Sustainable Finance: Climate change challenge for regulators
Christian Hawkesby and Rob Everett talk climate change and sustainable finance at Infinz. Photo / Garry Brandon Part of our job is to make sure it does what it says on the tin, says FMA chief. Financial Markets Authority CEO Rob Everett says the FMA is sceptical about the number of investment product providers who are badging products as responsibly invested or green products. "Even where the intentions might be good, we're not really convinced that is robust and measurable and comparable," Everett told the 2019 Infinz conference. "Part of our job is to make sure it does what it says on the tin and if you're going to sell something as a socially responsible or environmentally responsible product, you actually need to have done some work to make sure that's the case rather than just superficial." The FMA recently sought submissions on draft guidance for consultation on green labelling and disclosure. Everett told Infinz the scepticism that may have come through in the FMA document "may have been more about the enthusiasm for the industry to rush to badge everything without having thought about what that's actually going to look like in 10 years' time". The FMA chief recently spent a week with APAC and European regulators discussing taxonomies for sustainable finance and green investment "making sure that proper thought is going into creating those frameworks". "The broader impact of climate change on business models, and investment risk profiles is going to be enormous and I think in a lot of those conversations, particularly with the ECB (European Central Bank) and the European Commission, there was a real acceptance amongst the regulators that it's a game-changer and people probably should have seen the game-changing 10 years ago," Everett said. "But in disclosure around investment products and corporate disclosure, the challenge that climate change will bring to those business models needs to be brought out. "I think the acceptance around that table was that probably there's not enough recognition yet of the need to think through business models based on risk from climate change." Reserve Bank Assistant Governor Christian Hawkesby said the central bank was taking a leadership role on climate and the environment and using its position as a regulator to encourage banks and insurers to face up to some pretty significant changes that are going to happen over the next 20 to 30 years. Asked if banks and borrowers would get capital relief for sustainable lending if the central bank is serious about climate change, Hawkesby responded: "That's not in the plan at the moment. But that is very well something we could move to. At the moment, the onus is on really getting banks and insurers to focus on the issues and look at it from their own commercial incentives. "Again, just using an analogy from the asset management industry, when I started in asset management eight years ago, ESG investing (environmental, social and governance investing) was seen as a real niche and if anything was seen as potentially a marketing tool to use for niche investors. That's moved now from being absolutely and completely mainstream in the sense that fund managers know that why would you invest in a company that doesn't have a long-term future over the next 20 to 30 years. "So our challenge at the Reserve Bank is to encourage banks and insurers to have that same approach to their lending and their relationships and take a commercial view that it's actually going to be in the long run a benefit that they take those environmental and climate change factors into account." The FMA's consultation sought issuer and investor input on green bonds and other responsible investment products that expressly take into account environmental, social, and/or governance considerations. Submissions will initially be used to help the FMA develop guidance for issuers. The regulator will also publish separate material on its website covering matters that may be relevant for investors, including questions they should ask of product and service providers, and examples of different kinds of responsible investing products and their features and risks. The consultation, and the resulting guidance and investor information, will be particularly relevant for: issuers of green bonds (wholesale and retail) managers of managed investment schemes (MIS), including KiwiSaver schemes, that are labelled as 'responsible' or have responsible investment objectives retail and wholesale investors in these products financial advisers, and any other financial service provider or issuer promoting itself or its financial products or services as responsible. Nick Kynoch, FMA General Counsel and Acting Co-Head of Capital Markets, said there was a growing demand for sustainable or responsible investment products. "In response, issuers and providers are now offering an increasing array of products. "While the FMA supports the development of the market for these products, there are associated risks and issues, largely arising from the lack of common understanding of what makes an investment responsible," said Kynoch. "With the growing popularity of these products we want to ensure investors are protected from 'greenwashing' and have a clear understanding of what is on offer. They should be able to determine just how green, ethical, or responsible a financial product is. "For example, making it clear that a green bond is funding the construction of a new environmentally sustainable building rather than necessarily funding a green issuer." The FMA's guidance will not set out prescriptive definitions but will set expectations for issuers and product providers about good conduct and good disclosure so investors can make an informed choice. Currently, all regulated offers, including those for responsible investment products, must explain features, benefits and expected returns to investors in accordance with Part 3 of the Financial Markets Conduct (FMC) Act and the related Regulations. All investment products must also comply with the fair dealing provisions in Part 2 of the FMC Act, which prohibit misleading or deceptive conduct, false or misleading representations and unsubstantiated statements in relation to all offers of financial products and services. "We are satisfied the current law is flexible enough to accommodate responsible investment products. But in an area like this, with a lack of consistent, agreed-upon definitions, we are keen to benchmark what good conduct and good disclosure look like, to ensure issuers focus on meeting investor needs," said Kynoch. Read the Sustainable Finance Report here . OPINION: Momentum is on the rise, but plenty more to do.