NEW ZEALAND: Disclosure Framework for Integrated Financial Products

•      for a debt security or equity security, the nature of the underlying assets being funded (e.g. is it a specific asset, unallocated across the

full balance sheet of the issuer, or a special purpose vehicle for a specific project?);

•      for a managed investment product such as interests in a KiwiSaver fund, the nature of the underlying investments that may and may not

be made.

assess whether the criteria aligns with their expectations.

•      What specifically justifies the label the issuer has attached to the

integrated financial product? Evidence and support for the label may be required to avoid breaching the fair dealing provisions by making unsubstantiated representations.

•      Is the label confusing or misleading due to exceptions that are only noted in fine print (e.g. exceptions to exclusions)? As noted above, it is

the overall impression that counts. For example, to say “We say no to fossil fuels” with a footnote to explain exceptions to this statement is very different to “We limit our exposure to fossil fuels” with a footnote to elaborate.

•      Outlining the specific non-financial features of the integrated financial product could include describing whether the integrated financial

product is intended to achieve a particular non-financial outcome or whether it is a screening product. For example:

–     An outcome-focused integrated financial product could be aimed at reducing CO2 by a certain amount by a particular date.

–     A screening product could be a managed investment product of a managed investment scheme that excludes certain investments based on ethical criteria, or only includes investments that meet a specific set of non-financial criteria.

•      the specific intended outcome;

•      the timeframe for the outcome to be achieved;

•      explanation of how progress (or lack of progress) against that outcome will be measured;

•      evidence of progress against that outcome.

Similarly, issuers of financial products designed to screen out certain investments or only invest in particular investments need to include details such as:

•      the initial eligibility criteria for exclusion or inclusion in the investable universe;

•      the ongoing criteria, if different to the initial criteria;

•      any exceptions to the criteria, such as a certain percentage of the portfolio being allowed to fail the eligibility criteria, targeted

percentage allocations, or non-breach thresholds;

•      disclosure of the entire investment portfolio to evidence adherence to the criteria (or otherwise), or an explanation of why this is not possible.

In all cases, the issuer should explain (and substantiate) why the intended outcomes of their integrated financial product are beneficial to investors. These benefits could include:

•      reduced risk;

•      more stable or diversified returns;

•      purely non-financial outcomes (e.g. the return on an impact product is 100% the impact with negligible or no financial return);

•      purely ethical outcomes (e.g. the issuer simply believes it is ‘not right’ to invest in tobacco, and avoiding such investments is the benefit for

those sharing that view).

Possible disclosure themes include:

•      Does the board attest to adhering to an integrated financial products policy (whether captured within the SIPO or in a separate policy

document) and, if so, how often is this attestation made?

excluded, purported outcome not eventuating, use of proceeds not allocated correctly)? What are the consequences of a breach of the policy?

•      When was the policy last reviewed? What were the outcomes of the review or amendment?

•      How frequently is the policy reviewed?

It is important for issuers to explain why these services have been obtained and their appropriateness for the purposes of advertising their integrated financial product. Possible disclosure topics include:

•      What does the internal function or external service purport to do and what does the resulting assurance, certification or membership mean

for the investor? For example, is it an endorsement? An unenforceable commitment to adhere to certain standards?

•      Why was this particular internal function or external provider selected to provide assurance, certification or membership services?

•      What was the process undertaken by the internal function or external provider?

•      When does the assurance, membership or certification expire, and what are the implications of expiry?

•      Will the issuer remove reference to the external provider if the issuer or product fails to meet the external provider’s criteria? If not, why not?

Possible disclosure topics include:

•      If there are non-financial outcomes being sought (e.g. reducing CO2 emissions by a certain date), what is the risk of these outcomes not

eventuating, and what are the implications of failure to achieve the outcomes?

(e.g. due to reduced investment universe, competing traditional quantitative financial analysis and non-financial factors)? What is the basis for this?

•      What are the fee implications due to integration of non-financial

factors into the investment decision, such as additional external assurance costs, additional operational costs, extra fees due to non- financial analysis?

•      What is the risk of the integrated financial products policy (whether captured within the SIPO or in a separate policy document) being

breached and therefore investor funds not being allocated as intended or expected, and what would be the resulting implications?

If there is a breach of the integrated financial product policy (whether captured within the SIPO or in a separate policy document), the issuer should disclose what the breach was, the extent of the breach, consequences of the breach and what is being done to remedy the breach. Depending on the context and the nature of the integrated financial product, consequences may include:

•      no consequences whatsoever (if so, why not?);

•      a sale position within a prescribed timeframe or a limit break;

•      a redemption or return of funds to the investor.

Disclosure should also cover:

•      Whether the issuer will remove the non-financial label when referring to the integrated financial product if a breach occurs, to avoid

misleading or confusing investors. If not, why not?

•      Does the investor have any redress?