Last month saw a flurry of sustainable finance related activity in New Zealand, with the publication of a legal opinion on climate and fiduciary duties, the launch of a consultation on climate risk disclosures and the release of the awaited interim report by the country’s Sustainable Finance Forum. In the first of RI’s latest series of Country Profiles, Paul Verney takes a closer look at developments.
New Zealand’s commitment to tackling climate change was underlined last week, with the near-unanimous Parliamentary approval of a bill committing the nation to zero net carbon emissions by 2050.
As a result, an independent climate change commission will be set up to advise the government on achieving the goal. But the target has already garnered criticism – particularly over its exclusion of methane emissions, which have a separate reduction target of just 24-47%.
Nonetheless, the goal – along with public-private efforts through initiatives such as the Aotearoa Circle, a government-backed platform focusing on fostering sustainability – makes New Zealand “one of the most exciting markets” in the world when it comes to ESG, according to Simon O’Connor, Executive Director of the Responsible Investment Association Australasia (RIAA).
He points to a RIAA study that shows a three-fold increase in assets being managed under some form of responsible investment strategy in the country over the last five years – putting the figure at NZ$188bn (or 70% of the country’s assets).
Kiwi Savers’ sinful past – a catalyst for change
ESG, however, has not always been front and centre of New Zealand’s investment thinking.
In 2015, a scandal engulfed the country’s opt-in government-backed retirement provision, KiwiSaver, after an exposé by the national press revealed that many of the scheme’s default options, supplied by some of the country’s largest financial institutions, were invested in sin stocks – most controversially manufacturers of weapons banned under the New Zealand law.
KiwiSaver schemes were set up over ten years ago and manage an estimated NZ$57bn (€33bn) in workers’ savings.
The scandal led to questions in the country’s parliament and the filing of a police complaint in Auckland by Amnesty International. It also led to many of the implicated providers introducing investment exclusions.
O’Connor says the whole affair “really catalysed and sharpened the focus on this area and really brought to light the real-world impacts that the finance sector carries”.
A sign, perhaps, of how far the country has come in the intervening years is that a government consultation on the KiwiSaver schemes, which closed in September, included consideration of whether to strengthen the responsible investment approach of the default providers.
Current providers, whose contracts expire in 2021, include the likes of Westpac and ANZ New Zealand.
A spokesperson for the Ministry of Business, Innovation and Employment (MBIE) tells RI that it has received close to 300 submissions to the consultation and aims to seek approval on eventual policy from the government by the end of the year.
NZ Super – leading by example
If the Kiwi Saver schemes are looking for inspiration on sustainability, they need look no further than the country’s NZ$44bn (€25.3bn) sovereign wealth fund, NZ Super.
In August 2017, the fund ditched 297 companies worth NZ$950m to hedge its carbon exposure, and announced that its entire global passive equity portfolio – then 40% of its overall assets – was now low carbon.
A recent five-yearly review (September 2019) by consultant Willis Towers Watson found the fund’s responsible investment process to be “impressive” but also encouraged it to keep innovating and increase its capabilities. In response, the fund is now looking to add capacity to its RI team, a spokesperson says.
And New Zealand’s largest asset owner silences any concerns that ESG considerations ultimately compromise performance, returning 7% over the last year and 14% over the last decade.
One of the fund’s highest profile engagement campaigns this year has focused on Facebook, Google and Twitter.
Since March, in the wake of the Christchurch atrocity that left 51 people dead, the fund has been pushing the tech giants to strengthen content controls after it was revealed that the attack had been livestreamed through their online platforms.
NZ Super’s CEO, Matt Whineray said at the time that the “companies’ social licence to operate has been severely damaged” by the scandal.
The fund also excluded companies involved in the manufacture of civilian automatic and semi-automatic firearms, bringing it into alignment with the country’s new Arms (Prohibited Firearms, Magazines and Parts) Amendment Bill, which was swiftly passed on 10 April in response to the massacre.
NZ Super’s spokesperson says that its engagement with the companies is “ongoing” and is now supported by 95 investors representing $8trn in assets.
He says that despite some progress, the companies have still “not given us confidence that the risk is managed with the appropriate level of governance and proportionality to the scale of the problem”.
New Zealand’s HLEG reaches halfway point
Whineray also co-chairs the Sustainable Finance Forum (SFF) – the Aotearoa Circle’s first project. Launched in March, the forum mirrors similar initiatives in Europe, Canada, Japan, Germany and elsewhere; tasking national regulators, ministries, insurers, investors, banks, civil society and lawyers to develop a sustainable finance roadmap for the country.
Its interim report, released last month, outlines the case for shifting to a sustainable economy and discusses “principles and characteristics” that would underpin such a system.
The discussion is organised around three themes: ‘changing mindset’, ‘aligning the financial system’ and ‘mobilising capital’.
Feedback on the document is being sought, ahead of the SFF’s final report, which will be presented to government next summer.h6. Ruling on fiduciary duty
One action already taken by the Aotearoa Circle, on the SFF’s advice, was to seek a formal legal opinion on the role of climate risk within fiduciary duty. That opinion, also published in October, stated that fund managers “must” take climate change into account when making investment decisions, highlighting the shift from climate change being recognised as solely an environmental issue, to a “foreseeable” financial risk.
Chapman Tripp, the law firm behind the opinion, described the conclusion as “not controversial” but “important in grounding the analysis within New Zealand’s legal and regulatory environment”.
A RIAA study shows a three-fold increase in assets being managed under some form of responsible investment strategy – putting the figure at NZ$188bn (or 70% of the country’s assets)
Twin Peaks – New Zealand’s regulators
The country’s Financial Markets Authority (FMA), one of the ‘twin peaks’ of its financial regulatory system, has also been making headway on sustainable finance. Responsible for financial conduct in New Zealand, it closed a consultation with investors and issuers last month on guidance for green bond and responsible investment products to help mitigate the risk that investors could be “misled” when buying them.
Guidance is expected to be finalised later this year, according to a spokesperson.
New Zealand’s Treasury is also currently overseeing a comprehensive review of the governing legislation of the Reserve Bank – the second of the ‘twin peaks’, whose governor, Adrian Orr formerly headed up NZ Super. It will consider whether the prudential body should be given a specific climate change objectives as part of its mandate. A progress report on this is expected later this year.
Orr wrote last month that the Bank, which released its first Climate Change Strategy last year and is a member of the Network of Central Banks and Supervisors for Greening the Financial System, already considers “climate risks as part of our fundamental role of assessing risks to the financial system as a whole”. Last month, the bank announced that it had invested $100m in the Bank for International Settlements’ new green bond fund.
A productive development – TCFD and climate risks
In yet another consultation on the topic, New Zealand’s Ministry of the Environment last month began seeking feedback on proposals for financial firms and listed companies to understand and disclose how climate change will impact their business and investments.
The consultation comes off the back of the Productivity Commission’s Low-Emissions Economy report, which made a number of recommendations, including introducing mandatory climate-financial disclosures for companies. That consultation ends on the 13 December. The Commission also recommended that the New Zealand Government backed the recommendations of the Task-Force on Climate Related Financial Disclosures (TCFD), which it did in its response to the report.
New Zealand’s Green Investment Fund open for business
In September, the New Zealand Green Investment Fund (NZGIF), the Crown-owned investment vehicle created in 2018 and backed by NZ$100m in government funds, announced that it was looking for its first investment opportunities.
The fund, designed to “accelerate investment in projects that reduce domestic greenhouse gas emissions”, was spun out from the Treasury in May to become a stand-alone company, and will focus on investments that crowd-in private capital.
Early this year, the country’s stock exchange, which is a member of the UN Sustainable Stock Exchange Initiative, revised its corporate governance framework in an update a spokesperson describes as the most “substantive” since 2003. The move followed the publication of accompanying ESG guidance to the framework in late 2017.
In the new ‘comply or explain’ framework, NZX encourages issuers to use a “recognised international reporting initiative” such as the Global Reporting Initiative guidelines or Integrated Reporting, when reporting on ESG factors.
Climate Leader Coalition
New Zealand also has a Climate Leaders Coalition, which was launched in 2018 and includes Westpac among its leadership group and ANZ among its 120+ signatories. CEO signatories to the coalition have voluntarily committed to acting on climate change.
The Importance of Government backing
While New Zealand’s sustainable finance initiative looks much the same as neighbouring Australia’s, there is a key difference: while the Austrialian initiative is market-led, New Zealand’s Aotearoa Circle was convened by the government, and New Zealand’s Prime Minister, Jacinda Ardern, recently insisted that “New Zealand will not be a slow follower” when it comes to climate change.
This attitude is increasingly visible in the country’s approach to sustainable finance. The work of the Aotearoa Circle and the outcomes of its many consultations, reviews and initiatives make it one to watch over the next twelve months.
Katie Beath, Senior Investment Strategist at New Zealand Super, will be discussing the fund’s ESG work at RI New York next month.