Matt Whineray. Photo / Jason Oxenham
A fully-integrated sustainable financial system that locks in environmental and social values and collective leadership from the public, private and philanthropic sectors is likely to be functioning within 10 years.
That's the big goal of the Aotearoa Circle's Sustainable Finance Forum which will be pressing for regulatory change — and in the first instance voluntary change from public and private sector leaders — to help transform the financial system and keep New Zealand in step with international developments.
The Aotearoa Circle, a unique partnership of public and private sector leaders, today launches the Sustainable Finance Roadmap for Action. The forum's co-chairpersons, Westpac's general manager experience hub Karen Silk and NZ Super Fund chief executive Matt Whineray, said: "Our current financial system is contributing to environmental degradation and entrenching inequality across many measures.
"We are rapidly consuming finite pools of natural and social capital to produce financial capital. Simply put — this is unsustainable. We urgently need to scale-up and re-direct capital to enable a smooth transition to a sustainable financial system that supports long-term social, environmental and economic prosperity," they said.
"Collectively, we need to change the way investment and lending decisions are made so that environmental, social and economic factors and wellbeing are integral, and negative impacts — both immediate and the long term — are avoided. We need all financial system actors to play their part; and we need to change to not only save the planet but also ourselves."
Silk, Whineray and the other forum members believe the Roadmap will strategically position New Zealand to access international markets, as well as maintain its global reputation and presence. They said the recommendations are targeted at accelerating capital towards sustainable investments.
The forum says traditional financial models and economic theories have limitations and do not incorporate environmental and social factors, and tend to judge performance with a short-term horizon and performance valued on growth, risks and financial return.
For example, discount rates used in net present value calculations mean they heavily favour short-term performance. A sustainable financial system is one that focuses on all stakeholders, including environment and society, not just on shareholders, the forum says.
"This is a financial system which is more resilient, robust and agile through the incorporation of environmental, social and economic considerations," Silk and Whineray said. "We want to ensure we have a society that has trust and confidence in our financial system and its actors."
The forum, comprising a voluntary leadership group and 24-strong technical working group, has spent the past 22 months conducting research and workshops. More than 200 stakeholders were engaged throughout the Roadmap process, and 95 per cent of those surveyed felt the current financial system is not sustainable or inclusive.
After further consultation and feedback, the plan for a sustainable finance system will head to Cabinet for approval. The plan should first land in the lap of the Minister of Commerce and Consumer Affairs, with comment from government agencies such as the Ministry of Business, Innovation and Employment, The Treasury and Ministry of Social Development.
Amongst its 11 recommendations, the forum has outlined four priority actions:
● Explicitly require financial system actors to manage and account for environmental and social risks and opportunities. Consider including environmental and social factors with fiduciary duties and remove barriers to purpose-led businesses and investment models (green finance).
● Improve public and private sector governance for sustainability, and incorporate environmental and social outcomes within governance codes and purpose statements. Establish a Stewardship Code for financial institutions and link this to the licensing requirements of KiwiSaver and managed fund providers.
● Improve and extend external reporting and disclosures to include asset owners, fund managers and large private companies, and drive positive environmental and social outcomes.
● Integrate environmental, social and cultural outcomes into investment decisions by introducing market mechanisms and fiscal incentives; broadening financial regulation; and financially account for environmental and social outcomes.
The plan calls for the establishment of a Centre for Sustainable Finance (CSF), probably under a public-private partnership. Britain set up a similar organisation, the Green Finance Institute, last year with seed funding of nearly NZ$8 million from the UK Government and City of London. Australia is also setting up a sustainable finance organisation.
The forum says driving this agenda forward will require a step change around resourcing and funding to secure the successful adoption and implementation of the roadmap. The CSF needs to be mandated, agile and independent, and become the principal vehicle for collaboration between the public and private sectors.
"The centre's role would be to facilitate New Zealand's vision of a sustainable finance system by 2030.
It will consolidate an active space for existing initiatives and work streams such as the National Advisory Board for Impact Investing, thus obtaining efficiencies.
"The centre would establish clear, measurable and time-bound objectives to align with international commitments such as the UN Sustainable Development Goals and the Paris Agreement (to limit climate to 1.5 degrees of global warming above pre-industrial levels," the forum says.
The CSF would work with the Responsible Investment Association Australasia and an equivalent sustainable finance forum in Australia to develop trans-Tasman solutions such as product certification criteria. It would also coordinate the development of a New Zealand Stewardship Code.
A Stewardship Code would set behaviour and ethical expectations for asset owners, fund managers and financial intermediaries.
The forum says there is little transparency in the actual engagement actions and outcomes between financial institutions and service providers and issuers.
"The sector relies on voluntary initiatives such as Mindful Money to provide better transparency and comparison of investment funds. These services cannot compare actual engagement activities or provide commentary on how they align with the purpose of the fund manager or financial product.
This allows financial institutions to make general claims around environmental, social and governance (ESG) stewardship, such as 'we integrate ESG into investment decisions' without requiring supporting evidence on actions or expectations."
A Stewardship Code expects financial institutions to have a purpose and supporting governance structure, oversee and monitor the environmental and social activities of service providers, and undertake and report on active engagement, the forum recommends.
Britain's 2020 Stewardship Code requires asset owners and fund managers to become signatories by March 31 next year. They will develop a report on a comply-or-explain basis that covers the reporting requirements under the principles of purpose and governance; investment approach; engagement; and exercising rights and responsibilities.
A stewardship code that incorporates ESG within fiduciary duties is also mandated in the European Union and Canada, while Australia, South Africa and United States are moving towards that.
The forum applauds the Financial Markets Authority's corporate governance in New Zealand principles and guidelines handbook and the NZX corporate governance code, but it says they do not generally relay the importance of positive environmental and social outcomes or risks such as climate change to an entity, with many requirements being optional.
The forum suggests the FMA handbook and the NZX code be updated to recognise explicitly the risk of climate change, inter-dependence between environmental, social and economic performance, and importance of engaging with the Living Standards Framework.
Private and public sector entities should include their environmental and social purposes within their constitution, and statement of intent with supporting letter of expectations, or publicly disclose Mission and Values statements. Directors and business leaders should encourage social purpose and long-term thinking by linking them to executive key performance indicators and chief executive and officer remuneration.
The Government introduced the Living Standards Framework to measure New Zealand's wellbeing and broaden its view on prosperity to include environmental and social outcomes. Treasury now assesses business cases on the contributions they generate to the framework's outcome areas as part of the Government's consideration for funding.
The forum is pushing for a mandatory apply-and-explain reporting regime using sustainability metrics and disclosures, and that the External Reporting Board, in consultation with Māori and others, should be resourced to develop these standards, using the World Economic Forum's White Paper as the starting point.
This would require reporting entities to disclose their actions and progress against standard reporting criteria and to explain how their organisation's purpose and actions have contributed to the improvements in its assessment and management of its significant and environmental and social issues.
Pip Best, who led the forum's secretariat team, said the key is changing behaviour and transforming a financial system that directs capital towards sustainable investment and a lower-carbon economy.
"We can't just wait for regulatory change — we want businesses to provide leadership, to take up the Roadmap actions and create transformational change themselves.
"A lot of the recommendations are not new — they are being implemented internationally.
"There is a shift; for instance, we already have a legal opinion around fiduciary duty on climate change, and the rate and pace of change will pick up," says Best, EY Oceania's climate change and sustainability services director.
Sustainable Finance Forum Leadership Group
Karen Silk: Co-chair. GM Experience Hub, Westpac
Matt Whineray: Co-chair. CEO, New Zealand Superannuation Fund
Jenny Gill: Philanthropy Consultant
Sir Stephen Tindall: Founder, The Tindall Foundation
Mark Peterson: CEO, NZX
John McCarthy: Manager, The Tindall Foundation
Bryce Davies: Exec Manger Corporate Relations, IAG
Paul Newfield: Head ANZ, HRL Morrison & Co
Simon Mackenzie: CEO, Vector
Julia Hoare: Independent Director
Penny Sheerin: Partner, Chapman Tripp
Sustainable Finance Forum
Technical Working Group
Anne-Maree O'Connor, NZ Super Fund; Alec Tang, Auckland Council; Barry Coates, Mindful Money; Christian Barrington, IAG; David Hall, AUT/Mohio Research; David Woods, Independent Director; Dean Spicer, ANZ; Emma Sutcliffe, Chapman Tripp; Generation Zero; Ivan Diaz-Rainey, Otago University; Jack Bisset, Ministry for the Environment; Jo Kelly, The Collective; Joanna Silver, Westpac; Jon Collinge, HRL Morrison & Co; Justine Sefton, KPMG; Matthew Mimms, The Investment Store; Olaf Adam, Westpac; Peter Jones, ANZ; Rebekah Swan, AMP Capital; Rodger Spiller, Money Matters; Robert Sloan, Trustee Executor; Sue Walker, BNZ; Tim Grafton, ICNZ and Wendy McGuiness, McGuiness Institute. Advice and guidance also provided by: Aaron Drew, My Fiduciary; Akina Foundation; CAANZ; Debbie Birch, Independent Director; Fonteyn Moses-Te Kani, Westpac; SBC and WWF.
● Best was joined in the secretariat by Madeleine Deacon, Simon Ngawhika, Isabelle Smith, and independent consultant Erica Miles.
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