What works and what needs attention: the FMA publishes insights on ethical investing disclosure practices

The Financial Markets Authority – Te Mana Tātai Hokohoko (FMA) has shared insights from its oversight of ethical investment disclosures. Ethical investment practices have become a key component of the FMA's supervisory approach. In 2020, the FMA introduced a disclosure framework for integrated financial products, followed by a 2022 thematic review assessing application of the framework by market participants.

The insights stem from the FMA's targeted engagement with Managed Investment Scheme (MIS) managers. This includes reviewing offer documents for new, novel, or complex offers. The FMA also examines advertising and reporting practices in response to complaints or its own findings. In addition, the FMA assesses the underlying assets in specific funds to ensure they align with the MIS managers' stated sector exclusion policies.

 

Offer documents

The FMA noted that confusing, unclear and inconsistent disclosure in offer documents is still common. The FMA identified problems such as:

• Inappropriate use of ethical labels: some funds used ethical labels but did not provide details on ethical strategies and how they were applied.
• Unclear ethical scoring systems: some funds claimed to make investment decisions based on ethical scoring systems but failed to explain how these systems were applied. In these cases, the FMA sought clarification on whether investment decisions were solely based on the ethical scores or if the scores were just one of several factors considered.
• Insufficient detail on asset non-compliance: MIS managers are expected to outline the steps they will take if an existing asset no longer complies with their ethical investment policy, including specifying the timeframes within which investors can expect these steps to be implemented.

However, the FMA highlighted several good practices by MIS managers, including:

• Effective cross-references: clearly stating that the information provided in the product disclosure statement (PDS) may not include all details, and ensuring there are clear cross-references in the PDS to the statement of investment policy and objectives (SIPO) and other material information (OMI) where additional details can be found.
• Accessible and succinct strategy disclosure: providing full ethical investing strategy on the Disclose register, which clearly outlines the exact strategy currently applied or any previous changes. Any related content on the MIS manager's website should summarize the strategy without introducing additional information.

 

Advertising and reporting

The FMA raised concerns that advertising and reporting by MIS managers in relation to their ethical investing practices might be misleading, deceptive or likely to confuse investors. Specifically, they raised the following concerns:

• Advertisements misaligning with SIPO and policies: advertising around ethical investing strategies not aligning with the contents of the SIPO or responsible investing policy.
• Unclear reporting on carbon offsets and company engagement: unclear or no reporting on planned activities such as carbon offsets or engagement with companies where investments are held.
• Lack of progress updates on target claims: managers claiming they had carbon net-zero targets but not reporting on progress being made towards those targets on a regular basis.

Good practices identified by the FMA are:

• Public list of excluded companies: some MIS managers have on their website a list of companies that they do not invest in. This saves investors from having to conduct extensive research and make their own judgments about the scope of any exclusions being applied.
• Comprehensive reports on shareholder voting: where a MIS manager claims to engage in shareholder voting as part of its strategy, reports were provided on what votes they cast, and themes of reasons for voting.

The FMA also stated that when it raised issues with MIS managers, they had voluntarily withdrawn advertising or improved their reporting.

 

Asset review in funds

The FMA reviewed assets in certain MIS funds to check compliance on sector exclusion policies, particularly those that focused on sustainable labelling or claiming third-party certification. The FMA stressed that all funds claiming to use ethical criteria to select investments need to:

• Understand the companies they invest in; and
• Ensure that investments align with representations made by the fund.

The FMA found that when it engaged MIS managers to explain how specific assets held were consistent with exclusion policies, a majority of managers were able to provide adequate explanation. Some managers voluntarily divested doubtful holdings to avoid potential risk or doubt.

 

What happens now?

The FMA noted ongoing inconsistencies in ethical investing practices and may use regulatory powers when it considers conduct or advertising is misleading, disclosure is false or likely to mislead, advertising confuses investors, or there are material omissions in offer disclosures.

The FMA is also reviewing feedback from its April consultation on an exemption for certain green, social, sustainability, and sustainability-linked (GSSS) bonds. This would extend the "same class" exclusion, allowing green bonds to be issued based on an existing vanilla bond, provided issuers explain the GSSS criteria. The exemption would allow issuance of GSSS bonds without full compliance with disclosure and registration rules of the Financial Market Conduct Act 2013, with finalisation expected in 2025.

As the regulator of the Climate-Related Disclosures (CRD) regime, the FMA is reviewing filed climate statements and providing feedback through individual engagement with climate reporting entities. A monitoring report on the FMA's findings will be published in November 2024.

Looking ahead, the FMA will continue to monitor national and international trends of looking towards a 'sustainable', 'ethical' or similar investment. The FMA will be observing overseas developments, as well as taking into account developments from the Sustainable Finance Taxonomy currently being developed by the Ministry for the Environment.

 

Our views

We welcome the FMA's clear outline of its expectations, highlighting both good practices and areas for improvement. This insight provides MIS managers with a clear understanding of the FMA's expectations and specific steps to undertake.

We anticipate that the FMA will continue its approach of individual engagement with MIS managers to further fine tune its expectations for MIS managers to reach an ideal standard of best ethical investing practices. We welcome this proactive engagement approach in contrast to the increasing litigation seen in Australia lodged by the Australian Securities and Investments Commission, and the UK's Financial Conduct Authority's anti-greenwashing rule, which came into force on 31 May 2024. You can read our DLA Piper UK update on the new rule here. We hope that the FMA's engagement will continue in a manner that empowers MIS managers to continue to offer investors innovative and diverse ethical investment options.

We have published a guide to assist you in navigating environmental advertising standards for businesses. Please get in touch if you have any queries relating to ethical investing disclosures, sustainable finance, greenwashing, or would like assistance with CRD disclosures.