FMA wants feedback on green bonds

The Financial Markets Authority (FMA) is considering whether to grant a class exemption to issuers of green, social, sustainable and sustainability-linked (GSSS) bonds to get such instruments to market more quickly and cheaper than a full retail investment offer.

Thursday, April 4th 2024, 6:37AM

by Andrea Malcolm

Liam Mason, FMA general counsel, executive director evaluation and oversight says the industry has said there is a need for a more efficient route to market for GSSS bonds.

The FMA says the exemption would operate in a way similar to the same class exclusion in the Financial Markets Conduct Act 2013 (FMC Act), that allows already-listed companies to raise further capital using simple, streamlined disclosure.

It is seeking feedback on whether to grant an exemption to allow issuers to offer bonds that have identical rights, privileges, limitations and conditions to existing quoted bonds, except for a different interest rate, redemption date and GSSS status, without having to prepare a product disclosure statement (PDS) as required under part 3 of the FMC Act.

This would be on the basis that the new GSSS bond is sufficiently similar to an existing quoted bond that information is already available to inform investors and allow the product to be effectively priced by the market.

The exemption would be subject to conditions, including that the issuer must make available information about the GSSS features of the bond.

The labels green, social, sustainability and sustainability-linked are applied to bonds offering a non-financial benefit relating to advertised environmentally or socially responsible aspects of the product.

For example, this could include an intent to use the proceeds of the bond in an environmentally friendly or socially responsible way, or commitments by the issuer against certain sustainability performance targets. Bonds that don’t offer these added non-financial benefits are known as ‘vanilla’ bonds.  

Because GSSS bonds claim to offer investors an added non-financial benefit, they are not the ‘same class’ as vanilla bonds, even if all terms are identical. This means GSSS bonds cannot be offered off the back of existing quoted vanilla bonds under the same class exclusion.

This approach may help to reduce regulatory burden on issuers raising capital and increase opportunities for New Zealanders to invest in products that align with their values and/or deliver non-financial benefits, says the FMA.

“The consultation is looking for feedback on whether our proposal provides the right balance of allowing issuers to get to market quickly and cost-effectively, while still ensuring that investors are given information that they will find timely, accurate, and valuable in making investment decisions. We're keen to know where we can remove potential barriers, and work with industry to enable innovation and flexibility,” says Mason.

In a consultation paper the FMA says the global market for GSSS bonds has grown exponentially and NZ consumers are increasingly prioritising non-financial characteristics when searching for investments.

“This surge in popularity means there is an opportunity to grow and develop New Zealand’s sustainable finance market, and for New Zealand retail investors to participate in capital raising with green or socially responsible objectives.

“The development of New Zealand’s GSSS bond market would increase the range of innovative financial products available for New Zealand retail investors. These bonds may attract investors who would not otherwise invest in bonds, or would substitute vanilla bonds for GSSS bonds.”

Developing New Zealand’s sustainable finance market may also incentivise issuers who are also climate reporting entities to issue GSSS bonds supporting their climate transition, it says.

Tags: FMA