Sustainable investment funds must stay true-to-label or risk regulatory intervention, according to Robert Sloan, Financial Markets Authority (FMA) head of disclosure capital markets.
Sloan told the Responsible Investment Association of Australasia (RIAA) NZ conference last week.
“If you say you’re a green fund, make sure you are,” he said. “Even if we think it’s close to misleading we will intervene. If it looks cute, we will want to have a chat.”
But for now the FMA has a limited range of socially responsible investment (SRI) funds to police with just a handful explicitly labeled as such. For instance, Sloan said just 7,000 KiwiSaver members invest into SRI funds operating under the savings regime.
“Not a lot of people have seriously engaged [over SRI issues in KiwiSaver],” he said. “But even fees and returns are not getting people seriously engaged.”
However, John Berry, Pathfinder director, said KiwiSaver schemes would face more pressure to disclose their environmental, social and governance (ESG) credentials in line with global trends.
Berry said KiwiSaver providers now simply have to report to members whether they take responsible investment – including ESG factors – into account.
He said under regulations introduced last week, UK workplace savings schemes will have to explicitly disclose how they manage ESG risks – or if not, why not.
The UK rule change will require workplace pension funds to report annually on how they addressed ESG risks or face potential fines of £50,000 per entity or £5,000 for an individual.
“That will happen in NZ too,” Berry said.
He said financial advisers would also be required to tackle responsible investment issues once the Financial Services Legislation Amendment Bill (FSLAB) comes into force.
FSLAB, due for a third reading in parliament soon, requires advisers to put their clients’ interests first. Berry said the law change should see advisers more closely matching product selection with their clients’ values.
“There’s a statutory duty under FSLAB to make sure clients understand the product,” he said.
Paul Richardson, chair of the NZ Corporate Governance Forum, (NZCGF) said local listed firms would also have to improve disclosure standards on ESG issues such as climate change.
The NZX released ESG disclosure guidelines last year for listed firms but Richardson said many firms were still providing low-quality reports.
He said many listed firms disclose on ESG issues using “boilerplate language that we are getting increasingly irritated with”.
Coincidentally, last week the Australian Securities and Investments Commission (ASIC) found ASX-listed companies were also lagging on climate risk disclosure.
An ASIC review of 60 listed firms across the ASX 300 concluded that in some cases “climate risk disclosures to be far too general, and of limited use to investors”.
“Outside of companies in the ASX 200, there was very limited climate risk disclosure by listed companies,” the ASIC release says.
In a statement, John Price, ASIC commissioner, said climate change was a “foreseeable risk” that affected a broad range of companies and sectors.
“Directors and officers of listed companies need to understand and continually reassess existing and emerging risks (including climate risk) that may affect the company’s business – for better or for worse,” Price said.
“Climate risk disclosure practices are still evolving, not only in Australia but also globally. We intend to monitor market practice as it continues to evolve and develop in this area.”