Submission: Financial Markets (Conduct of Institutions) Amendment (Duty to Provide Financial Services) Amendment Bill

Mindful Money's Submission on Financial Markets (Conduct of Institutions) Amendment (Duty to Provide Financial Services) Amendment Bill

Submissions can be made here

Mindful Money is a charity providing education and transparency on KiwiSaver and other investments. We undertake research, public education and provision of information to individual and institutional investors, investment  providers and the broader financial sector. 

The Financial Markets (Conduct of Institutions) Amendment (Duty to Provide) Amendment Bill aims to prevent banks, insurers and other financial advisers from refusing or withdrawing financial services based on "woke" reasons, specifically citing environmental, social, or governance (ESG) considerations. Mindful Money considers this Bill is misguided; harmful for banking and insurance customers; financially dangerous; and represents legislative overreach.

Misguided

The Bill fails to understand the purposes and uses of ESG analysis by banks, insurers and other financial service providers. The primary aim of ESG tools in financial analysis are to understand forms of non-financial and financial risks, so banks and providers of capital can manage those risks.

Banks use ESG analysis as part of credit risk management. Failure by borrowers to manage ESG risk or their impact on ESG factors can lead to higher financial risks including direct impact of physical risk (e.g. to flooding), fines, lawsuits or profit shocks. Banks also use ESG to identify long-term opportunities and to lend more to economic activities with potential for long-term growth. Analysis by banks is used to identify such opportunities, which may be related to climate transition or sound environmental practices.

ESG analysis has become mainstream financial practice. It is used widely in the New Zealand financial sector and globally. For example, signatories to the UN Principles of Responsible Investment manage over US$120 trillion of assets. This is a large proportion of global assets under management.

It is not credible to believe that the world’s leading financial institutions undertake ESG management because they are ‘woke’. They do so because their research and experience has shown this provides the best outcomes for the achievement of risk-adjusted returns.

The evidence shows that ESG management is not practised in order to pursue a woke agenda. It is for the benefit of banks, insurers and financial institutions and their customers. To deprive those customers of the use of ESG tools would lead to worse financial outcomes. Those who would call this ‘woke’ are misguided.

Harmful for New Zealand users of financial services

The censoring of ESG analysis would harm customers. The ability for banks and insurers to avoid risks where they can, including climate-related natural disasters and poor governance, allows lower costs for other customers. Most New Zealanders fall into this category, and most would be adversely affected if banks and insurers were unable to use ESG factors in their risk analysis.

In addition, Mindful Money surveys of the New Zealand public show a large majority of respondents want to avoid financing companies that cause harm, including companies that breach internationally-agreed standards on social and environmental issues, such as climate change and fossil fuels, modern slavery and human rights violations. This survey data suggests that most New Zealanders would also prefer that their banks and insurance companies avoid extending financial services to those companies. To prevent ESG factors from being taken into account would restrict choices for those consumers.

Dangerous to the New Zealand financial sector

Most of the world’s leading financial institutions use ESG management. They require reporting on ESG issues in the banks, insurers and companies they invest in. Foreign investment, in the form of inward portfolio investment, would be adversely affected by New Zealand financial services companies being unable to use ESG management. 

New Zealand prides itself as an attractive destination for investment. To pass a law against ESG management, especially on such spurious grounds, would make our country a laughing stock in most countries. It would seriously damage New Zealand’s reputation as an investment destination.

Legislative Overreach

The Bill represents an unwarranted intrusion into the practices of the financial sector. The effect of the Bill would result in a significant incursion into the contract between financial institutions and their customers. It would also restrict the ability of financial institutions to assess and manage their own commercial interests.

Proponents would suggest that the existence of an exception for decisions made for a “valid and verifiable commercial reason” would protect the rights of financial services companies to use ESG management. But this could create a minefield. The onus would be on financial services providers to justify their decision in a potentially wide range of cases brought by those denied services, claiming the reason for refusal was ‘woke’. 

The exclusion clause in the draft Bill will not address the core problems with this Bill. Nor will  the addition of amendments during the Select Committee hearings. This Bill should be rejected by the Select Committee.