Retail investors will have access to so-called ‘green’ bonds on the same disclosure-lite terms as colourless NZX-listed fixed income securities under proposals tabled by the Financial Markets Authority (FMA) last week.
Liam Mason, FMA general counsel, said the regulator opened consultation on the mooted ‘same class’ exemption following feedback from industry and sustainable finance lobby groups suggesting strong retail demand for green bonds.
“We have heard from the industry the need for a more efficient route to market for these green, social and sustainability bonds,” Mason said in a statement.
To date just two green bond issuers on the NZX have been granted one-off relief from requirements to file a product disclosure statement (PDS) for offering debt with non-standard conditions.
If adopted, the same-class relief would see green bonds listed under the same PDS-less regime as ‘vanilla’ fixed income counterparts that relies on existing disclosure material to fill the information gap.
The law “enables issuers to offer financial products of the same class as financial products that have been quoted on a licensed market for at least 3 months, without the usual disclosure requirements”, according to the FMA consultation document.
Mason said the let-out clause had proved popular for vanilla bond issuers while supporting the “healthy retail appetite for debt” among NZ investors.
However, while plain-pack bonds centre on standardised financial metrics (interest rate, term etc) and risk factors, the green overlay introduces a wide range of complex qualitative and quantitative information.
As the FMA consultation document points out, there is “no universally accepted or comprehensive definition that determines how these [green] labels may be applied by issuers”.
But the regulator says the eco-friendly debt products, initialised as GSSS (for green, social, sustainable, and sustainability-linked) by the FMA, fall under two broad camps: use-of-proceeds – where money is earmarked for explicit projects; and, sustainably-linked bonds – that tie features of the debt issuance, notably interest rates, to defined green performance goals of the issuer.
Either way, greenness brings another level of complication in a market where even the standard risks of vanilla bonds might escape retail investors.
GSSS issuer green claims would fall under the ‘fair dealing’ provisions of the Financial Markets Conduct Act, Mason said, for regulatory monitoring and policing purposes.
If approved, the proposed GSSS bond exemption could see a rush of issues on the NZX, putting pressure on the FMA to up its green policing resources.
“But we’re doing that anyway,” Mason said, noting the ‘integrated financial product’ guidance released by the regulator in 2022.
He said the new FMA ‘outcomes-focused’ stance would also impact how green bonds are assessed from a regulatory point of view.
The consultation, which closes on April 30, is about fnding “the right balance of allowing issuers to get to market quickly and cost-effectively, while still ensuring that investors are given information that they will find timely, accurate, and valuable in making investment decisions”, Mason said in the release.
Meanwhile, the FMA has flagged another class exemption on the horizon for UK pension transfer advisers.
“When pension holders wish to transfer funds held in a UK pension scheme with safeguarded benefits to a New Zealand Qualifying Recognised Overseas Pension Scheme, they must receive advice on the UK law aspects of the transfer,” the latest FMA update says.
“This exemption would aim to provide relief to the UK firms who provide this advice from some FMC Act requirements. We expect to launch this consultation in April.”