FMA clarifies green bond disclosure requirements

The Financial Markets Authority (FMA) has published an information sheet outlining when issuers of securities described as “green bonds” can apply the “same class exclusion” to disclosure requirements.

The same class exclusion allows issuers to offer a new financial product, without full disclosure requirements, when that new product is of the same class as an existing quoted financial product. The same class exclusion is part of the Financial Markets Conduct Act, and helps to reduce compliance costs for issuers.

Green bonds are growing in popularity around the world, as part of an increasing appetite for responsible investment products.

Sarah Vrede, FMA Director of Capital Markets, said the FMA recognises that it has a role in facilitating growth and innovation in New Zealand’s capital markets, including growth of financial products which incorporate environmental, social and governance (ESG) features.

“The FMA’s role is to facilitate fair, efficient and transparent financial markets, and providing guidance about responsible investment products with environmental, social and governance features is part of that mandate. Green investment products can help mobilise capital to mitigate climate change and its impacts, and offer new opportunities for investors,” Ms Vrede said.

The information sheet makes clear that the same class exclusion is available to an offer of green bonds if an issuer already has quoted green bonds with identical green features (rights, privileges, limitations and conditions), and all other relevant disclosure and compliance criteria have been met.

The FMA is aware that some market participants believe green bonds should be considered as of the same class as standard (or “vanilla”) bonds. However, the FMA position is that green bonds and vanilla bonds are not of the same class.

Ms Vrede said that investors typically have a clear and reasonable expectation that they are getting something more from a green bond than a vanilla bond.

“Our view is that treating a green financial product as of the same class as a vanilla financial product, when only the former has specific green features, could undermine investor’s confidence in these green products.

“It could be confusing for investors to have a green bond described and treated as of the same class as a vanilla bond. If they are of the same class, then what is it that makes the green bond ‘green’? This distinction is important in managing the risks for investors from product marketing that could potentially be ‘greenwashing'”.

For market participants who have quoted vanilla bonds, the FMA is open to considering individual exemption applications for a green bond offer. Any such exemption would likely be subject to conditions requiring additional disclosure about what makes the bond green.

Green financial products are included as part of a wider guidance consultation process on responsible investments that the FMA began in September 2019.

The objective of the guidance is to inform issuers, product providers and fund managers about good conduct and good disclosure expectations for green and other responsible investment products. The guidance will not set out prescriptive definitions of what constitutes “green”, “ethical” or “responsible”.

The FMA received 36 submissions on the consultation and expects to respond with the final guidance in early 2020.

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