KiwiSaver exclusions not necessarily a performance drag: ISS

KiwiSaver providers will be banned from investing in fossil fuels and controversial weapons later this year, but analysis from ISS suggests there will not be a negative impact on returns from those exclusions.

There are currently nine default KiwiSaver providers in New Zealand, and their contracts expire at the end of June. From 1 July, investment service providers will have to screen out controversial weapons and fossil fuel companies as well as maintain a disclosed ESG policy. Further, the annual report for the default scheme must include information on actions taken over the year in relation to the ESG policy and any changes in the ESG policy since the last annual report.

ISS analysed the impact that these exclusions would have on portfolios based on the ASX300 and NZ50 and found "a combination of relatively poor performance from the industries being excluded and the relatively small total number of excluded companies combine to mean that the application of the KiwiSaver exclusion policies need not hurt beneficiary returns, and indeed may contribute to better performance in the longer term."

When applying the same exclusions to the FTSE Developed Index, the index with exclusions showed "minor difference in the performance on the upside."

"Interestingly, the data here shows that the bulk of the underperformance is associated with screened fossil fuel companies," said ISS associate director - account executive Australia and New Zealand Bjorn De Smedt, a co-author of the analysis.

"It is right to question the impact of government policy on KiwiSaver performance - in this instance it appears likely that the outcomes will be favourable to beneficiaries," the report noted.

Read more: KiwiSaverISSESGIndexNew Zealand Bjorn De SmedtAustralia