Fiduciary duty, KiwiSaver default asset allocation and passive investing could all face major changes under proposals in the broad-ranging Sustainable Finance Forum (SFF) interim report tabled last week.
The SFF report, an initiative of the public-private sector thinktank – The Aotearoa Circle, says the notion of ‘fiduciary duty’ could be extended by law to compel NZ trustees, fund managers, financial advisers et al to consider environmental, social and governance (ESG) and other “real-world” factors in the course of their respective businesses.
“Existing fiduciary duties do not explicitly require environmental and social factors to be considered and are sometimes interpreted as prohibiting this,” the SFF report says. “The scope of fiduciary duty needs to be reviewed and clarified, along with a move from shareholder focus to stakeholder focus.”
Other jurisdictions such as the UK, European Union and Canada are moving to redefine fiduciary duty to include ESG factors, the paper says, while the United Nations Principles for Responsible Investment (PRI) also backed a wider ambit for the bedrock financial concept.
An accompanying legal opinion, drafted by Chapman Tripp, concludes that investors, company directors, superannuation scheme trustees and others likely have to consider climate change in their risk assessment processes – although it falls short of applying the finding to ESG and fiduciary duty more generally.
But adopting a ‘green’ fiduciary duty standard is just one of the 11 “potential pathways” to change mapped out in the SFF report, which also blazes a trail through thorny issues such as systemic structure, data and reporting, transitional market stability and “scaling positive impact”.
On the last point, for example, the SFF study suggests: “There is scope to increase scale through managed fund settings and sustainable lending requirements (e.g. KiwiSaver default providers could be required to have some focus on positive impact funds) and relaxing liquidity and fee restrictions and allowing multi-provider options would enable greater product choice, including allocation to private markets.”
Furthermore, the report notes that the “increasing trend towards passive investment” could stymie the progress towards sustainability if left to its own devices.
The report says index investing has proved popular “due to its low-fee structure and high demand for liquid assets”, however, both these features “also reduce the market for active, long-term investment strategies, targeting positive environmental and social outcomes”.
“Given the predominance of passive investment strategies currently, measures to promote and monitor the quality of ‘enhanced passive’ index products would assist,” the SFF paper says.
In fact, the report suggests NZ needs to adopt an “internationally aligned, Aotearoa fit-for-purpose set of definitions for sustainable investments” to counter the growing risk of ‘green’ marketing spin.
“This lack of rigour around responsible investment claims has created mistrust, with ‘greenwashing’ eroding the credibility of genuine responsibly invested funds,” the SFF says. “The recent FMA consultation on labelling and disclosure for green bonds and other responsible investment products is looking to address this concern.”
Overall, the SFF – co-chaired by NZ Superannuation Fund chief, Matt Whineray, and Karen Silk, Westpac NZ executive – lays out an ambitious plan to “move mainstream investment from its current position to further along the spectrum, with a focus on both the avoidance of harm and the generation positive environmental and social outcomes”.
According to the report, 95 per cent of the more than 50 “stakeholders” interviewed for the SFF study “told us the current financial system was not sustainable, equitable, and/or fair”.
From now until the end of February 2020, the SFF will seek feedback on the report ahead of a ‘Roadmap for Action’ final set of recommendations due for publication next July.
The Aotearoa Circle, headed by Vicki Watson, describes itself as “a voluntary initiative bringing together leaders from the public and private sectors to investigate the state of our natural resources, and to commit to priority actions that will halt and reverse the decline”.