FMA sets expectations for issuers of ‘green’ and ‘responsible’ funds

15th Dec. 2020

The “Disclosure framework for integrated financial products” guidance shows the FMA is ready to take into account a wider scope of investor outcomes than just financial returns.

Published on Scoop, by Daniel Smith. The original article can be found here.

The “Disclosure framework for integrated financial products” guidance shows the FMA is ready to take into account a wider scope of investor outcomes than just financial returns.

In new guidelines released by the FMA, the regulator has laid out its expectations for investment offerings claiming to be “green” and its aims to support New Zealand’s transition to an “integrated financial system”. An integrated financial system is one which takes into account non-financial factors such as natural, social and human capital impacts.

The guidance framework sets out how “fair dealing” provisions in the Financial Markets Conduct Act pertain to integrated financial products, the type of disclosure the FMA expects from issuers of such products, and the FMA’s enforcement options in this area.

The FMA has also clarified their position on vanilla bonds that have undergone a “greening” process.

Sarah Vrede, director of capital markets at the FMA, said the move is aligned directly to its strategic priorities.

“We plan to help investors understand integrated financial products, and likewise expect issuers to also arm investors with the information they need to decide if their products’ objectives and claims align with each investors’ expectations and values.”

Vrede said the FMA has a range of enforcement tools it can use to address false, misleading, deceptive or confusing behaviour by issuers of integrated financial products.

“At the upper end, we can issue a stop order or direction order, which can force a business to take certain steps to rectify or withdraw an offer. More serious breaches may result in the FMA taking court action.”

The FMA’s release of the disclosure framework for integrated financial products follows stakeholder consultation, during which the FMA sought feedback from the industry and received 38 submissions.

One of those submissions came from Mindful Money, a company which has long shown investors what is going on inside investment funds.

Founder and CEO of Mindful Money, Barry Coates says, “I am very pleased. I think that the FMA [has] set out not only the specifics of how [it] would deal with misleading advertising such as greenwashing, but [it has] set out a much broader approach as to how [it is] going to deal with ESG investing.”

“This area has needed a stronger regulatory framework. The FMA is signalling that it is going to do a number of things to bring this area under better regulation.”

Coates has seen the widespread impact of “greenwashing”. Although he is happy with the direction that the FMA is heading in, he would still like to see it go further.

“We would still like to see some specifics around, for example, requiring reporting that would enable people to compare ethical investments. Because at the moment there aren’t those specifics it can be very hard for people to sort out the language and misleading or imprecise terms.”

The FMA guidance is principles-based, which Coates says could mean that “there is less of a likelihood in the short term that they will be coming out with specific rules. We will continue to ask them to do this.”

The kinds of rules that Coates would like to see are along the same lines that the FMA has already put out surrounding default KiwiSaver funds. Exclusions in munitions and in fossil fuels, as well as having readily available client access to an ethical investment policy.

Coates says that the FMA have recognised that “The key issue here is that the finance sector isn't just about finance. It is also about the impacts of the finance sector on broader society.”

Despite the FMA refusing to use the words “ethical” or “responsible” investment, opting instead for the appropriately centrist “integrated financial system”, it does seem that the regulator has turned its attention to New Zealand's ESG market, to the detriment of any fund manager who has painted their vanilla fund green.