Thursday 31st October 2019
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Company directors and fund managers who fail to manage investment risks associated with climate change are failing in their legal duties under the Companies Act, according to a legal opinion commissioned by new business lobby group The Aotearoa Circle.
Based on the opinion from law firm Chapman Tripp, the Circle argues in a 68-page interim Sustainable Finance Forum report, that directors' and investment managers' fiduciary duties should be clarified to make clear that environmental and social are factors they need to consider.
Led by the chief executive of the New Zealand Superannuation Fund Matt Whineray and Westpac NZ senior executive Karen Silk, the Circle plans to make recommendations on reshaping the current financial policy, regulatory and financial framework in order to "redirect capital to enable the transition to a sustainable economy."
The interim report draws on interviews from some 50 financial system participants, including NZX chief executive Mark Peterson, Jarden head of direct wealth Fiona Mackenzie, Insurance Council of New Zealand chief executive Tim Grafton, professional director Rob Campbell, representatives of Standard & Poor's and a clutch of leading accounting and law firms. It found that 95 percent of those interviewed considered the current financial system was "unfair."
The report was authored by Justine Sefton, an independent consultant involved with ethical investment guidance service Mindful Money, EY Oceania Climate Change and Sustainability Services director Pip Smith and Erica Miles, sustainability services director at accounting firm KPMG.
It says "the current New Zealand legal framework does not explicitly require consideration of environmental and social factors as part of fiduciary duty."
The recent review of the Code of Conduct for Financial Advisers also omitted that consideration.
However, the Chapman Tripp opinion also published this morning, and tipped as the most significant element of the initiative, says that "directors and scheme managers must assess and manage climate risk as they would any other financial risk".
"Our conclusions are not controversial but reflect the application of settled principles to a rapidly developing area," says the opinion, which is seen as having the same potential to underpin litigation in that same way as a similar initiative in Australia, also using the proactive publication of a legal opinion on this issue.
"Climate change presents a risk of foreseeable harm to many companies, particularly with respect to the impacts of transitioning to a lower-carbon economy."
At a minimum, the opinion says directors must identify the risk, periodically assess its nature and extent in the context of the company, and whether and how to take action.
Publicly listed companies should treat climate change risk policy decisions as subject to continuous disclosure requirements where a "material" financial risk is identified and should expect such disclosure to become mandatory, as it will soon be in Australia.
The opinion says the 2017 recommendations of a G20 Taskforce on climate-related financial disclosures were a guide and a "watershed moment." It warns directors that "arguing that climate change does not exist" would not get a company director off their fiduciary hook under the Companies Act.
"The only debate will be on whether the director's actions (or inactions) were justified against the specific climate-related risks faced by the company."
The Reserve Bank of New Zealand, which has been criticised for formally making climate change risk a financial stability issue, welcomed the Circle's discussion paper and the legal opinion.
It was involved, through the Network for Greening the Financial System and the Sustainable Insurance Forum, "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."
Whineray told BusinessDesk that corporate leadership and culture change would be as important as regulatory change or legal enforcement in shifting attitudes among company directors to accepting that environmental and social factors were not only legitimate, but necessary issues to consider.
The report notes some tension between the many parties involved in the report on the role of regulation versus voluntary action to drive change.
"Regulatory interventions on governance and fiduciary duties will play a role but will not suffice," the report says. "Regulation generally lags leadership and sets a compliance mindset rather than focusing on the opportunities."
In its request for feedback before it releases a final report in mid-2020, the Aotearoa Circle asks: "should business and investment sectors be expected to serve a broader social purpose and to deliver positive social and environmental outcomes?"
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