It has released a consultation paper on responsible investment products and is seeking feedback.
Nick Kynoch, FMA general counsel and acting co-head of capital markets, said there was a growing demand for sustainable or responsible investment products.
“In response, issuers and providers are now offering an increasing array of products. While the FMA supports the development of the market for these products, there are associated risks and issues, largely arising from the lack of common understanding of what makes an investment responsible.”
He said the FMA would eventually publish official guidance for the market on how to provide investors with a clear understanding of what they were being offered, and the risks involved.
The consultation paper says responsible investment adds a layer of complexity.
Approaches to product design could vary and there was no agreed standard on what made something green, ethical or responsible.
“It can be difficult for investors to determine how responsible a financial product is. Without adequate disclosure it is difficult to tell whether an issuer has extensively validated their product’s features, or is overstating the greenness of their product (‘green-washing’) to take advantage of market hype and investor demand. There is also risk of a mismatch between what investors think is meant by ‘green’, ‘ethical’, or ‘responsible’, and how issuers use those labels.”
The paper says that the FMA is not proposing prescriptive definitions but issuers should be expected to substantiate and explain how they labelled their products.
They would have to ensure that investors were not likely to be misled by the labels used.
“With the growing popularity of these products we want to ensure investors are protected from ‘green-washing’ and have a clear understanding of what is on offer. They should be able to determine just how green, ethical, or responsible a financial product is,” Kynoch said.
“For example, making it clear that a green bond is funding the construction of a new environmentally-sustainable building rather than necessarily funding a green issuer.”
Other than for KiwiSaver, there are no requirements in New Zealand financial services legislation specifically aimed at green, ethical or other responsible investment products or services.
However, the absence of specific requirements does not mean the existing law cannot accommodate new financial products.
“We are satisfied the current law is flexible enough to accommodate responsible investment products. But in an area like this, with a lack of consistent, agreed-upon definitions, we are keen to benchmark what good conduct and good disclosure look like, to ensure issuers focus on meeting investor needs,” Kynoch said.
Submissions close on October 24 and final guidance is expected by the end of the year.
The FMA noted that the review of the KiwiSaver default provider scheme, which is considering introducing a responsible investment mandate, could be relevant to the guidance.
It comes as a background paper on responsible investment in New Zealand, prepared for the Commission for Financial Capability's review of retirement income policies, found people could be poorly served in knowing how to judge KiwiSaver funds' ethical claims.
KPMG found “ambiguous and inconsistent terminology” which varied between and even within KiwiSaver fund providers, and which could confuse investors
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