Trustees Executors chief risk officer and general counsel, Robert Sloan, explains why the just-released NZ investment stewardship code is a step into a better future…
A new stewardship code for New Zealand’s investment industry was launched this week at the Responsible Investment Aotearoa New Zealand 2022 conference.
Developed by an industry-led committee, the new voluntary code creates a strong framework for corporate engagement and active ownership practices to support responsible ownership by investors in a way that drives a strong and sustainable economy.
So, what is ‘stewardship’ in investment, and why should fund managers, asset owners and investors care?
Stewardship is about creating and preserving long-term value for current and future generations by responsibly managing and allocating capital. Stewardship is sometimes also referred to as ‘active ownership’.
Active owners use various levers to influence a company towards more sustainable outcomes, including voting, engaging directly with the company, filing shareholder resolutions, or advocating for policy changes.
Stewardship promotes sound investor and corporate governance, and business practices that lead to sustainable outcomes for our environment, society, and economy.
Strong stewardship also benefits investors by ensuring their capital is deployed efficiently. The signatories to the New Zealand code are accountable to those whose money they invest – their clients and beneficiaries.
It demonstrates that clients’ and beneficiaries’ interests are at the core of their business model and conduct and gives confidence to regulators that investors meet standards for culture and conduct.
The code promises to enhance investors’ approach to responsible ownership, while fostering constructive relationships between investors and issuers and holding issuers to account over their sustainability claims.
The code removes the false ‘either/or’ dichotomy that can arise in thinking about sustainability and stewardship. It does this by being clear that the value needing good stewardship is intergenerational value for those whose funds are being managed by signatories – not just a narrow idea of value as short-term financial returns.
This means fund managers need to be across the environmental, social, and governance factors that influence risks and opportunities tied to long-term financial performance. When they are, capital will be more efficiently directed to where it’s most needed for a resilient, strong economy over the long-term.
Another important function of the code is to help counteract greenwashing by bringing transparency and accountability to the practice of stewardship through reporting and disclosure.
It is quite easy for a fund manager to proclaim that they’re doing a lot of engagement and voting. But this can be prone to a form of greenwashing unless real outcomes can be detailed in a report. By shedding light on the conversations taking place between investors and investees, these codes work to increase accountability on both sides.
It is very pleasing that the founding signatories to the new code are some of New Zealand’s biggest asset managers, including Westpac, Kiwi Wealth, NZ Super, Harbour Asset Management, Milford Asset Management, Devon Funds and Trust Management.
The stewardship code will be hosted by a secretariat jointly managed by RIAA and Toitū Tahua: Centre for Sustainable Finance. Combined with a well-constituted, independent governance committee, this will provide the code with the strength and independence to enforce and drive meaningful stewardship.
New Zealand’s stewardship model has been developed based on international precedent, including the Australian insurance industry code governance committee. The Financial Markets Authority, and other regulators and market participants, have reviewed the code several times during its development.
Some observers may regard a voluntary stewardship code for New Zealand as a bit of a toothless tiger. Whilst the code is voluntary, signatories will be required to comply or explain their non-compliance. The founding signatories have committed to produce their first Stewardship Report by December 2024 and become stewardship leaders in New Zealand.
New Zealand was the first country in the world to introduce a law that requires the financial sector to disclose the impacts of climate change on their business and explain how they will manage climate-related risks and opportunities.
In the same vein, successful implementation of the stewardship code will influence investor and investee behaviour to create and preserve long-term value, including the value of environmental, social and economic assets, for current and future generations as part of a responsible investment approach.
Robert Sloan is Chief Risk Officer and General Counsel for Trustees Executors and is a member of the Stewardship Code development committee.