Written by Robert Sloan, Chief Risk Officer & General Counsel of Trustees Executors, originally published here on October 11, 2021
New Zealand is rightly congratulating itself in the fact that with the introduction of the ‘Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill’ we have become the first country in the world to introduce a law that requires the financial sector to disclose the impacts of climate change on their business and explain how they will manage climate-related risks and opportunities. Despite this ‘worldleading’ approach, in other areas we appear to be ‘world-lagging’ against our international peers. In particular, one of these critical areas concerns a ‘Stewardship Code’. We are one of the very few developed economies where such a Code does not exist.
Stewardship is the use of influence by institutional investors to maximise overall long-term value – including the value of environmental, social and economic assets, upon which returns and clients’ and beneficiaries’ interests depend. A Stewardship Code is used to govern or steer the interactions between investors and investee companies, with a view to promoting long-term value creation.
Overseas, Stewardship is part of a suite of policies that governments, regulators and industry are using to encourage sustainable finance. As a recap, sustainable finance isn’t about being ‘green’, it is finance which is about changing the way investment and lending decisions are made, so that environmental, social and economic factors are integral and negative impacts both immediately and over the long-term, are avoided.
In New Zealand there is currently no official Stewardship Code, and no immediately obvious place to integrate stewardship into. The Sustainable Finance Roadmap, released in November 2020, recognised this and recommended the introduction of a Stewardship Code for financial institutions. The Forum went on to recommend application of this Code should link to the licensing requirements of KiwiSaver and managed fund providers.
There are many benefits to a Stewardship Code as they help investors and asset owners:
Achieve long-term value through the active consideration of ESG factors (risks) in investment processes.
Address real-world problems and achieve positive outcomes at scale (e.g. climate change).
Give regulators trust and confidence that investors are demonstrating fiduciary duty by acting in the best interest of their clients and beneficiaries.
Provide the framework needed to help them ensure their products credibly deliver what they promise (to avoid ‘greenwashing’).
Give confidence to regulators that investors are meeting standards for culture and conduct (including conflicts of interest).
Provide clients and beneficiaries with information to allow them to make informed decisions, through improved transparency.
Maintain international currency in the rapidly evolving responsible investing policy landscape.
That is not to say that members of New Zealand’s investor industry are not employing Stewardship approaches of their own as there are a number who have been certified by the Responsible Investment Association Australasia (RIAA) and/or are a signatory to the United Nations Principles for Responsible Investment. However, a properly implemented Stewardship Code would level the playing field for investors and give corporates clarity about what to expect from their investors in terms of engagement around outcomes on systemic issues, common goals and collaborative action. This latter point is especially pertinent given the introduction of the afore mentioned Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill. Stewardship will be a critical success factor to the implementation of this Bill.
There is no doubt that a Stewardship Code is beneficial but the conundrum we face in New Zealand is how should one be implemented, if at all? And should a Stewardship Code be led by industry or the regulator?
The Sustainable Finance Forum’s consultation from the industry was very clear: “On striking a balance between ‘Carrot’ and ‘Stick’: A Stewardship Code can be developed by the industry for the industry, with the Government bringing in legislation to support/reinforce its importance.”– Sustainable Finance Forum, November 2020.