Incorporating ESG: A Legal Checklist

Dentons Kensington Swan partner David Ireland warns against greenwashing when implementing ESG.

Wednesday, March 23, 2022, 8:12 a.m.

by Jenni McMannus

Trustees of workplace savings schemes that plan to include ESG considerations in their investment decisions must comply with a range of legal and other obligations to avoid falling under the regulator’s purview. .

This is according to David Ireland, a partner at Dentons Kensington Swan, who also warns that the issue of “greenwashing” – making false or misleading claims that a company’s products are environmentally friendly when they do not aren’t – is “right on the FMA’s radar”. .

Ireland, which is the organizer of the Financial Services Council’s workplace savings committee formation discussion group, told attendees of an FSC webinar last week that trustees need to ensure that the information they disclose to plan members is correct and that they are not being misled by greenwashing.

“Make sure you follow the chops – that you can substantiate any claims you make about your approach to ESG,” he said. “It all comes down to” are we [being]mislead or misrepresent the nature of the plan’s investments? It’s about doing your homework and making sure your systems are in place.

Komal Jalan, the Sydney-based head of Mercer Fund’s Pacific region sustainable investing function, says greenwashing is a “massive problem” and investors need to “look under the hood” to make sure that what an organization’s marketing managers claim is actually true. “If a fund claims to be ‘100% fossil fuel free’, is that even possible?”

Over the past 10 years, ESG (environment, social, governance) and SRI (socially responsible investment) considerations have become widespread. Ten years ago, according to Ireland, this was not the case: the question was whether it was prudent to apply an SRI filter to investment decisions. He himself questioned whether it was reasonable for trustees to limit their decision-making in this way while fulfilling their responsibilities as prudent trustees.

Now, says Ireland, the dial has flipped completely. “If you don’t think about SRI/ESG considerations, are you really careful? »

He compares the shift in investor sentiment to the journey the financial services industry took in the 1990s with passive versus active investing. Active investing got the green light but “now there’s a very strong argument from some sectors saying ‘passive’ is the only logical thing and questioning whether ‘active’ is an appropriate strategy,” Ireland said.

“I see SRI/ESG being a very similar camp, although I think the dial has swung more towards the idea that as a director your responsibility should involve you thinking about ESG. [and whether] it makes sense in the context of your program.

Jalan says millennials, in particular, expect their funds and trustees to have a stance on ESG. “Not being seen to do that could damage reputation,” she says. These investors tend to be motivated by three key elements: the belief that ESG considerations will lead to better returns; their investment decisions must align with their personal values ​​(these investors also see themselves as custodians of the assets entrusted to them); and a desire that their investments have a measurable and positive impact.

The legal framework
The basic law for trustees is the Trusts Act 2019 with its broader definition of what it means to invest prudently. Trustees must also follow the rules set out in the trust deed to ensure they follow the correct process if they are considering changing their investment strategy to incorporate considerations such as ESG/SRI, says the Ireland, “although that would be a very unusual trust deed saying you couldn’t get into an SRI strategy”.

The Financial Markets Conduct Act also comes into play as it contains the broad legal obligations directors must meet when considering their approach to ESG.

“As trustees of a workplace savings scheme – and any retail scheme operating in New Zealand – you have a legal duty to act in the best interests of your scheme participants,” says Ireland. “Furthermore, when exercising investment authority, you must exercise the care, diligence and skill that a prudent business person would exercise in similar circumstances, with an added layer if you are a professional fiduciary.

“So the question to ask is ‘is ESG, or your approach to ESG, in the best interest of your members and a prudent thing for you to do? “”

In a work environment, a belt-and-braces approach may include surveying plan members to ensure they are comfortable with an ESG filter, acknowledging that, unlike retail investors, those who have their funds in workplace savings plans do not have the ability to vote with their feet. Trustees must demonstrate that they act in the best interest of the participants. They must therefore document their justification for choosing an ESG approach and record all their decisions and the reasons for them. Disclosure to members should be reflected in the plan’s investment policy and objectives.

There are other statutory filters to consider – for example, prohibiting investment exposure to cluster munitions and chemical weapons. And, on Friday, March 18, Russia’s sanctions law and regulations came into effect, prohibiting (among other things) any dealings with companies, rights, services and people on the government’s blacklist of those who have links to the Russian invasion of Ukraine or persons and entities. of strategic or economic importance to Vladimir Putin.

Thus, New Zealanders and New Zealand entities are now prohibited from dealing with assets and services owned or controlled by anyone on the blacklist. Those who held Russian assets before the law came into effect will not be in violation by continuing to hold them as long as there are no more transactions (most are illiquid and have lost considerable value since the invasion).

However, if a sanctioned Russian person or entity owes you a bond, it can still be paid, Ireland says. “This is a major change for New Zealand and we are still digesting what the implications will be.”

Tags: ESG

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