High Court clarifies expectations for NZ Super Fund’s responsible investment policy

Members of the Palestinian Solidarity Network Aotearoa have successfully judicially reviewed the Guardians of New Zealand Superannuation’s responsible investment framework in relation to investments associated with business and human rights issues in the Palestinian territories.

The Guardians are required to manage and administer the New Zealand Superannuation Fund (NZ Super Fund) in a manner consistent with avoiding prejudice to New Zealand’s reputation as a “responsible member of the world community”, under the New Zealand Superannuation and Retirement Income Act 2001 (Act).

The High Court found that the Guardians’ policy documents did not meet this obligation and were therefore unreasonable and unlawful.

This judgment illustrates the difficulty fund managers can face when designing and governing sustainable or responsible investment policies:

• If policies are overly prescriptive, there may be insufficient flexibility to respond as issues arise, and there can be legal and reputational risk if policies cannot be applied consistently in practice.
• If policies are too vague, they may be challenged as ineffective.

 

What does this mean for fund managers and KiwiSaver providers?

Because the judgment relates to the Guardians’ bespoke statutory duties when managing and administering the NZ Super Fund, it does not have direct impact on fund managers or KiwiSaver providers.

However, we expect the decision to influence regulator and consumer expectations for sustainable or responsible investment frameworks across the financial sector, including KiwiSaver providers.

Fund managers should regularly review their statement of investment policy and objectives, and any separate sustainable or responsible investment policies and frameworks, including whether:

• policy documents provide a clear standard against which investment decisions can be assessed;
• high-level principles include sufficient detail to avoid being considered ineffective;
• decision-making processes are clearly defined and capable of consistent application; and
• decision-making responsibilities are allocated to specific roles and appropriately documented.

 

Policy documents under scrutiny

The applicants’ first ground of review assessed the NZ Super Fund’s Statement of Investment Policies and the Sustainable Investment Framework against the requirements of the Act. The Court found that:

• the documents must identify with sufficient clarity the standards and procedures to which the Guardians will adhere;
• there must be ascertainable practical benchmarks or criteria, but these need not be “hard-edged rules”;
• the policy documents must go beyond “a series of bullet points … preceded by [a] broad statement”, and beyond “a series of generic or broad categories notable for their lack of discernible boundaries”; and
• there must be defined processes, including:
• who will make the relevant decisions;
• how they will make them; and
• what standards, thresholds and criteria they will apply.

The Court noted that previous versions of the policy documents referenced detailed international standards, including the UN Global Compact and the Principles for Responsible Investment. However, a 2022 update to the NZ Super Fund's policy documents removed direct references to human rights standards and previous decision-making processes (including flowcharts).

The Act requires the NZ Super Fund’s policy documents to contain standards and procedures, including ascertainable benchmarks and defined decision-making processes. The Court found the Guardians’ current policy documents lacked sufficient clarity and consistency to satisfy these statutory requirements. In particular, the documents did not provide meaningful criteria for investment exclusions or procedural transparency regarding who makes decisions and how they are made.

 

Expectations around human rights issues in investing

The judgment also discusses human rights considerations in investment policies, international standards and what makes a robust process. This has broader relevance across the financial sector.

The Court accepted the UN Guiding Principles on Business and Human Rights as the “definitive global standard”, and recommended that the Guardians consider explicitly including this in its policies. While the Court did not prescribe specific standards (given the judicial review context), it indicated that responsible investment policies should be transparent, consistently applied, and refer to recognised human rights benchmarks.

The Court did not make conclusions or findings about the Guardians’ investments in the specific companies challenged by the applicants. Nor did it make a definitive finding about how investors should treat companies included on the United Nations Office of the High Commissioner for Human Rights database (the Court considered the database provides “a good faith basis for further enquiry”). Investors will need to continue to assess the nature and extent of any connection between investee companies and alleged human rights impacts.

 

Relief and implications

Following the Court’s declaration that the policy documents do not meet the Act’s requirements, the Guardians must update the relevant policies. It will then be for the Guardians to consider the challenged investments against the updated policies.

This decision underscores the importance of clear, ascertainable standards and procedures that can be applied consistently in practice.

It remains to be seen whether the Guardians will appeal.

If you would like to discuss how this decision may affect your business or your investment governance arrangements, please contact our team.