coffee, It's like it's not going to happen. How real is that appetite?
You think? So with that was actually within the next five years, So not in you know, in five years time, but within the next five years. And I think that just reflects you know, people are time poor at the moment, they realize they need to do a lot of research to weigh up the options, and they know it's it's complex and nuance and at the moment when it comes to money in mortgages, household budgets probably take priority over thinking about am I going to move my KBI savers?
Another part of for example, it's something on their radar, but it may not be an immediate priority. So I think part of it is about time. Part of it is not knowing where to get the right research and trusting the research because it's quite a big decision to make to move in line with your values. And I just encourage people to go to the website which did
the research, which is mindful money dot nz independent. They do all the thinking for you in terms of the transparency of beholdings, what may be in a keep savior that's good or bad, and providing returns and feed information as well. So they've done the thinking and provided the data there. I just encouraged people to visit that website to accelerate the five years to something closer to now.
You mentioned trust's an important thing, and you mentioned labeling that's an important thing too. I just wanted to mention you had a few words with the regulator of the FMA last year around an issue that they'd picked up. Yeah, and I comparaphrase it or you can talk, but basically they'd said, how yours was a completely ethical product, and then there was a bit of a reference to a couple of particular companies that were in the portfolio that
had engaged in limited animal testing. Yeah, and also there was an exception or carve out for Contact because although it was thermal coal, you felt it was on a track, but you hadn't kind of made that super clear.
Is that what was the problem? Yeah? Look, please then thank you for raising that. If you think about investing, there's sort of three sides to what we do. There's the policy of how we invest in our ethical approach, there's our portfolio of what we're actually invested in. And the third limb is how we talk about it and how we tell people about it. And we let ourselves down with how we talked about it and tell people
about it. And the example you gave was Contact. Our investment policy says we won't invest in fossiphuel expiration production or companies that burn coal to produce electricity. We made an exemption for contact energy on the basis that it generates power through burning fossil fuels. However, they have a pathway to net zero and its credible pathway. They're regarded as a leader in the world around decalbanization. In our
advertising we explain we don't invest in possibil companies. We should have said either mentioned the contact a little less as a little astracts and mentioned contact, or we should have just said FOSSi fuel extraction and production. But we had that exception for FOSSi fuel. Similarly, with animal testing, we ran some advertizing it said we don't invest in
companies that test on animals. We have granted a small number of exceptions, and often there in what we call the transformational bucket, which is a company that's producing synthetic skin, but unfortunately, to prove so this is going to do away with the use of animal products in the future, but to prove the product works, I need to test
it on animals. So we've granted them an exception on the basis that their product is transformational and we'll change that category and the use of animal products.
So that's a long horizon approach rather than just sort of looking at the immediate movements.
Yeah, and like you said, we should have mentioned that at the strengthen talked about that in our advertising.
As an ethical fund manager to suspect that your investors aren't just looking for return. They want you to vocalize that and the kind of votes that you make or the kind of communications you have with the company, and.
The way we talk to companies, the way we invest And that's a challenge from the perspective of there is no perfect company. So every company you invest in has both got attributes and bad attributes, and you need to make trade offs between the two. And I'll give you an example of Tesla. So Tesla we invested in years ago because we love the mission of Elon Musk to essentially drive decarbonization not just the car you have in
the garage, but of transport. And so he was leading in the transport in the decombanization, electrification space.
And apouting batteries in just about every driveway. Right, So that's a whole other thing that's happening too.
Yeah, So there's that powerful drive. But you look at the company from an ESG perspective, like governance, pretty bad governance right, that's one person who's controlling the show, and it's always going to lead trouble in large companies. Environmental and social issues around supply chain, for example, and where you get the rear earth and minerals from. We sort of weighed that the mission, you know, outweighed the the
ESG harms. But more recently we've said, actually, other car companies are now catching up to Tessa and have followed that leadership. We don't need to invest in the company with the concerns we have around So where she sold it earlier this year, you.
Have sold all your testa Yeah, wow, yeah, what are you buying?
What are we buying? Oh, look we've got you know, there's there's plenty of tech companies, you know mag seven, there's fantastic opportunities there. But Tesla is no longer in the portfolio.
Wow, big moment.
If I can turn just back locally again, We've sort of got an interesting political climate, I would say, where you've got a lot of phrases thrown around about red and green tape, and I think one of the parties has had to crack up woke lending the idea that banks have got both climate related disclosures, but also maybe lending preferentially on broadly green or renewable topics, and that might be costing others who don't want to necessarily undertake
that kind of lending. All of that sort of stuff. Does that send What sort of a message do you think that sends to potential investors that are looking at New Zealand and from you know, from your point of view as a fund manager, do do you have anything to say about that?
The political environment is complicated and polarized globally and we're seeing parts of that in New New Zealand as well. You know, what are international investors think of New Zealand. Sure they're interested in New Zealand because we're safe, secure, politically stable, you know, legal system is robust, We're perceived as green. But the challenge on the flip side is we less than point two percent of global equity markets.
And when you look at our listed companies, we've got a lot of infrastructure and power companies, but we're really lacking in high growth tech companies in our listed markets. So for international investors, you know, we're interesting, but we're kind of at the margins. Where I think they're interested
is in the private market space. There's a lot going on in New Zealand with private companies, green technology space, SaaS companies, some really really interesting companies in New Zealand and they're attracting international attention in capital and is.
That the kind of thing that Pathfinder is also exploring opportunities with, either from the funds management side or even from the k save side, because we're seeing a little bit more private private equity exploration thereby some of those Keyisaver funds an't.
We Yeah, Look, I've been an advocate for over a decade for keypsaver investing into private assets before long before I had to KIVSAB. We'll ran path one a KEPSAB. I think it's great for Enzidink to create jobs and drive innovation and keep our talented people in the country. It's also great from an investment a portfolio perspective for KYP Saver investors long term to have access to the
SASSE class. So yes, a Pathfinder, we're invested in great companies and New Zealand companies like Mint Innovation, which extracts metals from e waste, Loadstone which is producing solar energy for New Zealand. The cheapest energy source in New Zealand. You know there's a host social housing. We've invested in several social housing social housing projects, commercial return, but at the same time it's great social benefit.
None of them are listing.
None of them look like they have a will list, to be quite honest, I mean, is that a problem that we're not getting that kind of i PO level disclosure and exposure so that people can take a look, a very clear look at the market and a bit of liquidity in there as well.
Yeah, and look, hopefully some of them will list and choose to list in New Zealand rather than listen in Australia. But from a keyvsaver because their private asseats and they're not liquid, they can only ever be a small part of a kiwisaver. So for us it's around five percent of our key savers in these private as seats. But because the because of the portability of keep sav everyone can transfer the KEYPSAB to another provider at any time
it's appropriate for it to be. It's important, but it's a small part of the KIW saber.
Would you like to see that twitched or changed it all slightly? Just a little bit that five percent is sorry that that's what that's.
What we see it. That's what we see it. And because there is no guidance in New Zealand a round, so providers like us and separ other providers are really focused on the private seat space. We're sort of trying to work out what is the right right level. We've been quite conserve a bit of it, setting it at five percent.
Yeah, I mean you mentioned that there's some data out on key we Saver as a scheme broadly across the across the board just today, one hundred and seventy five thousand transfers within schemes in the last year. That's probably the highest that's ever been. So people are switching, they are making more are definite choices about where they want to place their keep saver. Is that are you seeing let people go or people come?
We're seeing people come. Yeah, absolutely, we're seeing people join pathfinders. So every month for us, were yet new people joining and on pleased to say our tune rate, which is people leaving, is way lower than the market average of a pathfinder.
So the stats out I think key we sab funds as that would have been in March probably one hundred and twenty three billion invested, which is pretty sizeable, sort of a figure one point five six of that in what you would call socially responsible according to the definition that the FMA provided, that seems like quite a small number. We're talking about one percent of KEI WE SAB funds being in socially responsible funds. Do you see that picture when you look across the market.
No, Look, I don't see that picture, and I question the categorization that's been used to come up with one point five percent. I believe the number is much much higher.
Than one point five to six billion, I think. But anyway, yeah, yeah, yeah, okay, so that's that's that's a little over one percent. Then, look, I would say it's much higher than that. You know, a pathfinder.
We're a smaller provider with about five hundred and fifty million in KII SABER, but the values driven sustainability driven key WE SABER choices of New Zealanders is much much higher up than that. I think it's borne out in the mydful money of research. We talked about twenty percent of kiwis, you know, in responding to the survey are saying they're invested in ethical law sustainable funds. That doesn't quite match up with the fma's categorization.
Yeah, I'm according to them, there are three times as many four and a half four point six billion in cash, right, I mean it's easy to count cash, right, cash as cash. Yeah, but I guess your definition of what's a socially responsible fund you might be a bit trickier. And that takes us back to where we started, right.
Yeah, Look, it's how do you label it and what's It's not just the labeling, it's actually the reality of what is in that fund and how has that fund invested? What are the values that are the values that are driving the investment process?
Again, Ken we saver just in the last of a well, it's someddenly to become a political football. You've got one of the big parties saying, hey, we want to make it compulsory, we want to take it to ten percent. They're not quite clear on the details the costs. Is there a risk there if people tinkle with can we savor?
That it kind of kills some of that ability to transform the economy, to lift people's savings and to provide that potential capital into those private assets that you're talking about.
Yeah, I think consistency of the rules around key WE saver is really really important because people need confidence of what the rules are and understanding when they can access it, so you can open your qpsaber at sixty five. It's really important people have that certainty and know their contributions will be accessed and it will provide for them in retirement.
The increase ten percent that one of the parties has floated in Australia it's twelve is the contribution from employers, which is why their balances are so high in Australia, which is why Australians are probably going to have a better retirement than New Zalanders. We need to lift the savings rate in New Zealand. We've got to be careful how we do that with this that people can afford to put much higher contributions into their quivsaber and equally it's a burden. You can't shift it all on to
the employers. So the best way to do it is, in my mind, has actually come up with a ten year plan and say over the next ten years we're going to be increasing contributions. This is what it looks like, and step it out in a really gentle, really well planned, well signaled.
Way and try and get everybody to sign up to agree to it along the way. Good luck with that.
Well, I don't think people necessarily disagree with we need to save more for retirement. It's just where does a burden fall and over what time period? And that's what we need to be really clear about is the fairness of the sharing and spreading it over a long time period.
It's a lot to think about. Thank you, John, and thank you all for your time, whether you will watching, all listening. We know that time is precious and we want to know what you thought about this, So let us know for us kumatu that shared lunch for now,