Ākina submission on Green Bonds and Responsible Investment Products
In September this year the Financial Markets Authority put out a call for consultation on green bonds and other responsible investment products. Given the work of Ākina in the Impact Investment space with initiatives like the Impact Enterprise Fund, we were excited to make a submission – the full text of which is below.
Find out more about the consultation, or take a look at the consultation paper which includes the full set of questions. We selected a range of questions from the consultation paper to answer in our submission.
Submission Summary
We are pleased to see the FMA considering guidance around responsible investments, and believe this is important for the NZ market. The crux of our submission is that ‘impact investment’ should also be included within this workstream, and similar guidance provided around it.
A recently released report by the Responsible Investment Association Australasia found that NZ respondents to its recent survey already had $889 million AUM in impact investments, equating to 1% of total AUM of respondents. Of the respondents not already making impact investments, a vast majority are interested in participating, and indicate that in the medium term (5+ years) they would allocate $5.9 billion to impact investing. The Global Impact Investing Network (GIIN) estimated in 2019 that the impact investing market is $502 billion, and has almost doubled in size each year in recent years, a trend which is showing no signs of slowing.
On top of this quantity and growth, impact investing also contributes in multiple measurable ways to NZ’s Living Standards Framework, and will therefore be an increasing ally of the Government as it continues to improve NZ’s economy more broadly. It is for these reasons that the FMA should be considering how it can guide the impact investing market also. Accordingly, we have answered the questions below in relation to impact investing to indicate what the key features of such guidance would look like.
Ākina has been actively building the impact investing market in NZ for several years now (including jointly launching NZ’s first impact investing fund, the Impact Enterprise Fund, and managing NZ’s leading impact investment readiness programme, the Impact Investment Readiness Grants), and would be happy to discuss further the market generally and what guidance it may need with the FMA.
What do you consider to be the key features that make a financial product green, ethical, or otherwise responsible? (Question one)
The key feature of an impact investment is an investment that is made with the intention to generate positive, measurable social and environmental impact alongside a financial return. This is distinguished from ethical and responsible investments which generally rely on negative screens to avoid investing in harmful things, or in some cases positive screens that identify investments which perform well within ESG screens (rather than actively seeking investments where the purpose is to deliver positive societal benefits alongside a financial return).
What are the key risks associated with green, ethical or otherwise responsible investment products? (Question two)
As with all investments, there are financial risks with impact investing. Research has repetitively shown that impact investments are able to deliver market returns, including recently released NZ focused research (RIAA Impact Investor Insights 2019 Aotearoa New Zealand) which found that 81% of active impact investors consider that their financial return expectations are either being met or exceeded.
A more important objective that FMA guidance can deliver is the retaining the authenticity of the impact investing market and the definition of impact investing. There is now growing experience and guidance internationally on what impact investing is (including from the International Finance Corp – Pages 1 -10 of their report “The Promise of Impact Investing”, and how to authentically undertake it. The crux of this is that the investments are made with the intention to have a positive, measurable social and environmental impact alongside a financial return.
There are a number of international frameworks available to support with this, including the Impact Management Project (IMP) which has gained strong traction and relevance in New Zealand as well as internationally. The IMP aims to create global consensus for how we talk about, measure and manage social and environmental impact, and is the basis of the Impact Enterprise Fund’s impact management framework.
Failing to provide appropriate guidance around what impact investing is may result in ‘impact washing’, or people claiming they are making impact investments when they are not. There are examples of this occurring already. This could cannibalise the sector, which would not only place NZ a step behind the international investing sector but also reduce the contribution that the private sector can make to the wellbeing of NZ communities.
What should disclosure for a responsible investment product include? How will this ensure investors are not misled about the nature, characteristics or suitability for purpose of a responsible investment product? (Question four)
Disclosure for an impact investing product should include, on top of the usual disclosures of traditional investments, for every investment:
Confirmation the investment was made with the intention of delivering a financial return and a measurable social or environment impact
The intended impact of the investment
The positive social or environmental impact(s) it has created, reported as
frequently as financial results are reported
How this is measured
A summary of the impact management framework used by the investor
Answers to these questions will help ensure the investment is an impact investment.
What are the key questions an investor should ask about responsible investment products? (Question five)
The key questions an investor should be asking about responsible investment products are (as they relate to impact investing):
What are the primary positive social or environmental impact(s) the investment enables;
How can this be measured;
What are the measurements;
What impact management framework are you using, and how does this
investment align with that; and
What negative consequences does this investment cause?
What should be included in a Statement of Investment Policy and Objectives for registered MISs that have green, ethical or responsible funds? (Question seven)
A key addition to the SIPO for registered MISs that have impact investments within the portfolio is to specifically mention the intention of any impact investments (i.e. their alignment with the Objectives of the broader capital allocation) and detail (to a level which is commensurate with the rest of the SIPO) around how these investments will be measured and managed.
What best practice features should MIS managers include in disclosure to ensure investors properly understand the nature of underlying investments? (Question eight)
Best practice disclosure by MIS managers around their impact investments would include:
The primary positive social or environmental impact(s) the investment enables;
How these are being measured;
What the measurements are;
What impact management framework is being used, and the alignment of
each investment with that;
What contribution are the investments having to the impact;
What, if any, negative consequences the investment causes; and
How the social and environmental impact of the investment is being managed
and improved over time (as they would report how they’re aiming to manage and improve the financial outcomes over time).
What other circumstances raise disclosure issues that our guidance should cover? (Question nine)
We suggest that the word “Impact” in the name of a financial product only be permitted to be used for investments that meet the definition of impact investing and best practise as described in Answer 7.
What other matters should our guidance include to:
promote and facilitate the further development of the broader responsible investment product market by providing greater clarity about the FMA’s expectations; and
ensure investors have a clear understanding of what they are being offered and the risks involved, and are able to make informed and deliberate choices? (Question ten)
The recently released Living Standards Framework and Indicators Aotearoa creates a strong and intuitive basis for impact investments within NZ to aim to report into. Over time, the FMA could be exploring how it can guide the market to be able to connect the individual outcomes the impact investments are having to the broader wellbeing framework which the Government has created.
Doing this will make clear how impact investments contribute to both the Government’s and NZ’s goals, and more clearly articulate the positive outcomes NZ’s investment sector is enabling. This will then enable both the Government and the FMA to better support the sector.