Amicus Curiae: Kiwisaver's Unethical Investments

By Claudia Russell

Over a million New Zealand citizens saving for retirement may be unwittingly aiding the production of cluster bombs, a new study suggests. An investigation by Radio New Zealand has revealed that at least five of the nine default KiwiSaver providers invest in the production of cluster bombs and other deadly weapons.

Under the KiwiSaver Act 2006, anyone who is over 18 and working automatically contributes to the scheme through their pay check. Most kiwis will be automatically enrolled under one of the nine default providers unless they choose otherwise. Automatic enrolment means that the money we earn could be used for devastating purposes without our knowledge. At present there are $28 billion KiwiSaver dollars invested by 2.5 million New Zealanders, with the amount of people enrolled in the scheme growing every year.

In response to the RNZ article the government has said that this is simply not a big enough issue to warrant a review of default providers. Prime Minister John Key added that “the onus is on each individual to find out where their money is going”. Similarly, in Parliament last week, finance Minister Paul Goldsmith stressed that New Zealanders have a choice of which KiwiSaver provider they prefer, and that the option is open for anyone to find out what each scheme invests in. He insists that doing so is a simple task, although many would disagree. To track a bank’s investments, one must scan thorough a 92-page document which makes little sense to those not financially literate.

What these statements have in common is the assumption that investing or not investing in cluster munitions, which mainly kill civilians (97%), is a question of ethical standpoint. This argument ignores the fact that such investments are technically against the law: New Zealand is a signatory to the International Convention on Cluster Munitions, and in 2009 introduced our own Cluster Munitions Prohibition Act. While ethical investing may not appeal to all, New Zealanders should at least be able to assume, without needing to investigate, that their government-directed savings are not enabling others to break domestic and international laws.

Are our banks acting illegally?

Arguably. Under section 10 of the Cluster Munition Prohibition Act, a person commits an offence who ‘provides or invests funds with the intention or knowledge that the funds be used in the development or production of cluster munitions.’ Any person or business who commits an offence under the act is liable on conviction to a term of 7 year imprisonment or a $500,000 fine. As the fourth country in the world to explicitly legislate against investment in cluster munitions, New Zealand was for some time a pioneer in tackling cluster munition production. Unfortunately it seems that the progress we made to eradicate these weapons has stalled.

Strangely, taken at face value it would seem that ordinary Kiwis who are aware of the investments are now breaking the law when they make their weekly KiwiSaver contribution. The reality, however, is more convoluted. None of the banks mentioned in the report are directly investing into cluster munition production, rather they are investing in third party manager funds or index funds. These types of funds consist of large investment pools which allow companies to access international shares at a lower cost than if they had invested independently. The downside of this is that our banks have little control over which holdings they end up with. The way in which KiwiSaver providers invest is fairly passive, as technically they have not ‘chosen’ to contribute to the production of weapons.

When we consider this in light of the Cluster Munition Prohibition Act 2009, it seems that ‘intention or knowledge’ that funds are to be used in bomb production may be difficult to prove. Intention is a strict test in the criminal law, and a defendant will usually only be convicted if the court is almost certain the defendant desired and planned to achieve the outcome. Similarly ‘knowledge’ in New Zealand law means that the defendant had ‘no doubt’ – merely being suspicious or reckless as to where the funds were going would not suffice (Kerr v R [2012] NZCA 121). During parliamentary discussion from the day the bill was passed in 2009, Hon Georgina Te Heuheu stated that “the offence is not directed at those who unwittingly invest in a company with some connection to cluster munitions,” highlighting the importance of intention. Having said this, she added that there would at least be a reasonable expectation that fund managers would investigate the full portfolio of a company before investing.

When adding the standard of intention to the fact that prosecuting five major banks would be incredibly difficult, it seems unlikely that any significant legal action will flow from the revelations. Contrary to statements made by some members of Parliament, this does not mean they have done nothing wrong. As a signatory to the UN Cluster Munitions convention, the fact that our banks are likely to remain relatively unscathed due to a mere ‘legal loophole’ is somewhat embarrassing. When banks contribute funds to companies which produce cluster bombs, they undermine their obligations under the Convention by allowing the bombs to be manufactured elsewhere. If the essence of the Convention and of the 2009 Act is to stop innocent civilians from having their lives ripped apart by death and injury, even small investments should be given zero tolerance.

Why not keep a more watchful eye on KiwiSaver?

This has been the response of Labour and the Green party, who believe that the RNZ report has highlighted deficiencies in the law. Many believe that because money acquired through KiwiSaver is government-directed, it should be held to the same standards as the NZ Superfund. The Superfund is closely aligned with the United Nations’ Principles for Responsible Investment as to insure taxpayer money is used in a way that reflects New Zealand’s values. The parties also suggest that KiwiSaver providers should provide a full and automatic disclosure of their investments that can be easily accessed and understood by the general public. Such requirements would encourage citizens to make free and informed decisions.

Change is on the horizon

Prompted by public outcry, four banks have already announced the removal of investments from the index funds. Some, including Fisher Funds, claimed that they were not aware of the investments until a recent review. Several other companies have vowed to undergo a review. The government also states that we will soon know whether there has been a breach of law, but in the meantime it seems that fear of losing customers has put change in the works for our banks.

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