If the last few years have done anything, they’ve forced investors to confront an uncomfortable truth: capital is rarely neutral. Liv Lewis-Long explores the complexities around ethical investment in 2026.
Wars in Europe and the Middle East. Trade tensions reshaping global supply chains. Energy security back on the agenda. Climate commitments under political strain. Companies caught between regulatory regimes, activist shareholders and shifting consumer sentiment.
Against that backdrop, many investors are asking: what does ethical investing actually mean? And what influence, if any, does our capital have? This is no longer simply about environmental, social and governance (ESG) definitions or glossy sustainability reports. It’s about trade-offs, real-world constraints and whether “ethical investing” can meaningfully coexist with diversification, index investing and fiduciary duty.
What ethical investing can (and can’t) do At its simplest, ethical investing incorporates ESG considerations into investment decisions. But that description barely scratches the surface. There are many distinct approaches: exclusion (screening out based on certain factors), integration (embedding ESG risks into analysis), stewardship (engaging with companies to improve behaviour) and impact investing (actively directing capital toward specific positive outcomes). Each has different objectives and limitations, as well as associated costs for the investment manager, which would then be reflected in the costs for the investor.
Ethical investing cannot immediately solve climate change, ongoing conflict or provide social equality. But it can give investors more choice when it comes to not funding things we would rather avoid, as well as not reaping financial benefits from activities that they don’t agree with. While some may see it as mere “cancel culture” or a moral purity exercise, the different approaches to ethical investing can allow everyday investors to align their values with how they are growing their long-term wealth, in a broader sense.
How it works for a passive manager
A common question is whether ethical investing is even possible in a passive, index-based strategy. Passive managers don’t hand-pick stocks. They track market indices – often holding thousands of companies across multiple countries.
That broad exposure is a key feature of the model. Diversification remains one of the most robust defences against volatility, including during periods of macro and geopolitical instability like we’re seeing now.
The ethical trade-off here is influence over individual company selection. At Simplicity for example, the approach is an exclusionary one, using responsibly screened indices for our global portfolios. This means that the index provider (in Simplicity’s case, Bloomberg) uses ESG screening data from independent research and data providers to apply negative screens, which exclude companies with significant involvement in certain sectors or activities – such as tobacco, alcohol, gambling, adult entertainment, fossil fuels, civilian arms, military weapons and nuclear power. The screening methodology includes defined rules, which include revenue thresholds set out in our Responsible Investment Policy.
Under this index screening methodology, exclusions also include companies that breach the principles of the UN Global Compact, covering areas such as human rights, anti-corruption, labour and environmental standards. This is deliberately an exclusion-based framework. As an investment manager, we choose the screened index that aligns with our Responsible Investment Policy so that we can choose at a high level what we do not want to invest in, while maintaining broad market exposure.
It’s important to note that ESG screening reduces the investable universe, aka diversification, given some companies will be excluded from an index and thus the investment manager’s portfolio. A screened index may perform differently – either better, or worse than – an unscreened index during any period of time. Screening can exclude whole sectors and/or subsectors, for example fossil fuels or military, meaning a screened index is less likely to proportionally reflect the market.
Large, diversified companies, which may play in multiple products sectors and regions can also move in and out of a screened index based on the percentage of reported revenue they derive from different business activities. So, while investing in screened indexes does allow investors to align their portfolios with defined ethical boundaries, it’s not an exact science, and there are (as always in life) trade-offs.
Current geopolitical tension
Recent years have tested the definition of ethical investing. Energy supply concerns have complicated the fossil fuel debate. Defence spending has increased globally, raising questions about whether arms manufacturers should be categorically excluded or considered within a national security context. While not an ESG matter, sanctions regimes have forced rapid divestment for investment managers as part of compliance requirements. Meanwhile, regulatory scrutiny of ESG claims has intensified, with greenwashing investigations globally reminding fund managers that intent and labelling is not enough; strict processes and controls under disclosed rules and methodology as well as a high level of transparency are required.
There is no universal definition of “ethical”. Investors can disagree on where lines should be drawn. Some prioritise decarbonisation above all else. Others focus on labour standards, data privacy, or governance integrity. For passive managers, the framework must be systematic, transparent and defensible while taking into account their understanding of what their investors find important. Clear processes, published policies, ongoing monitoring and adaptation are important, as is careful language about what the strategy does and does not promise.
Stewardship still counts
One misconception is that passive investing is passive in every sense.
While passive managers track indices, they are often significant long-term shareholders. That position brings voting rights and engagement opportunities. Stewardship – through proxy voting and dialogue – is one small way managers can try to encourage better corporate behaviour while maintaining a degree of diversification. It is not a guarantee of change, nor is the impact of this stewardship well proven. But as large, long-term capital providers, passive funds have standing in the conversation –
which should be seen as an opportunity to seek improvements.
The broader point is that ethical investing sits on a spectrum. Exclusion is one tool. Stewardship is another. Actively seeking “ethical” investments, corporate philanthropy, and green business practices are additional layers that some managers pursue.
Transparency as an anchor
In today’s environment, transparency is an important component of ethical investing. Investors are rightly sceptical of vague ESG claims. They may want to know what is excluded, on what basis, how thresholds are defined, and how policies are enforced. This could include being able to look through to portfolio holdings, and clear information around fees and trade-offs. Tools that can show exactly where funds are invested, and clear disclosure of screening methodologies shouldn’t be marketing add-ons but foundational inclusions.
Ethical investing will continue to evolve as geopolitics, regulation and societal expectations continue to shift. There will be debates about defence stocks, decarbonisation, and what constitutes “significant exposure” to different business activities. Those debates are healthy. What matters is that investors understand the framework they are buying into – and that managers are clear about what they are delivering.
Ethical investing cannot insulate portfolios from volatility. Nor can it single-handedly reshape the global order. But it can allow investors to set boundaries, manage certain long-term risks, and align capital with clearly defined principles, without abandoning diversification or disciplined portfolio construction.
In a world where it’s hard to work out how you can contribute to a more positive future, that’s not insignificant.
The information provided and opinions expressed in this article are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation. This article is not intended to convey any guarantees as to the future performance of any of the investment products, asset classes, or capital markets mentioned. Simplicity NZ Ltd is the issuer of the Simplicity KiwiSaver Scheme and Investment Funds. For Product Disclosure Statements please visit our website simplicity.kiwi. For more on Simplicity’s ethical investing approach and a link to the Responsible Investment Policy, go to simplicity.kiwi/about-us/ethical-investments.
