Motu Research calls on fund managers and industry bodies to set up systems that consider human rights when it comes to investing in government bonds

There’s no current system in the responsible investment industry for “consistently evaluating the government bond investment segment of investments”, an economist and social entrepreneur says.

That’s why Anne-Marie Brook from economics organisation Motu Research is calling on fund managers and industry bodies like Responsible Investment Association Australasia (RIAA) to set up systems that consider human rights when it comes to investing in government bonds.

This comes as Brook, along with K. Chad Clay and Zoe Shepherd from the University of Georgia, publish a working paper on Wednesday looking into sovereign bond investing and human rights using New Zealand data.

The working paper, called Sovereign Bond Investing and Human Rights: An Analysis of New Zealand's Retail Investment Funds, found that as of March 2024, New Zealanders’ savings are going to countries on ‘high alert’ for human rights violations with more than half a billion dollars being invested via sovereign bonds.

The March 2024 snapshot shows in total, New Zealand KiwiSaver and retail funds invested $26.1 billion in sovereign fixed income across 71 countries and four non-sovereign entities (European Union and development banks).

Sovereign bonds are essentially loans from New Zealanders to governments around the world - they usually use this money to do things like secure funding for infrastructure and debt repayment.

The working paper acknowledges that things could have changed since the March 2024 snapshot, but Brook says it’s not about evaluating every individual KiwiSaver fund but showing there’s a gap in the system when it comes to sovereign bonds.

‘High alert’ places

As part of the research, two datasets were looked at - the Human Rights Measurement Initiative’s (HRMI) 2024 Rights Intelligence dataset and sovereign investment data from charity Mindful Money.

Mindful Money sources portfolio data from the Companies Office Disclose Register and then researches indirect investment in external funds to get a full picture of fund holdings.

When it comes to how a place is considered ‘high alert’ - the researchers use this term when it comes to places that received an E grade in the Human Rights Measure Initiative Rights Intelligence dataset “or are reliably accused of genocide”.

The places that received over half a billion dollars in New Zealanders’ savings and investments are China ($492 million), Israel ($63 million), Qatar ($3 million) and Saudi Arabia ($16 million).

HRMI’s website says: “We measure economic and social rights as laid out in the International Covenant on Economic, Social, and Cultural Rights, and civil and political rights as laid out in the International Covenant on Civil and Political Rights.

“We also refer to related treaties such as the Convention on Torture, and General Comments of treaty bodies.”

Brook, who is also one of the co-founders of HRMI, says “I don’t think I’m being biased here when I say that is the go-to source of data globally for country human rights’ practices”.

It was a match made in heaven between both datasets, Brook says, as HRMI evaluates countries on a range of human rights and New Zealand’s regulatory regime requires funds to disclose all of their holdings.

Brook says: “I don’t think it could be done anywhere else in the world because New Zealand’s regulatory disclosure is quite unique.”

“And so partly because of that, I think this research is of global interest, not just New Zealand interest, because it is drawing attention to the fact that there is no current system in the responsible investment industry for consistently evaluating the government bond investment segment of investments,” Brook says.

The findings

When it comes to the March 2024 snapshot, New Zealand KiwiSaver and retail funds invested $26.1 billion in sovereign fixed income across 71 countries and four non-sovereign entities (European Union and development banks).

The working paper shows the majority of savings was invested in New Zealand government bonds - this was at $11.5 billion or 44% of the total - followed by investments in the United States ($6 billion or 23%).

The research also shows investments were highly diversified with 6% invested in Japan’s sovereign bonds, then 2% each in sovereign bonds issued by France, Australia, the United Kingdom, Germany, Italy, China and Spain.

One percent was in Canada, Mexico, South Korea and the Netherlands.

With the March 2024 snapshot, the research found bank funds were more likely to invest in ‘high alert’ countries than non-bank funds.

“In addition, the bank funds were much larger on average. Total bank retail fund lending to all governments was $12.7 billion versus $6.7 billion from non-bank funds. Therefore, it is not surprising that most lending to ‘high alert’ countries came from bank-run funds,” the paper says.

The paper says non-bank funds were “significantly more inclined to lend to Israel, whereas bank-run funds showed a greater concentration in China”.

The paper found ASB, BNZ and Westpac funds, “lending to high alert countries was driven by significant lending to China (with zero or quite small levels of lending to Saudi Arabia and Israel)”.

“For ANZ there was zero lending to China, but some lending to Saudi Arabia and Israel. None of the four banks had any sovereign fixed income investments in Qatar.”

The March 2024 snapshot also showed at the time that ASB and Westpac funds all had RIAA certification while none of the BNZ funds had any kind of certification. ANZ had a mixed approach - 7 out of their 18 funds had RIAA certification at the time.

Brook says what stood out to her was that there were very few funds lending exclusively to what HRMI’s data considered ‘best performing’ countries (HRMI ranked places like the Netherlands, Finland and Denmark as top performers).

“There’s a huge opportunity there for funds to offer more access to investments in those best performing countries. It’s a market opportunity.”

No investment in Taiwan

Brook says it was interesting to find there were zero investments in Taiwanese government bonds.

"They're an excellent human rights performer and they have a really good quality, liquid bond market." 

Brook says: “The other thing that surprised me is how much of the lending to the ‘worst performing’ countries was coming from funds that have some kind of RIAA certification."

"So that was 67% … It’s not surprising that those certifications are not screening for that, although I hadn’t expected it would be that much.”

The working paper found RIAA-certified funds contained $381 million of investment in ‘high alert’ countries.

Brook says the field of responsible investing is still emerging.

“Twenty years ago, the sort of certifications that RIAA developed just didn’t exist at all and so that’s already huge progress,” Brook says.

“My hope is that five years from now we’d be able to say that their systems now cover the human rights angle of investing in government bonds. They’re not doing it yet but it is an evolving field.”

‘Huge scope’

Brook is calling on industry bodies like RIAA to set up systems that consider human rights when it comes to investing in government bonds.

For funds themselves, Brook says they could expand their range and offer more access to investments that are particularly focusing on the ‘best performing’ countries.

“We identified 35 countries around the world that are in that ‘best performing’ category and 31 are investable. They have decent liquid bond markets,” Brook says.

“But when we looked at the funds that are investing exclusively in those best performing countries, the maximum number of countries that any fund was investing in was four which is tiny.

“There’s huge scope for them to offer diversified, positive products.”

As for funds investing passively, Brook encouraged them to contact their index providers, because “there is a lack of good bond index products for passive investors that allow them to invest in the ‘best performing’ countries only”.

“Providers will just provide whatever they think there’s demand for.”

Brook says people should tell their providers they care about this and even consider switching providers if their current provider doesn’t care themselves.

“The way I think about it from an individual perspective is thinking about what the future is that they want to invest into it, what’s the future that their children and their grandchildren want to live in, and how good they can feel about their investment holdings if they know that they’re aligned with that future they want to help build.”

Important conversation

RIAA co-chief executive Dean Hegarty says getting any kind of evidence-based research on what’s going on in the market helps to drive conversations around lots of complex issues.

“I think in particular, fixed income options are sometimes pushed down the agenda when it comes to how you can have an impact … sovereign bonds, I guess, are part of that,” Hegarty says, which is why it’s great to have this type of research.

When it came to RIAA’s certification programme, Hegarty says it’s designed “to provide confidence to investors that products they they are investing in are avoiding significant harm but that they are also high quality, transparent in terms of their investment approaches with good quality processes that are true to label, that the investments that they make match the claims and the marketing material and the labels that they’re putting on their products”.

“What it doesn’t do and very intentionally doesn’t do, is make judgement decisions about what an investor should and shouldn’t invest in.”

Hegarty says this is with the exception of what they consider significant harm criteria such as tobacco, cluster munitions, controversial weapons and things that break nuclear protocols - “where there’s no clear reason why anybody should be invested in those areas”.

Hegarty says human rights is a complex issue and there are numerous responsible investment strategies such as excluding things from your portfolio and other strategies around engagement criteria.

But he says “simply excluding is not a one-size-fits-all investment approach for everybody”.

Both Hegarty and Mindful Money co-chief executive Barry Coates also point out how people view human rights violations and what is ethical differently.

Noting the working paper discusses sustainability, Hegarty uses China as an example and its trillion dollar investment in renewable energy.

“That is more than double the United States. It is nearly double the entire European Union … We need to be careful when we say well, anybody who’s purchased a bond from China - which was the vast majority of the assets that were highlighted in the report - that 'by buying bonds from China, I therefore cannot have a sustainable fund’.”

“That’s something I strongly disagree with,” Hegarty says.

Human rights frameworks

When asked about the limitations of using a March 2024 snapshot, Coates says from the research Mindful Money has done, there’s much less churn than you think in portfolios.

“I would say generally, the fact that the data goes back to March 2024 is not really a problem in terms of it being pretty up to date.”

Coates says there are a number of different human rights frameworks.

“Some focus more on financial risk, and others on different issues. I think [HRMI] focuses more on civil and political human rights whereas if you focus more on social and economic rights, you get very different answers.”

“That particularly affects China,” Coates says. “If you look at it from the perspective of which country in the world has done more than anyone else to bring people out of poverty, China’s top of the list but if you look at civil and political rights, then China is one of the violators.”

“That area of what are human rights is contestable,” Coates says.

While Mindful Money supports the analysis, Coates says it does not necessarily “buy off on the particular definition of human rights that are used”.

Coates says: “Most investment by far is corporates. In a way, corporates tend to be more openly accountable for influence through investment processes.

“You can use corporate governance to influence companies, you can influence funds through what they invest - it’s much harder to do that with government.”

Coates says it’s good the report talks about human rights violations and investment funds.

When it comes to investments, sometimes people still think in “fairly narrow terms about ‘oh yes, I don’t want to invest in tobacco or alcohol or gambling or something else, but they don’t think more about the behaviour of the companies that would abuse human rights”, Coates says.