Default KiwiSaver funds will no longer invest in fossil fuels.
The bombshell policy, announced on Sunday, will take effect in July 2021, with nine default providers expiring the month before.
Minister of Commerce Kris Faafoi says it shows the Government is putting its money where its mouth is, after committing the country to being carbon-neutral by 2050 and cutting back fossil fuel exploration and mining.
"Just a little over $1 billion of KiwiSaver funds are invested in fossil fuels, so it's not an insignificant amount of money," he told Newshub.
Green Party leader James Shaw welcomed the move.
"People setting aside money for the future want to know their savings are being put to good use, helping to create a better future for their kids and grandkids. The changes announced today mean that investments in fossil fuel production will be excluded from future KiwiSaver funds that are default providers."
The CEO of Caresaver, which claims to be the only KiwiSaver provider that's 100 percent fossil fuel-free, said KiwiSaver's move would make it harder for oil and gas companies to raise revenue, stunting their operations.
"It will also protect investors in default funds from the poor returns from oil and coal companies, which have dragged on global investment returns for at least the last five years," said John Barry.
Faafoi says investors have nothing to worry about, with plenty more environment friendly options out there.
"I'm sure those people who are in charge of investing in KiwiSaver will find alternatives to make sure they get good returns for their customers."
He said the Super Fund stopped investing in fossil fuels two years ago, and its gains haven't suffered.
Shaw called on other investors to follow suit and divest from fossil fuel investments.
Climate activist group 350 Aotearoa called the move a "win for the climate over corporate interests".
"The Government’s commitment to ensure default Kiwisaver funds exclude investments in fossil fuels sends a clear signal that fossil fuel companies are no longer morally acceptable to be associated with," said director Erica Finnie.
Also banned are investments in companies that make land mines and cluster bombs, RNZ reported.
Faafoi says they'll also be changing default funds to a 'balanced' setting to increase earnings. Conservative funds fluctuate less, but tend to lag well behind balanced and aggressive funds in the long-term.
"When someone is 18 investing 3 percent of their earnings of $42,000 a year, when they retire at 65 they'll have another $56,000 available to them," said Faafoi.
Almost 700,000 New Zealanders are in default KiwiSaver funds, many of whom probably haven't bothered to check whether there are options that would leave them significantly better off by retirement.