ESG Investing in New Zealand: What You Actually Need to Know

The hype, the backlash, and the surprisingly messy reality of sustainable investing.

ESG investing has had a wild decade. Trillions of dollars poured into funds promising not just returns but a better world. Politicians, pension funds, and dinner party guests all had opinions. Then came the backlash: accusations of greenwashing, political weaponisation, and awkward questions about whether a tobacco company really should score higher on ethical ratings than an electric car maker.

For New Zealand investors trying to work out whether ESG funds belong in their portfolio, three issues matter most: performance, regulation, and the gap between what fund managers claim and what they actually hold. This article covers all three.

First, What Does ESG Even Mean?

ESG stands for Environmental, Social, and Governance. It describes a set of criteria investors use to evaluate companies beyond conventional financial metrics. Environmental factors cover emissions, waste, and resource use. Social factors include labour practices, diversity, and community impact. Governance examines leadership quality, board independence, and corporate ethics.

Simple enough in theory. In practice, the terminology is a mess. Fund managers use words like responsible, sustainable, ethical, impact, and ESG more or less interchangeably, often meaning quite different things. Some funds exclude entire sectors like tobacco or weapons. Others invest deliberately in companies they believe will drive positive change. Others still take stakes in poorly rated companies with the aim of influencing them from the inside. All of these approaches get bundled under the same three-letter acronym.

The New Zealand financial regulatro, the Financial Markets Authority (FMA) found 68% of New Zealand investors prefer their money to be invested ethically and responsibly. Yet only 26% have chosen a fund manager based on ethical credentials. We see this confusion regularly when reviewing clients’ existing portfolios: people assume an ethical label means one thing, only to discover their fund still holds companies they expected would be excluded.

The Performance Question: Do ESG Funds Actually Deliver?

This is where honesty matters more than ideology.

ESG funds had a rough stretch in 2022 and early 2023. Higher interest rates punished the growth and clean energy stocks many ESG portfolios were overweight in. Fossil fuels, boosted by the Russia-Ukraine war, outperformed handsomely. The Magnificent Seven tech rally favoured conventional benchmarks. In the United States, sustainable funds recorded their worst year of outflows in 2023.

Critics declared ESG investing dead. They were premature.

According to the Morgan Stanley Institute for Sustainable Investing, sustainable funds outperformed traditional funds in the first half of 2025 by their widest margin since the Institute began tracking: a median return of 12.5% versus 9.2%.

Over a longer horizon, a hypothetical US$100 invested in a sustainable fund in December 2018 would have grown to roughly US$154 by mid-2025, compared with US$145 for a traditional fund.

Before ESG bulls start celebrating, the second half of 2024 told a different story. Sustainable funds underperformed for the first time since early 2022. Regional exposure explained most of the swing: about 70% of sustainable funds invest in European or global markets, versus 41% of traditional funds. When America and Asia-Pacific outperformed, conventional benchmarks got the tailwind.

The honest assessment? Over a full market cycle, the evidence for a persistent return premium or penalty from ESG is inconclusive. Sector and style tilts explain most of the variation. ESG is not a guaranteed shortcut to better returns, and anyone telling you otherwise is selling something.

The Ratings Problem (or, Why Cigarettes Beat Electric Cars)

Perhaps the most damaging criticism of ESG is the ratings system itself. Different agencies use different methodologies, weight different factors, and arrive at wildly different conclusions about the same company. A Review of Finance study confirmed the problem is not just definitional but reflects fundamental disagreement about the underlying data.

The result? ESG absurdities. Philip Morris, a tobacco company whose core product kills roughly eight million people a year, has at times scored higher on ESG metrics than Tesla. At face value, cigarettes are apparently a more ethical investment than electric vehicles. Elon Musk was characteristically restrained in his response, calling ESG “the devil.”

These inconsistencies erode investor trust and make it genuinely difficult to compare products. When two funds both carry an ESG label but hold completely different portfolios based on completely different criteria, the label itself becomes close to meaningless.

Political Backlash: The Culture War Comes for Your Portfolio

ESG was always going to become political, and in the United States it has become intensely so. Republican-led states have introduced over 100 anti-ESG bills since the movement gained momentum. Thirteen states now prohibit government agencies and pension funds from using ESG criteria in investment decisions.

Texas and nearly a dozen other states have filed antitrust lawsuits against BlackRock, Vanguard, and State Street, alleging the firms used their shareholdings to pressure coal companies into reducing output.

The federal response has been equally blunt. The Securities and Exchange Commission abandoned its climate disclosure rule in early 2025 and withdrew a separate proposal requiring enhanced ESG fund disclosures. Major asset managers have quietly exited climate coalitions. JP Morgan, State Street, and PIMCO left Climate Action 100+. The Net Zero Banking Alliance has effectively collapsed.

Even Larry Fink, BlackRock’s CEO and once ESG’s most prominent champion, publicly distanced himself from the term, telling an audience at the Aspen Ideas Festival he was “ashamed” of the political debate around it.

The result is a trend sometimes called greenhushing: companies continuing sustainability work behind closed doors while scrubbing ESG language from public communications. A 2025 Conference Board study found only 25% of S&P 500 firms used the term ESG in their report titles, down from 40% the year before, even as 87% still disclosed climate-related targets.

Europe, by contrast, remains broadly committed to sustainable finance regulation, though it too is simplifying disclosure frameworks.

Why This Matters for New Zealand Investors

This is not just an American drama. Many investment portfolios held by New Zealand investors include funds managed by these same global firms. When BlackRock or Vanguard changes how it engages with companies on governance or climate issues, the ripple effect reaches KiwiSaver Schemes and managed funds on this side of the Pacific.

The regulatory divergence between the US and Europe also affects what fund products are available here and how they are marketed. A fund product designed to meet European sustainable finance rules may look very different from one shaped by the US retreat from ESG regulation, yet both might end up on a New Zealand platform.

Where Does New Zealand Fit?

New Zealand occupies an interesting middle ground, and recent developments have pulled the country in two directions at once.

Less Corporate Climate Reporting

In October 2025, the Government announced a major scaling back of the climate-related disclosure regime. The mandatory reporting threshold for listed issuers jumped from $60 million market capitalisation to $1 billion. Managed investment schemes, including KiwiSaver Schemes, were removed entirely. Director liability was softened.

The number of reporting entities dropped from approximately 164 to 76. Commerce and Consumer Affairs Minister Scott Simpson framed the changes as making the regime fit for purpose, noting some companies had reported compliance costs as high as $2 million. Critics argue it weakens transparency at exactly the moment international reporting standards are converging. The FMA issued a no-action stance for affected entities from November 2025.

More Scrutiny on What Fund Managers Claim

At the same time, the FMA has been tightening its focus on what fund managers say about their ethical credentials. In September 2025, the FMA opened consultation on updated ethical investing disclosure guidance, setting out clearer expectations for how issuers present products with ethical features. The guidance extends beyond formal disclosure documents to websites, advertising, and all marketing materials.

This followed a concrete enforcement action. In December 2024, the FMA censured Pathfinder Asset Management for misleading KiwiSaver Scheme advertising. Pathfinder had run campaigns stating its funds did not invest in companies involved in animal testing or fossil fuels, without disclosing exceptions its own policy permitted. Those exceptions included holdings in a company generating electricity from fossil fuels and five companies conducting pharmaceutical-related animal testing.

The regulatory direction is two-track: less compulsory corporate climate reporting, but more rigour on what fund managers can claim in their marketing. For investors, the second development is arguably more important.

What This Looks Like Inside Your KiwiSaver Scheme

Consider two KiwiSaver Scheme growth funds, both marketed as ethical. Fund A excludes fossil fuel producers entirely but permits holdings in pharmaceutical companies conducting animal testing. Fund B takes the opposite approach: it excludes animal testing across the board but allows holdings in gas companies transitioning to renewable generation.

Both funds are legitimately following their own stated exclusion policies. Both can fairly call themselves ethical. But the risk exposure is meaningfully different. Fund A carries more concentration risk by removing the entire energy sector. Fund B carries the reputational risk of holding a company still burning gas, even if the trajectory is toward renewables.

Neither might be right or wrong, depending on your view. The point is you need to understand the difference before committing your retirement savings, and a label alone will never tell you enough.

So What Should You Actually Do?

If you care about ESG, here are the things worth keeping in mind.

• Your values are legitimate. Wanting your money to reflect your beliefs is a perfectly rational preference. There is no financial reason to dismiss it. Equally, values should sit alongside risk, return, diversification, fees, and long-term objectives, not replace them.
• Labels are not enough. A fund calling itself sustainable or ethical tells you remarkably little about what it actually holds. Read the Statement of Investment Policy and Objectives (SIPO). Look at the exclusion list. Ask about exceptions. If a fund manager cannot explain clearly how their ethical process works, treat it as a red flag. If assessing a fund’s SIPO feels overwhelming, our team can help you review your current holdings.
• Performance is not a reason to choose or avoid ESG. The data does not support confident claims in either direction. ESG funds outperform in some periods and underperform in others, largely driven by sector and regional tilts rather than the ESG screen itself.
• Watch the regulatory direction. New Zealand’s regulatory environment is evolving. Less compulsory corporate climate reporting does not mean less scrutiny on fund managers. If anything, the FMA’s recent actions suggest the opposite: make a claim, and be prepared to prove it.

How We Approach This at Become Wealth

Our starting point is always what matters most to the client. For some, screening funds against specific ethical criteria is a firm priority; they want to know their retirement savings are not funding industries they oppose. For others, the focus is squarely on risk-adjusted returns, diversification, and long-term wealth accumulation, with ESG a secondary consideration at most.

We do both, and we are comfortable doing both. Our investment recommendations are grounded in independent, third-party research rather than any single ideology. When a client wants an ethical tilt, we help them understand exactly what a fund’s exclusion policy does and does not cover, so the decision is genuinely informed. When a client simply wants the best risk-adjusted outcome, we build around evidence and diversification. The conversation starts with you, not with a label.

The Bottom Line: ESG Investing in New Zealand

ESG is not dying. It is growing up. The hype has faded, the political circus has arrived, and the industry is being forced to move from slogans to substance. For investors, this is actually good news. Scrutiny makes markets more honest. The worst thing you can do is treat ESG as a binary: either a silver bullet or a conspiracy. It is a set of considerations, and how much weight they deserve in your portfolio depends on your goals, your values, and your willingness to look past the label.

Want advice on building a portfolio aligned with your values and your financial future? Talk to the Become Wealth team.

Related articles:

• What is Greenwashing?
• Are You Investing Too Much into KiwiSaver?
• Stocks Versus Real Estate
• New Zealand’s Decline in Financial Literacy