The Financial Markets Authority (FMA) – Te Mana Tātai Hokohoko – announced on 2 April 2024 that it was opening consultation on a potential class exemption for certain green, social, sustainable, and sustainability-linked (GSSS) bonds. This class exemption would operate on a similar basis to the same class exclusion available in the Financial Markets Conduct Act 2013 (FMCA), allowing listed companies to bring GSSS bonds to market more quickly, and without incurring most of the regulatory costs of a full retail investment offer.
The consultation documents can be found here.
What is a GSSS bond?
‘Green’, ‘social’, ‘sustainability’, and ‘sustainability-linked’ are labels commonly applied to bonds that
have a component that offers investors a non-financial benefit, relating to advertised environmentally or
socially responsible aspects of the product.
While there is no universal definition of how these labels may be applied by issuers, GSSS bonds can be grouped into two categories:
- ‘Use of proceeds’ bonds – proceeds are committed to a project that the issuer considers to have a positive environmental or social benefit. For example, green bonds are where the proceeds will be used to finance environmentally friendly projects or assets. Social bonds are where proceeds will be used to finance assets or projects with positive social outcomes or to address a social issue.
- Sustainability-linked bonds – the financial characteristics vary according to the issuer’s progress against predefined sustainability performance targets.
The FMA has stated that it would expect a bond with GSSS status to fall within one or both of the above categories. The FMA has also suggested that a useful reference point for GSSS bonds, particularly sustainability-linked bonds, may be the issuer’s climate statements prepared under Part 7A of the FMCA.
What would the GSSS class exemption cover?
If granted, the class exemption for GSSS bonds would allow listed issuers to offer bonds that have identical rights, privileges, limitations and conditions to existing quoted bonds (which have been quoted on the NZX debt market for at least three months), except for a different interest rate, redemption rate and GSSS status without the usual disclosure requirements in Part 3 of the FMCA, such as producing a product disclosure statement (PDS).
The class exemption would be subject to certain conditions, including:
- requirements for issuers to disclose the basis on which the bond has GSSS status, in line with the FMA’s disclosure framework for integrated financial products;
- an obligation for the issuer to include certain key statements in the principal term sheets of the bond identifying the bond as having been made under the class exemption;
- the class exemption would not apply where the offer is made within three months of (or in connection with enabling) a change to the essential nature of the issuer’s business or in relation to a transaction for which the issuer has provided (or will be required to provide) disclosure to the NZX debt market as if it were listing on the market; and
- the class exemption would not be available if the FMA has previously made an order against the issuer under section 474 of the FMCA, which prevents the issuer relying on the same class exclusion.
The rationale for this exemption is similar to that for the same class exclusion under the FMCA, being that the appropriate information (e.g. pricing, trading history) is already publicly available to enable the quoted product to be effectively priced by the market, and for investors to make informed and confident decisions.
Our view
The market for green, social and sustainability-linked financial products is rapidly growing, with investors both in New Zealand and globally prioritising green, social and sustainability-linked objectives and targets when considering which products to invest in. We welcome the introduction of a class exemption for GSSS bonds and expect it will support and encourage the development of New Zealand’s sustainable finance market.
Reducing the regulatory burden on issuers may incentivise issuers who would not typically consider offering green, social or sustainability-linked products to do so, increasing the number of GSSS bonds in the market and making green, social and sustainability-linked financial products more available to retail investors. GSSS bonds also have the potential to attract investors who would not otherwise invest in bonds, promoting growth in the market.
What next?
The FMA are currently seeking feedback on the viability of the proposed exemption, including to determine whether there is a pipeline of issuers who would be interested in issuing GSSS bonds but are disincentivised by the current regulatory settings.
The final date for submissions is 30 April 2024. Submissions can be made here.
This article was co-authored by Phillipa Lamberton, a Solicitor in our Banking & Financial Services team.
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