Guidance Note

Responsible Investment Disclosure by KiwiSaver Scheme Providers

What is "responsible investment"?

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.

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.

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)."

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 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.

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.

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:

Investment process⁴ :

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

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).

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.

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.

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: