KiwiSaver fossil fuel divestment small step in the right direction

The government has announced that from mid-2021 KiwiSaver ‘default’ schemes must have a responsible investment policy and they must not invest in fossil fuels. Less than eight percent of KiwiSaver’s wealth is located in the default funds, but this is still a significant adjustment to the system.

Predictably, a chorus of complaint has followed, this government is interfering in the way our money is invested, we are told. Leftist-greenie values are being imposed on all of us. But these complaints show a basic misunderstanding of how the new KiwiSaver arrangement will work and a failure to appreciate the logic behind it.

The new arrangement does not interfere with anyone’s investments any more than the current system does. It will require all default funds to exclude investment in fossil fuels, but this does not force anyone not to invest in fossil fuels any more than the current arrangement forces people to invest in them.

Under the current arrangement, although you might be automatically enrolled in a fund that invests in fossil fuels, you are free to switch to one of the few available KiwiSaver funds that exclude fossil fuels. Similarly, under the new arrangement you will be free to switch to any one of dozens of KiwiSaver funds that invest in fossil fuels if you wish to do so.

In other words, the degree of autonomy and choice enjoyed by KiwiSaver members is not changing. What is changing is the ‘choice architecture’ of the system. Whereas now you have to opt out of fossil fuel investments, in future you will have to opt in if you do want to invest in fossil fuels.

This is smart policy. Mandatory retirement savings schemes around the globe, like KiwiSaver, are creating a massive and growing pool of capital in search of investment opportunities. Where are the billions invested through superannuation schemes going? This is an issue of concern for all of us.

From a societal point of view, it is not desirable for massive flows of capital to be funnelled into socially and environmentally harmful industries.  

In particular, we know that if we are to preserve a habitable planet, the fossil fuel industry needs to be mothballed as soon as possible. We cannot sustainably afford our financial systems to keep shovelling money into fossil fuel exploration and production.

Historically, the finance sector has paid little to no attention to the social and environmental impact of its activity. But too much is at stake for this status quo to continue.

Requiring KiwiSaver default providers to dump investments in fossil fuels and adopt a responsible investment policy will help to embed climate responsibility and principles of responsible investment as a normal part of business in the managed funds sector.

But won’t KiwiSaver investors take a hit on their investment returns if fossil fuel companies are excluded from their portfolios? Probably not. Fossil fuel companies are a small and shrinking sector on global stock markets, and the sector has under-performed compared to the rest of the market over the past decade. These stocks no longer represent guaranteed long-term growth for investors.

What’s more, it is now widely accepted that fossil fuel reserves will become ‘stranded assets’ at some point in the future, either because governments will prohibit reserves from being extracted or because new forms of renewable energy will render extraction of fossil fuel reserves economically unviable. At that point, fossil fuel stocks will completely lose their value.

If the KiwiSaver system is intended to ensure a prosperous and secure future for New Zealanders for decades to come, then principles of sustainable and responsible investment should be built into it.

The new policy promotes fossil-free retirement savings without curtailing the freedom of KiwiSaver members to keep profiting from the business of dirty energy if they really must. At a time of climate breakdown, this is the least we should be doing.

It is a small step towards nudging the finance sector into line with the goal of carbon neutrality, a goal which – let’s not forget – has cross-party support in New Zealand and has recently been enshrined in law by the Zero Carbon Act.