The NZ Superannuation Fund (NZS) has won a landmark court case that could set a high bar for activist legal challenges to its investment decisions.
In the ruling handed down in the Auckland High Court last week, Justice Woolford dismissed the move by Fadel Mohamed and M Barton to foist a judicial review on the NZS over investments related to phosphate mining in Western Sahara.
Woolford found against Mohamed et al on all four grounds (ranging from general processes to specific practices) the plaintiffs alleged breached NZS responsible investment rules.
Most importantly, the decision backed the NZS methodology put in place to meet the legal requirement that the fund’s investments not jeopardise the country’s international reputation.
According to Woolford, the NZS had followed global best practice in developing the responsible investment framework.
Furthermore, he said as the fund had wide discretion in meeting the reputational risk obligation, “the Courts are not well placed to assess its exercise of judgment in giving effect to the statutory mandate through its published policies, standards and procedures”.
The judge also gave some legal weight to corporate engagement over negative screening in managing environmental, social and governance (ESG) investment risks.
Woolford said the “high threshold” the NZS set for screening out investments was “not a fetter”, as alleged by the plaintiffs.
“Engagement with a company with ESG issues may be more effective in changing a company’s practices for the better than withdrawal of investment in the company altogether (exclusion),” he said.
Citing evidence supplied by Anne-Maree O’Connor, NZ head of responsible investment, Woolford noted if taken to a logical extreme, ESG-based exclusions would leave “nothing left to invest in”.
In her evidence, O’Connor says, “very few businesses … cannot be linked in some way to undesirable ESG practice or impacts, often through supply or customer chains”.
“As Ms O’Connor notes, “a wide-reaching approach to exclusion can also unreasonably limit the diversity and number of stocks available, introduce volatility and effectively concentrate risk for investors” in ways which conflict with Guardians’ duty to avoid risk and secure returns on a balanced investment portfolio,” the judgment says.
The ruling also cleared the NZS of breaching duties in relation to specific investments in Western Sahara-based companies and via its NZ farm assets, which source fertiliser from local firms Ballance and Ravensdown. All of the fertiliser produced by Ballance and Ravensdown is currently based on phosphate imported from Western Sahara.
As well as the four substantive counts, Woolford briefly touched on three peripheral legal issues concerning the ‘standing’ of the plaintiffs, whether the Moroccan state could be dragged into the case and whether state immunity would apply.
The judge found neither Morocco nor state immunity were relevant in the case but he left the question of the plaintiffs’ ‘standing’ open. NZS had challenged the legal standing of plaintiffs on both public and personal grounds in a bid to prevent politically motivated vexatious legal attacks on its investment decisions.
“… Guardians [NZS] argue that genuine interest is insufficient in this case because the application has been brought for collateral purposes, namely to promote Saharawi rights and independence,” the ruling says. “The use of judicial review proceedings for collateral purposes has been recently characterised as “lawfare”.”
Woolford said the question of ‘standing’ was “academic” given “the applicants have failed on the substantive issues”.
In a statement, the NZS said it welcomed the High Court decision.
“We take our obligations as a responsible investor very seriously. These obligations are integrated into Guardians’ activities through several policies including our Responsible Investment Framework,” the release says.
“In all investment matters we appropriately apply our Framework to meet our legislative requirements to manage the Fund in a manner consistent with, among other things, avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.”
As reported last June, the Fertiliser Association of NZ also joined the legal action in opposition to the plaintiffs after the court granted approval.
The failure of the long-running legal challenge should make it more difficult for other single-issue activists to pursue political (or other) grievances through the courts based on investments in the NZS, an acknowledged global leader in ESG management.
“Costs are to follow the event,” the ruling says.