The bill, sponsored by Labour Party MP Grant Robertson, was voted down by the National and Act Parties, with government backbench MPs Craig Foss, David Bennett and Aaron Gilmore calling legislation unnecessary.

Market support for responsible investing was already leading investment away from less palatable companies, and the direction from former Finance Minister Michael Cullen to the five biggest government-owned fund managers, which manage $45 to $50 billion of assets, National's Foss told Parliament.

Labour's Robertson accepted the bill might have needed some tightening around how to define which companies are ethical and which are not, but said those things could be ironed out in the select committee process. Having got support from the Green and Maori Parties, he urged the government benches to support it.

"The Bill sought to have clear and consistent criteria for ethical investment in the legislation that govern our major investment funds such as the Super Fund and ACC," Robertson wrote on the Labour Party's Red Alert blog.

"The criteria are based on international norms and treaties and emphasise the importance of investing in organisations that have good governance, treat their stakeholders fairly and uphold human rights and good labour standards," he said.

Labour's David Cunliffe said the bill would give more clarity to the crown-owned funds by giving managers guidance as to what was deemed unethical investment.