New Zealand is falling behind the rest of the world in its use of sustainable finance, putting at risk our chances of attracting international investment while domestic investors are missing out on the chance to have more say in what companies are doing, a legal expert is warning.
Sustainable bonds - debt which is raised by companies or organisations to meet a specific climate change or social goal - has hovered around $2 billion to $3b a year in New Zealand for the last three years.
But globally it has risen from US$326b in 2019 to US$1.03 trillion last year, and is set to hit US$1.5 trillion in 2022.
Luke Ford, a partner at Chapman Tripp in its capital markets team who specialises in sustainable finance, said that meant New Zealand had finished 2021 further behind in the world rankings than in 2017 when the first green bonds were issued in New Zealand.
"Sustainable finance across its various forms ... is on a growth trajectory in New Zealand. But other countries are setting a cracking pace, leaving us still in their dust."
Ford said one of the reasons New Zealand had lagged behind was because there had not been the large uptake of social and green bonds in 2019 that happened overseas.
Part of that was because New Zealand had a very large retail (small) investor base compared to other countries, he said.
"It's our greatest strength but can also be a weakness in our ability to move quickly in some cases."
More retail investors meant there needed to be more regulation first, he said.
"As we bring in more retail investment the focus on regulation becomes stronger and it also becomes difficult for any one single investor to be heard.
"It really requires a wide range of investors to be stepping up and also for a lot more work to be done to make sure disclosure and regulation requirements are met and that really has to some degree slowed us down - we have taken a more cautious approach to that."
While sustainable bond issuance has been static there has been growth in sustainability-linked bank loans where the interest rate on a loan can come down if the company meets certain goals.
The number of New Zealand companies using sustainability linked loans was just one in 2017 but grew to 13 last year compared to the 11 companies that issued sustainable bonds.
But sustainability linked bank loans look set to grow with the likes of BNZ last week launching New Zealand's first agribusiness sustainability linked loan product (SLL) for farmers.
Ford said heavy hitters like the BNZ were now getting involved but New Zealand needed to do more or it risked falling further behind.
"We could lose our access to international investors which we have slowly been increasing over the last 10 years."
He said overseas investors could bypass New Zealand companies who were trying to raise debt because they were not doing the right engagement or reporting.
"I think domestically we also risk losing the opportunity to have debt investors and KiwiSaver and people's investments generally make a statement beyond just the financial returns.
"The ability to engage, which they haven't traditionally had, in the direction of the business and one that we are seeing more and more internationally with more activism - just engagement beyond the traditional shareholder. It's one we risk missing out on if we don't build up a market in this in the same way it has occurred internationally."
Some KiwiSaver providers have moved to invest in social and housing bond programmes but Ford said more could be done.
"I think they are certainly going in the right direction - we are seeing more specialised funds. I do think the next steps are continuing to expand that product range and actively going out of their way to give investors a voice."
Ford said providers should telling their members what they were investing in and holding businesses to account.
"Overseas a lot of changes are being driven by institutional investors that may be representing a mix of money from different people but it is giving a voice to people who are investing through them."
Ford said there were three elements to a successful market.
"It needs support from Government, strong investor engagement and businesses that are willing to move into this new area. I think we have got, to some degree we have all of those elements but the key will be increasing that link between investors and businesses in particular."