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Responsible investment disclosure by KiwiSaver scheme providers - Guidance note [2008] NZSecCom 4 (20 March 2008)

Last Updated: 14 November 2014

_{Guidance Note}

_{Responsible Investment Disclosure by}

KiwiSaver Scheme Providers

20 March 2008

1. Introduction

1.1 From 1 April 2008, every investment statement for a KiwiSaver scheme or a complying superannuation fund must include a statement about the scheme’s approach to responsible investment.

1.2 Each KiwiSaver scheme investment statement must state whether or not the scheme takes into account responsible investment in its investment procedures and policies. If responsible investment is taken into account, the provider must have more information available about this for prospective members.

1.3 This guidance note aims to help KiwiSaver scheme providers understand this new disclosure obligation so that they can comply with the law, and investors can obtain useful information about the scheme’s approach to responsible investment.

1.4 The Securities Commission is responsible for the enforcement of securities law. This guidance note sets out the Commission’s understanding of the new law, and the approach it intends to take to the new disclosure requirements.

1.5 The new responsible investment disclosure will require KiwiSaver providers that do take responsible investment considerations into account to provide extra information in a document that is available to investors. The Commission does not expect that all of the matters suggested in this guidance note will be contained in the initial explanatory material published by all scheme providers. This will be acceptable so long as the information provided contains an accurate explanation of the extent to which responsible investment considerations are taken into account, and the information is not likely to mislead, deceive or confuse investors.

1.6 We will expect all schemes who do take responsible investment considerations into account to have full explanatory notes available by 30 September 2008. The

Commission intends to review responsible investment disclosures made by KiwiSaver scheme providers late in 2008, and may amend or supplement this guidance note at that time.

1.7 This guidance note covers:

(a) The legal requirements

(b) What is “responsible investment”?

(c) The explanatory document - how a provider should describe “the extent to which responsible investment is taken into account”

(d) How detailed should disclosure be?

1.8 In preparing this guidance the Commission has had regard to the Australian Securities and Investments Commission’s Regulatory Guide 65, ‘ASIC guidelines to product issuers for disclosure about labour standards or environmental, social and ethical considerations in Product Disclosure Statements (PDS)’. Given the level of trans- Tasman operations by many New Zealand funds managers, there are advantages for New Zealand issuers if the guidance about responsible investment is consistent with the equivalent disclosure standards in Australia. However, there are differences in the precise legal requirements in Australia and New Zealand, so scheme providers should take care to be familiar with the New Zealand law.

2. The legal requirements

2.1 From 1 April 2008 all investment statements for a KiwiSaver scheme or a complying superannuation fund must include a statement telling investors whether or not responsible investment is taken into account in the scheme’s investment procedures and policies. A complying superannuation fund is a fund that has been approved by the Government Actuary as having met certain criteria similar to KiwiSaver – for example, KiwiSaver lock-in rules, portability etc.

2.2 The legal requirement to do this is in Section 205A of the KiwiSaver Act 2006. It sets out two statements, one of which must be included in every investment statement for a KiwiSaver scheme (or a complying superannuation fund).

2.3 The statement must be included at the end of the “Who is involved in providing it for me?” section of the investment statement.

2.4 Regulation 7A(4) of the Securities Regulations 1983 requires all information, statements, and other matters specified under an italicised question set out in Schedule

3D that are required to be contained in an investment statement in respect of a security to be set out together in the investment statement under that question. Providers may wish to note that investment statements first distributed before 1 April 2008 need not be set out as required by Regulation 7A(4).¹ Instead, providers may, until 31 July

2008, indicate the changes or corrections to investment statements required because of

Section 205A of the KiwiSaver Act 2006 by way of an insert or supplement

¹ KiwiSaver Amendment Regulations 2008.

distributed with the investment statement. However, information provided in the inserts or supplements must be set out in a style or format consistent with the investment statement.

2.5 Non-compliance with section 205A of the KiwiSaver Act is taken to non-compliance with the Securities Regulations 1983.² This means that the enforcement and liability provisions of the Securities Act 1978 apply to this requirement in the same way that they apply to the rest of the investment statement.

2.6 If you offer a KiwiSaver scheme or a complying superannuation fund which takes into account responsible investment (including environmental, social, and governance (ESG) considerations) in its investment policies and procedures, every investment statement for the scheme must contain the following statement:

‘Responsible investment, including environmental, social, and governance considerations, is taken into account in the investment policies and procedures of the scheme. You can obtain an explanation of the extent to which responsible investment is taken into account in those policies and procedures –

[if the issuer has a website] on the issuer’s website on the Internet at [specify website address], which is publicly accessible at all reasonable times; and

from the issuer, free of charge, upon request.

2.7 If you provide a KiwiSaver scheme or a complying superannuation scheme which does not take responsible investment (including ESG considerations) into account in its investment policies and procedures, every investment statement for the scheme must contain the following statement:

‘Responsible investment, including environmental, social, and governance considerations, is not taken into account in the investment policies and procedures of the scheme.’

2.8 If a scheme does take responsible investment into account, the investment statement must refer investors to an explanation of the extent to which responsible investment is taken into account in those policies and procedures. If the issuer has a website, the explanation must be available on the website, and the investment statement must give the website address. Whether or not the issuer has a website, copies of this explanation must be given to any person, free of charge, on request.

2.9 A statement in any document that is referred to in an investment statement is taken to be included in that investment statement for the purposes of the Securities Act. This means that the explanation about responsible investment, which must be referred to in the investment statement of a scheme that does take into account responsible investment, is part of the investment statement for the purposes of securities law. Issuers must take care to ensure that the explanation is not misleading, deceptive or confusing in any respect that is material to the offer of securities.

² KiwiSaver Act 2006, section 205A(4).

3. What is “responsible investment”?

3.1 The KiwiSaver Act does not give an exhaustive definition of the term “responsible investment”. The term, as it is used in this legislation, is derived from the United Nations 2006 Principles for Responsible Investment. These principles were developed by an international group of institutional investors in a process convened by the UN Secretary-General and coordinated by the United Nations Environment Programme Finance Initiative (UNEP FI) and the United Nations Global Compact. The principles are intended to help institutional investors to incorporate environmental, social, and corporate governance factors into their investment decision making and ownership practices.

3.2 The statements required in investment statements under the KiwiSaver Act must refer to “responsible investment, including environmental, social and governance considerations”. The phrase “environmental, social, and governance” has emerged as a label used in the context of responsible investment to describe categories that cover the various aspects of responsible investment. Broadly the term is understood to cover investment policies and practices that for the most part may have been thought to be beyond the scope of traditional investment decision-making. Used in this sense, the phrase “responsible investment, including environmental, social, and governance considerations” is intended to be a description of a particular approach to investing, which takes into account these broader (sometimes referred to as “extra-financial”) matters, rather than a strict list of necessary ingredients.

3.3 Environmental, social, and governance considerations are often referred to simply as “ESG”. This term is not precisely defined, nor does it appear that it is intended to be interpreted as a literal or exclusive list. A report prepared by the law firm Freshfields Bruckhaus Deringer for the UNEP FI³ defines environmental, social, and governance issues “as having one or more of the following characteristics:

• Are the focus of public concern (e.g. genetically modified organisms);

• Are qualitative and not readily quantifiable in monetary terms (e.g. corporate governance, intellectual capital);
• Reflect externalities not well captured by market mechanisms (e.g. environmental pollution);
• Are often the focus of a tightening policy and regulatory framework (e.g. greenhouse gas emissions); or
• Arise throughout the company’s supply chain (e.g. labour issues at supplier factories).”

3.4 Given this background, the Commission considers that the intent of this legislation is to provide investors with information about whether or not a KiwiSaver scheme’s investment policies and procedures take into account matters generally encapsulated within the term “responsible investment, including environmental, social, or

³ A legal framework for the integration of environmental, social, and governance issues into institutional investment, October 2005, report for the UNEP FI, available at the website of the UNEP FI (www.unepfi.org), at http://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf. This definition is ascribed to the Enhanced Analytics Initiative, www.enhanced-analytics.com.

governance considerations”. In this sense the term “responsible investment” does not limit the factors that can be taken into account in investment policies and procedures.

3.5 If a scheme’s investment statement says that it takes responsible investment into account, the scheme’s approach to responsible investment must be accurately explained in a way that is not likely to mislead investors. The investment statement must refer people to this explanation.

3.6 KiwiSaver scheme providers have various investment approaches. Different scheme providers will also have different approaches to including ESG factors in their investment decision-making process. Some examples of possible activities by scheme providers which take responsible investment considerations into account are-

Investment Policy:

(a) the scheme provider adopts and implements an investment policy or mandate which incorporates ESG considerations;

(b) the scheme provider is a signatory of the UNEP FI and the UN Global

Compact’s Principles for Responsible Investment;

(c) the scheme provider communicates its responsible investment policy to fund managers and to entities in which the scheme may invest;

(d) the scheme provider appoints a suitably qualified responsible investment adviser.

Investment process⁴:

(a) analysis of entities for their ESG performance in the course of selecting investments;

(b) thematic investment - positive investment in sustainable industries with ESG

practices and policies;

(c) best-of-sector - investing in the most sustainable entities in a sector with ESG

practices and policies;.

(d) engagement with entities on ESG issues;

(e) shareholder activism – raising resolutions or voting on ESG issues;

(f) negative screening of entities or sectors in the stock selection and portfolio construction process.

⁴ Responsible Investment 2007 : A Benchmark Report on Australia and New Zealand by the Responsible Investment Association Australasia. Commissioned by the Responsible Investment Association of Australasia (RIAA).

3.7 A scheme provider can combine various approaches in its responsible investment strategy.

3.8 A KiwiSaver scheme provider may offer one or two KiwiSaver schemes and each scheme may have a number of investment options (for example, a growth fund, a balanced fund and a conservative fund). Each investment fund may be comprised of a number of investment portfolios (for example, a growth fund may invest a certain percentage in an international equities portfolio and a certain percentage in an international bond portfolio).

3.9 Under the Securities Act an investment statement can cover more than one investment option or investment fund, and can cover more than one KiwiSaver scheme (although this is uncommon). The responsible investment disclosure required under the KiwiSaver Act refers to each scheme as a whole. If a provider offers one scheme that does take responsible investment into account and another that does not, one investment statement may still be used for both schemes, with a separate statement for each scheme.

3.10 Where a scheme is made up of a number of investment funds, or has funds with a number of investment portfolios, some of the funds or portfolios may take into account responsible investment considerations while others do not. In this case the investment statement can say that the scheme takes into account responsible investment, but it should be clear to readers that this is the case only for certain funds or portfolios.

3.11 An issuer may delegate all or part of a scheme’s investment decisions to other parties, such as investment or fund managers. However, the issuer remains legally responsible for the investment statement and must ascertain:

(a) whether environmental, social and governance issues influence the investment or fund manager in their selection and retention of fund assets, or engagement and voting activities; and, if so,

(b) the nature and extent to which these factors are taken into account in the investment decisions.

4. The explanatory document - how a provider should describe “the extent to which responsible investment is taken into account”

4.1 If a KiwiSaver scheme does take responsible investment into account in its investment policies and procedures, then the issuer must prepare a document explaining the extent to which responsible investment is taken into account. This document must be available on the scheme’s website (if it has one) and must be given free of charge to anyone who asks for it. This explanatory document is part of the scheme’s investment statement for the purposes of securities law, and must not be likely to mislead, deceive, or confuse investors.

4.2 As there is not a precise definition of “responsible investment”, it is important that this explanatory document gives an accurate and balanced picture of the role that responsible investment considerations play in the investment policies and procedures

of a scheme provider or complying fund. Explaining the extent to which responsible investment is taken into account means saying how far these matters are taken into account in investment policies and procedures. This explanatory document should give investors sufficient information for them to understand the actions that are taken by the people who make the decisions on the scheme’s investments.

4.3 An explanation of the extent to which responsible investment is taken into account is likely to have several dimensions, including:

(a) The role or weight given to responsible investment considerations – how responsible investment decisions fit into the scheme’s overall investment process, and what weight is given to these matters;

(b) Actions taken – what the scheme actually does to take responsible investment into account, including any verification or audit procedures;

(c) Scope – a scheme may take into account only some environmental, social, and governance considerations. If this is the case, the scope of these considerations should be clearly described. In addition, the scheme should also disclose if an entire portfolio is subject to the responsible procedures, or whether only certain portions of the portfolio are.

4.4 Ideally, the following information should be available on the website: (a) The scheme’s investment policies and procedures.

(b) The scope of the responsible investment issues which are taken into account in the scheme’s investment policies and procedures.

(c) How these issues are integrated into the scheme’s investment policies and procedures. This means giving sufficient information for an investor to understand the activities undertaken by a scheme provider by disclosing:

(i) the methodology (if there is one) for taking ESG and other relevant issues into account in the investment cycle (if there is no methodology this must be disclosed);

(ii) the weight allocated to each ESG or other relevant issue, if a weighting system is adopted;

(iii) any specific criteria or measures by which the scheme assesses ESG

issues when choosing or holding investments;

(iv) monitoring procedures used by the scheme provider relating to the scheme’s approach to responsible investing; and

(iii) any responsible investment rating, accreditation, or verification services used by the scheme.

4.5 The explanation should describe these matters, to the extent possible, in plain English, avoiding jargon. This is important to ensure that the explanatory material is not likely to mislead or confuse investors.

What should a KiwiSaver scheme provider do if it is developing an approach to responsible investment but will not have integrated one into its investment procedures and policies by 1

April 2008?

4.6 If a scheme provider does not take ESG considerations into account in its investment policies and procedures on or before 1 April 2008, then it must disclose that it does not take these matters into account, even if it is developing its responsible investment approach. However, a provider that is developing responsible investment policies or procedures can state that this work is being undertaken, and can provide more detail on this, either in the investment statement or in other materials, such as documents on the provider’s website.

4.7 Providers that are developing ESG policies and procedures, but that have not yet implemented these policies should take care that any statements about the development or intended development of such policies do not mislead investors about the current status of the scheme’s approach to responsible investment.

5. How detailed should the disclosure be?

5.1 The overriding principle for disclosure of information about investments is that the disclosure must not be likely to mislead, deceive, or confuse investors. Issuers should also keep in mind that the investment statement’s purpose is to provide key information to assist a prudent but non-expert investor. Information about a scheme’s responsible investment approach should be clear, concise, and written in plain English. The principles below apply to disclosure generally, and may help scheme providers explain about their approach to responsible investing:

Stick to the facts

5.2 The explanation about a scheme’s approach to responsible investing must tell investors what the scheme actually does when it takes responsible investment into account, and how it does this. The information can include subjective elements, such as specific environmental, social, and governance issues that are important to the scheme provider or that the provider believes may be important to investors in the scheme. However, the explanation must include the facts as well as any statements of opinion or ideals.

More marketing means more disclosure

5.3 A scheme which expressly markets itself to investors who are seeking environmentally or socially responsible or ethical investment choices will be expected to provide more detail to back up claims about responsible investment made in its offer documents or marketing material. This will include schemes that brand themselves as “ethical” or “socially responsible”.

Avoid jargon

5.4 There is a lot of jargon, established and developing, about responsible investment and the various methods and approaches that can be taken to responsible investment. Issuers should explain their approach to responsible investment in plain language. They should avoid jargon or, if jargon must be used, explain what it means. A document full of industry jargon may look impressive, but is unlikely to give an adequate explanation for non-expert readers.

Explain all policies and approaches used

5.5 Disclosure must go beyond rhetoric, and explain the scheme’s approach to ESG factors in sufficient detail to be helpful to readers. For instance, a scheme which claims to invest in entities that adopt sustainable practices and good governance should explain how it defines these things and how it determines whether an entity has them. Specific criteria or measures used to assess investments in terms of responsible investment should be described.

5.6 Disclosures must not be misleading, particularly when abstract or subjective terms such as balanced, sustainable, ethical, green etc. are used.

Consider referring to secondary sources

5.7 Scheme providers that take ESG considerations into account can help investors by providing links or references to other material about responsible investment that may give more detail relevant to the scheme’s approach to responsible investing. For example, if the scheme uses an external accreditation service, it should provide a reference to allow investors to learn more about the accreditation agency and its services, methods, expertise, and experience.

Note

The Securities Commission cannot give rulings on the interpretation of the law or provide legal advice. Accordingly this is for guidance only. It signals the approach the Commission intends to take to the law. The Commission may publish further guidance notes over time. However, the Commission is not bound by this or any other guidance note

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