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The Financial Markets Authority (FMA) disclosure framework for bond issuers and fund managers providing green, sustainable and other ‘socially responsible’ investments has now been released, alongside an update to the FMA’s existing information sheet on the “same class” exclusion for green bond offers.
The framework includes clear statements that the FMA supports growth and innovation in the sector, and a transition to an integrated financial system incorporating non-financial factors. But, in attempting to provide a principles-based approach across that product range, the framework also reinforces some existing uncertainties and confusion in the market.
It also reflects an ongoing FMA concern that these products (which the FMA refers to as ‘integrated financial products’) are inherently complex and difficult for investors to understand. As a result, it is important that issuers familiarise themselves with the FMA’s expectations and enforcement stance.
The framework provides a detailed set of disclosure expectations, including:
- standard ”vanilla” elements of each integrated financial product (such as use of proceeds or investment restrictions)
- what the integrated financial product purports to offer beyond a conventional product
- how non-financial performance is measured and evidenced
- governance oversight
- internal audit or external assurance provisions
- risks or costs associated with the integrated financial product, and
- consequences of failure.
Detailed considerations are included for each factor based on specific product types but, at a high level, the factors encourage transparency and accountability consistent with the market approach to sustainable finance.
A worked example for green bond disclosure is also provided in the framework, similar in many respects to the October 2019 consultation draft on which this framework is based. While it does not explicitly address retrospective greening of existing conventional bonds, a similar set of criteria may be expected to be applied by the FMA.
Separately, the FMA’s guidance on “same class” offers on green bonds now notes that issuers can generally offer a new same class green bond three months after greening existing bonds, but encourages issuers to adopt a third party review and assurance in the greening process and engage with the FMA in advance.
Regulation and enforcement
The framework focuses on the ‘fair dealing’ rules as providing appropriate general regulation of sustainable finance disclosure. Issuers will need to be particularly careful with representations regarding the nature, suitability and characteristics of an integrated financial product, which the FMA has flagged as a particular interest.
The FMA’s ‘stop order’ powers feature heavily in the framework as a tool the FMA can use where disclosure is “likely to confuse” (not just “likely to mislead”, which is the standard for many other enforcement tools).
The effect of a stop order is to prohibit further offers of the relevant products. While it does not attach a fine or criminal proceedings, the risk of a pulled bond or fund offering may still have wide-ranging consequences.
The framework is broadly drafted, which means that a lot will depend on whether the market and the FMA take a constructive approach to its application. For instance, the framework:
- does not set prescriptive requirements. This may encourage new entrants and innovation in the market but the laundry list of factors to consider (some of which are of limited or no relevance to some products) may also raise the barrier to entry and increase costs
- seeks to minimise confusion in the market, but uses new terms for existing products (‘integrated financial product’ may be a term unique to the FMA) and combines factors relevant to bonds and managed funds without signposting, and
- is preoccupied with contractual restrictions and limitations, without recognising that sustainable finance markets are typically global and New Zealand issuers are driven to meet international best practice or lose access to the investor base.
As we have previously noted, the sustainable finance sector is growing and evolving rapidly. It is likely to maintain this momentum, supported in New Zealand by the Sustainable Finance Forum Roadmap for Action.
Although the framework is based largely on a consultation that is now 14 months old, it is positive to see it picked up and finalised. We hope to see it maintained and updated as the market continues to develop.