Most institutional investors in New Zealand are engaging with values-aligned investing in some form. Exclusion screens, ESG integration, impact mandates, culturally grounded frameworks, responsible investment policies signed but not yet operationalised. The commitment exists. What is often missing is a coherent governance framework for turning that commitment into something the board can define, implement, monitor, and report on.
The industry has not made this easier. The language is crowded: "ESG," "responsible investing," "impact investing," "ethical investing," "sustainable investing," "values-based investing." These terms overlap, conflict, and confuse. Different advisers use different labels for similar things, and different things for similar labels. And the conversation is too often framed as a product choice (which ESG fund should we buy?) rather than a governance question (what do our values require of our investment framework, and how do we embed that requirement in our governance?).
This guide is a practical governance resource. It is designed for boards and investment committees that have already decided values matter for their portfolio. It does not argue the case for values-aligned investing. It provides the governance framework for making that commitment operational: how to define what your institution values, how to embed those values in investment policy, how to select and monitor managers who genuinely align with your framework, and how to report on whether the portfolio reflects your intentions.
Values mean different things to different institutions. An iwi board's values framework is grounded in tikanga and kaitiakitanga, obligations that predate modern portfolio theory. A health charity's values framework is grounded in its mission to improve health outcomes. A community trust's values framework may reflect the community's expectations for how settlement or endowment capital is invested. A religious organisation's values framework is shaped by its faith tradition. This guide does not prescribe what to value. It provides a governance framework for embedding whatever values the board has defined.
In This Guide
- The Spectrum of Approaches
- Four Governance Questions
- Getting Started
The Spectrum of Approaches
Values-aligned investing exists on a spectrum. At one end, values influence a narrow set of portfolio decisions. At the other, values are the foundational design principle for the entire portfolio. Each position on the spectrum involves different governance commitments, different implementation complexity, and different levels of alignment between the portfolio and the institution's stated values.
Understanding where your institution sits on this spectrum, and where it wants to be, is the first governance question.
Exclusion Screening
The simplest form of values-aligned investing. The board defines specific sectors, companies, or activities that are excluded from the investment universe. Common exclusions include tobacco, controversial weapons, fossil fuel extraction, and gambling. The exclusion list is applied as a negative screen across all mandates.
Governance requirement: The board defines what is excluded and reviews the exclusion list periodically. This requires a policy decision, not just a preference.
Limitation: Exclusion screening tells you what the portfolio avoids. It does not tell you what the portfolio supports. A portfolio with a clean exclusion list may still have no positive connection to the institution's values.
ESG Integration
Incorporating environmental, social, and governance factors into the investment analysis alongside traditional financial metrics. ESG integration treats these factors as material to investment risk and return, not as ethical considerations applied after the financial analysis.
Governance requirement: The board sets expectations for how managers weight ESG factors and monitors whether managers' ESG processes are substantive or cosmetic. This means asking for specific examples of investment decisions that were influenced by ESG analysis, not just policy documents.
Limitation: ESG integration is fundamentally a risk management tool. A manager can integrate ESG factors and still invest in sectors the board finds inconsistent with its purpose. ESG integration does not, on its own, align the portfolio with the institution's values.
Thematic Investing
Directing a portion of the portfolio toward sectors, themes, or outcomes that align with the institution's values. This might mean allocating to renewable energy, health innovation, affordable housing, sustainable agriculture, or other areas that connect to the institution's purpose.
Governance requirement: The board selects themes and monitors whether thematic allocations deliver both alignment and acceptable financial performance. This requires dedicated mandates or fund selection and an understanding that thematic allocations are a complement to the broader portfolio, not a replacement for it.
Limitation: Thematic investing typically applies to a portion of the portfolio. The rest of the portfolio may remain unaligned. A board that allocates 10% to a sustainable energy fund but does not address the other 90% has made a start, but the governance framework is incomplete.
Impact Investing
Investing with the explicit intention of generating measurable social or environmental impact alongside financial return. Impact investing goes beyond ESG integration (which identifies risks) and thematic investing (which targets sectors) to require specific, measurable outcomes.
Governance requirement: The board defines what impact it seeks, how impact will be measured, and what financial trade-offs, if any, are acceptable. This requires specialist managers and recognised impact measurement frameworks such as the IMP's Five Dimensions of Impact, IRIS+ metrics, or alignment with the UN Sustainable Development Goals. The board needs to be clear about whether it is seeking market-rate returns with impact or whether it is willing to accept a concessionary return in exchange for greater impact.
Limitation: Impact investing at institutional scale is still developing. Measurement standards are evolving, attribution remains difficult, and the investment universe for institutional-grade impact opportunities remains narrower than for conventional investments. The governance burden is higher than for other approaches on the spectrum.
Values-First Portfolio Construction
Building the entire portfolio around the institution's values framework. In this approach, values are not an overlay, a screen, or an allocation within a broader portfolio. They are the foundational design principle. The investment policy starts with the values framework and builds the portfolio to serve it.
Governance requirement: The board articulates a comprehensive values framework, and the investment policy is built around it. This requires deep alignment between the board, the investment adviser, and all managers. It is the most governance-intensive approach on the spectrum, and it demands an investment partner who understands the values framework well enough to implement it across a diversified portfolio.
Example: A Māori-values ethical investment approach grounded in tikanga, such as the framework TAHITO has developed within the Shaw and Partners New Zealand group, is an example of values-first portfolio construction. The investment philosophy starts from cultural values and builds outward to portfolio design, rather than starting from conventional portfolio theory and applying values as a filter.
These approaches are not mutually exclusive. Many institutional portfolios use multiple approaches simultaneously: exclusion screens applied across the whole portfolio, ESG integration as a baseline manager expectation, and thematic or impact allocations within specific mandate areas. The governance question is not which approach to choose in isolation but how to combine them coherently within an investment policy that the board can govern and that reflects what the institution has decided matters.
Four Governance Questions
The spectrum tells you what is possible. These four questions tell you how to make decisions about it. They form a governance framework that any board can apply, regardless of where it sits on the spectrum.
1. What do we value?
The starting point is the board's own articulation of what its institution's purpose, culture, or mandate requires of the investment portfolio. For some institutions this is relatively straightforward. A health charity knows it should not be invested in tobacco. An environmental organisation knows fossil fuel extraction is inconsistent with its mission. The exclusion list almost writes itself.
For other institutions it is more complex. An iwi board may need to translate tikanga into specific investment principles that can be operationalised across a diversified portfolio. A community trust with elected trustees may find that board members have different views on what the trust's values require, and building consensus takes facilitation as much as governance. A religious organisation may have well-articulated faith-based values but limited experience translating them into investment criteria.
The governance challenge is moving from broad statements ("we believe in responsible investing") to specific policy positions that can be implemented and monitored. "We will not invest in companies that derive more than 10% of revenue from fossil fuel extraction" is a governance position. "We care about the environment" is not, however sincerely it is held.
2. How do we embed those values?
Once the board has defined what it values, the next step is embedding those values in the investment policy. This means specifying which approaches on the spectrum the board wants to apply, to which parts of the portfolio, and with what governance expectations.
The investment policy statement should contain a clear values section that a new board member can read and understand, that a manager can implement without ambiguity, and that the board can monitor over time. If the values section of the investment policy is a generic paragraph that could appear in any institution's policy, it is not doing its job.
Practical embedding means answering specific policy questions:
- Which exclusions apply across the entire portfolio?
- What ESG integration expectations do we set for all managers?
- Are there specific thematic allocations we want to make?
- Do we have an impact target, and how will we measure it?
- Is there a portion of the portfolio where we are applying a values-first approach?
- What are the boundaries, and what happens when a manager holding falls outside them?
- Do we expect our managers to engage actively with companies on values-relevant issues?
If the investment policy cannot answer these questions clearly, the values framework is aspirational rather than operational.
3. How do we select and monitor for alignment?
Values-aligned investing is only as good as the managers implementing it. The board needs criteria for evaluating whether a manager genuinely embeds the institution's values or merely markets ESG as a product feature. And it needs a monitoring process that gives the board ongoing confidence that alignment is being maintained.
This is where many institutions fall short. They select a manager with a responsible investment policy, note the PRI signatory status, and move on. But signing a set of principles is not the same as embedding them in an investment process. The governance challenge is looking past the marketing to assess what the manager actually does, what decisions have been influenced by values considerations, and whether the portfolio holdings are consistent with the institution's framework.
There is a separate strategic choice the board should make explicitly: does it want its managers to actively push back on poor corporate behaviour, or simply avoid the companies it disagrees with? Active stewardship (engaging with companies on values-relevant issues, voting proxies in line with the institution's framework, participating in collective engagement initiatives) is a distinct governance decision. Excluding a company and engaging with a company to change its practices are both legitimate values-aligned choices. But the choice should be deliberate, not accidental, and the investment policy should reflect which approach the board has chosen.
Monitoring is equally important. A manager who was aligned at appointment may drift. New holdings may introduce contradictions. Market developments may require the board to revisit its framework. Without systematic monitoring, the board loses confidence in whether the portfolio reflects its stated values.
4. How do we report on it?
The board and its stakeholders need reporting that shows whether the portfolio aligns with the values framework. This goes beyond standard financial performance reporting. It should address the questions that matter for governance: Are our exclusions being maintained? How are managers performing on the ESG factors we have prioritised? What impact are our thematic or impact allocations generating? Is there anything in the portfolio that contradicts our values framework?
Effective values reporting gives the board governance confidence, not just data. A quarterly values report that shows a green tick next to every metric is not useful if the board does not understand what the metrics mean or how they connect to the values it defined. Values reporting should answer one question clearly: is our portfolio doing what we said it would?
These four questions form a governance cycle, not a one-time exercise. The board should revisit them periodically. Values evolve. The investment landscape changes. New approaches become available. Stakeholder expectations shift. What was an adequate values framework five years ago may no longer reflect the institution's position or its community's expectations.
Getting Started
If your board is exploring values-aligned investing, or reviewing whether your current approach is robust enough, here are three questions to bring to your next investment committee meeting or board discussion.
1. Can we clearly articulate what our institution's values require of our investment portfolio?
If a stakeholder asked the board to explain its values framework in plain language, could it? Not the investment policy jargon, but the substance: what does the institution stand for, what does the portfolio avoid, what does it support, and why? If the answer is clear, the governance framework is probably sound. If the answer is vague, there is work to do.
2. Does our current investment policy contain a specific values section?
Not a generic responsible investment statement, but a section that specifies the institution's values framework, the approaches being applied (exclusion, ESG integration, thematic, impact, values-first), the governance expectations for managers, and the monitoring and reporting requirements. If so, when was it last reviewed? If not, should it be added?
3. Do we receive any reporting on whether our portfolio aligns with our stated values?
If so, is it useful? Does it answer the question "is our portfolio doing what we said it would?" Or is it a data dump that the board does not meaningfully engage with? If the board does not receive values-aligned reporting, should it ask for it?
These questions are not diagnostic or accusatory. A board that can answer all three clearly is in good shape. A board that finds some of them difficult to answer is not failing. It has identified an area where its governance framework can be strengthened.
Full Guide
Continue Reading
This is the public preview of our guide to values-aligned investing for institutional portfolios.
The full guide includes frameworks for evaluating manager claims around values alignment, a practical monitoring process for maintaining alignment over time, an honest discussion of the tensions values-aligned investing creates, composite patterns showing how different institution types approach values alignment, and a reporting framework for giving the board governance confidence.
Or visit shawandpartners.co.nz/values-aligned-investing
