In a global economy, earth shattering events on the other side of the world can create some pretty big wobbles for New Zealand wallets. As if the pandemic finally reaching our doorstep wasn’t enough, we’re now watching horrifying events unfold in Ukraine with the threat of WWIII hanging over our heads. For many of us, it feels frightening and out of our control, when we are already overwhelmed by events happening here. On top of existing concerns about inflation and the economy, there is now worry about the possible impact on our personal investments, which is where having an adviser to talk to really comes into play.

Ethical investing in times of war

 Ethical investing, whether we call it socially responsible, ESG, impact, sustainable or green; has traditionally been one way for individuals to speak with their wallets. Just as we can choose to shop locally at places we support, we can invest in companies and industries based on our values. The flip side being that we can also boycott companies, industries and even governments by not investing in them, if we know how.

 Although the actual impact of NZ’s actions as a nation will be negligible on the Russian government, a lot of ethical investing is about using your money to send a message. If investing is making your money work for you, investing ethically is making your money speak for you as well.

 These latest international developments have sparked debate over whether ESG investments, (which are designed to take environmental, social and governance factors into account when investing your money) are really doing what was promised.

According to Morningstar Inc, 14% of ESG funds were still invested in Russian companies at the end of last year, despite the well-known likelihood of war at that point in time. But therein lies the rub – there is no internationally agreed upon template for what is, or isn’t, an ESG investment. While many fund managers, companies and individuals feel that they should divest all investments in Russia completely, not everyone agrees, and clearly the issue is more nuanced than that. Although many of the large oil and gas companies are known for funding the government, and government bonds are just money straight into Putin’s coffers, several asset management companies in the States have been vocal about the fact that there are still companies in Russia who meet ESG criteria, for example by actively trying to promote democracy.

 As well as considering how we deal with Russia, when it comes to the world of ethical investments, we should be considering how we deal with other autocrats and countries that commit human rights violations. One company, Sustainable Market Strategies, has not only been advocating for avoiding Russia sin  is now recommending avoiding China as well. Our government’s response to China’s human rights violations has been somewhat lacklustre, but our individual responses need not be.

Ethical investments have good returns

 In addition to making a political or value-based statement, many people have started investing ethically because those funds perform better over the long term. Despite the clear intention of investors in choosing ESG funds, the fund managers have often refrained from political comment and from decisive action, as shown by the hesitation from so many to divest earlier in this situation.

 As Mindful Money points out, “The inclusion of the Russian government bonds and companies is not just a moral failing by investing in companies that financed the military build-up and invasion. It is a financial failing as well. The funds that were still invested up until the time of the invasion lost 80-100% of the value of those investments”

 Fortunately for our clients, neither Generate or Booster, our two KiwiSaver providers, have been heavily invested in Russian companies. Both have addressed the issue on their websites, giving investors peace of mind that they are not funding Putin’s war and that their funds won’t be excessively affected by any hurried divestment of funds. Booster have also elaborated on their portfolio set up, such as the inclusion of several unlisted companies in NZ, which is notable as these direct holdings are not subject to the same volatility as listed stocks are. They have also pointed out that they have intentionally been well diversified geographically, sheltering their funds, to a degree, from any country-specific shocks.

 Select Wealth, who we are fortunate to now be working with in the investment space as well, have also clarified that they had minimal holding in Russia, with any exposure being through passive indices in the international markets. Interestingly, for our providers, it hasn’t mattered whether you had chosen an ‘ethical’ fund or not, as the approach to Russian holdings has been the same across the board.

What about other investment options?

 For those not yet working with a Velocity adviser, or who have invested elsewhere, the question remains: if you can’t judge a fund by its ESG title, should you look at other options?

 Some investors have turned to Cryptocurrency as an alternative, with advocates for it stating that these situations – war, economic and political instability, rising inflation – are exactly what a stateless, decentralised currency was designed for. Having said that, we haven’t seen the uptake in investors or a surge in value for cryptocurrency that some expected. Whether this is due to lack of widespread understanding, access or confidence in what is notoriously an extremely volatile asset is unknown, but would indicate that the world is still not quite ready. Conversely, in previous market dips, notably in 2020 when lockdown hit, we saw people panic and shy away from all risk. Given the astronomically rising inflation this year, putting your money into cash, fixed interest or other conservative options is only going to see its value erode. Additionally, taking funds which were invested more aggressively and moving them into a conservative option is likely to lock in your losses – something my colleague Simon O’Neill expands on in his blog this month.

Getting started with your investment

 So, if neither investing in something you don’t understand, or hiding your money under the mattress is likely to workout long term – where can you confidently invest your hard-earned cash?

 The answer is that there is no silver bullet. Just as there is no universal standard for how an ESG fund can invest, there is no universal guide to how you should invest when the world is poised on the brink of a World War. The answer is to speak with an expert and make a plan for you, that aligns with your situation, your goals and you values. And when the world falls apart – refer to the plan and call your adviser.

 Having said that, as always when investing, two factors need to be considered at all times; timeframe and diversification. A well-diversified portfolio will weather almost any storm, given a long enough period of time. The question is whether you have sufficient diversity in your investment and enough time for that investment to pay off. If your situation has changed since we set up your investment, now is the best time to review your position and if you aren’t investing at all, now is a perfect time to start. Yes, the world is an uncertain and frightening place right now, but the right advice can help you achieve certainty in your financial future and reassurance that your money is in the right place, wherever that is for you.

Elizabeth

Disclaimer:

Elizabeth Tsikanovski (FSP693611) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Elizabeth’s disclosure statement on our website. 

‍

‍

‍