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Fund managers may have climate-change duty of care

Fund managers’ duty to act in the best interests of investors may now require managers to take climate change risk into account when designing investment policies, a new report says.

Thursday, October 31st 2019, 6:01AM 2 Comments

Matt Whineray

The Sustainable Finance Forum, an initiative of The Aotearoa Circle, has released its interim report.

The finance forum is chaired by Matt Whineray, chief executive of the NZ Super Fund, and Karen Silk, general manager of commercial, corporate and institutional bank at Westpac.

Its report identified priorities among 11 challenges that would need to be addressed to move to a financial system that supported desirable environmental, social and economic outcomes.

The Aotearoa Circle co-chair Sir Rob Fenwick said it was the first step towards designing a roadmap to 2030, which will be produced by mid-2020.

“The financial system is the engine of the economy and we need to scale up and redirect capital to enable the transition to a sustainable economy,” he said.

The forum identified leadership, from both fund managers and company directors, as a key issue.

It engaged Chapman Tripp to clarify their legal obligations.

It said directors and investment professionals needed to recognise climate change as a foreseeable risk to business and manage it as they would any other risk.

For fund managers, the duty to act in the best interests of their investors required managers to take climate change risk into account when designing investment policies, where to do otherwise could pose a material financial risk to the investment portfolio, the report said.

Fund managers might also need to implement a climate change investment strategy to future-proof their funds for their investors.

Chapman Tripp partner Daniel Kalderimis said: “Climate change has evolved from being a mere environmental or ethical concern to a financial business and investment risk.

“It will not pose a material financial risk for every business and investment, but where it could do, that risk needs to be taken into account in decision-making. Where a material climate-related financial risk is identified, directors and fund managers should formulate strategies to address it. This is the same advice that would apply for other material financial risks, such as projected company performance, domestic economic forecasts, global trade disruption or cyber-security concerns.”

The report said environmental and social data needs improved accuracy, comparability and availability to become integral to financial decision-making.

Whineray said jurisdictions around the world were setting out sustainable finance roadmaps that realigned their regulatory and financial policies to enable the financial system to contribute to, rather than hinder, the transition to a low-emissions, resource efficient, just and inclusive economy.

The financial sector was influential and could drive sustainability improvements in the business sector if participants adopted the right long-term strategies.

Silk said to effect systemic change collaboration and leadership were required. “We need to urgently align the New Zealand financial system with the task of meeting our 21st century sustainability challenges and, in the process, produce better outcomes for all New Zealanders."

Reserve Bank governor Adrian Orr said he commended the release of the report and agreed climate change could lead to material economic and financial stability impacts.

“This is why we have linked up with our international counterparts via the Network for Greening the Financial System (NGFS) and the Sustainable Insurance Forum to strengthen the global response required to meet the goals of The Paris Agreement. Through this network, we are working with more than 45 other central banks and supervisors from countries responsible for half of the world’s greenhouse gas emissions to enhance our role in the greening of the financial system, and the managing of environment and climate related risks.

“We launched our Climate Change Strategy last December, highlighting how we can address climate change through our core responsibilities including oversight of financial stability and prudential regulation of banks and insurance companies. Currently 60% of surveyed banks and around a third of surveyed insurers already disclose some information on climate risk. While this is great progress, we support further efforts towards a credible and workable climate reporting framework.

“We affirmed our Climate Change Strategy last month through the purchase US$100 million of green bonds via the Bank for International Settlements’ USD Green Bond Investment Pool – launched in response to the growing demand for climate-friendly investments among central banks.

“There is still a lot more work to be done, but we will be responding to the Sustainable Finance Forum’s call for leadership as we work alongside others in the finance sector towards a sustainable, productive and inclusive low carbon economy.”

Tags: ESG ethics green investment Reserve Bank responsible investing Sustainability Sustainable Finance Forum The Aotearoa Circle

« Adviser group reaches data 'milestone'Mann on a mission to diversify financial advice »

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Comments from our readers

On 31 October 2019 at 9:05 pm John Milner said:
I’m just not buying into this latest climate change hysteria sorry. Or this socialist “we know what’s best for our clients” mentality. Give me a break.
Fund managers can smell a dollar coming their way with some “Green” slapped over some products and boom the latest ESG product to hit hit the shelves.
I hate being so cynical but when you have seen so many trends come and go over a 30 year career, it’s pretty hard not to be.

On 3 November 2019 at 7:33 am JPHale said:
Agree to a point John, however, the science on climate is pretty clear, especially when talking to climate scientists.

But your point on the hype is quite valid, greenwashing to attract more dollars is an issue that needs increased vigilance, which isn't going to be an easy one for many to unpack.

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