ESG Regulations in New Zealand

Climate Related Disclosures (CRD) Regime

The Climate Related Disclosures (CRD) Regime, adopted in January 2023, establishes mandatory climate-related disclosures mandatory for large publicly listed companies, insurers, banks, non-bank deposit takers and investment managers. Currently, around 200 entities are required to report in New Zealand. These entities include:

● All registered banks, credit unions, and building societies with total assets of more than $1 billion NZD ($621 million USD);

● All managers of registered investment schemes (other than restricted schemes) with greater than $1 billion NZD in total assets under management;

● All licensed insurers with greater than $1 billion NZD in total assets or annual premium income greater than $250 million NZD;

● Listed issuers of quoted equity securities with a combined market price exceeding $60 million NZD; and

● Listed issuers of quoted debt securities with a combined face value of quoted debt exceeding $60 million NZD.

Reporting standards are established by the External Reporting Board (XRB) and monitored by the Federal Markets Authority (FMA). These climate standards were developed based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) after public consultation. Areas to report on include governance and management, scenario analysis and anticipated impacts, risk management, metrics and targets, and assurance of GHG emissions. The implementation takes a phased approach. The first phase, starting January 1, 2023, requires reporting from the developed XRB climate standards. The second phase, starting October 27, 2024, and additionally requires third-party verification on elements of the disclosures relating to greenhouse gas emissions.

New Zealand Emissions Trading Scheme

The New Zealand Emissions Trading Scheme (NZ ETS), established in 2008, helps reduce emissions by:

● Requiring businesses to measure and report on their greenhouse gas emissions;

● Requiring businesses to surrender one ‘emissions unit’ (known as an NZU) to the government for each one ton of emissions they emit; and

● Limiting the number of NZUs available to emitters (i.e., that are supplied into the scheme).

Disclosure Framework for Integrated Financial Products

NZ ETS covers all sectors of New Zealand’s economy, with the exception of agriculture, which reduces emissions through the He Waka Eke Noa: Primary Sector Climate Action Partnership. The rest of the sectors (forestry, waste, synthetic gases, industrial processes, liquid fossil fuels, and stationary energy) must report their greenhouse gas emissions and have surrender obligations at a rate of 1 NZU per every 1 ton of carbon dioxide equivalent (CO2-e) emissions they produce. This means that only direct emitters must participate in the ETS, and most businesses do not have an obligation to participate (although the price can be passed down through the supply chain).

In December 2020, New Zealand’s FMA released a Disclosure Framework for Integrated Financial Products, including issuers of ‘green’ bonds and ESG funds. Focusing on ways to avoid greenwashing and misleading labels, they cover integrated financial products such as debt securities or managed investment products, fair dealing provisions, disclosure expectations, and enforcement.

Modern Slavery Proposal

In April 2022, the New Zealand government announced a proposal regarding modern slavery and worker exploitation, which would create due diligence and disclosure obligations. The proposal addressed new responsibilities across operations and supply chains, with more responsibilities for larger organizations. Specifically:

● All organizations would be required to take action if they become aware of modern slavery or worker exploitation;

● Medium (annual revenue between NZ$20 million and NZ$50 million) and large organizations (annual revenue above NZ $50 million) would be required to disclose the steps they are taking; and

● Large organizations and those with control over New Zealand employers would be required to undertake due diligence.

Commentary was closed on June 7, 2022 and almost all submitters supported taking legislative action. However, commentors wanted more clarity on the definition of terms like "modern slavery" and "worker exploitation,” and believed due diligence should be required of all organizations, not just large ones. There has, however, been little news from the government regarding the proposal since then.

Although laws exist protect employees and uphold anti-discrimination principles—including the Human Rights Act 1993, Employment Relations Act 2000, Equal Pay Act 1972, Minimum Wage Act 1983, Wages Protection Act 1983, and Health and Safety at Work Act 2015—there are no other mandatory social reporting requirements in New Zealand. The government, however, provides certain New Zealand-specific resources for businesses to uphold human rights.

New Zealand Stock Exchange Corporate Governance Code (NZX Code)

The New Zealand Stock Exchange (NZX) has a set of principles and recommendations that companies must follow on a “comply or explain” basis. All companies on the NZX Main Board must list this information on their annual report or website. The most recent NZX Code released April 1, 2023 is based on eight principles:

1. Ethical standards (1.1-1.2)

2. Board composition and performance (2.1-2.10)

3. Board committees (3.1-3.6)

4. Reporting and disclosure (4.1-4.4)

5. Remuneration (5.1-5.3)

6. Risk management (6.1-6.2)

7. Auditors (7.1-7.3)

8. Shareholder rights and relations (8.1-8.5)

Environmental topics are briefly discussed (4.4) and direct readers to the ESG Guidance Note (see below). Social issues discussed include Health and Safety risks (6.2). Governance-related topics include board credentials (2.4), gender diversity (2.5), board independence (2.8-2.10), and audit committee structure (3.1-3.2). Additionally, the NZX released an ESG Guidance Note on April 1, 2023 to:

● Explain what ESG is;

● Provide context on why it is important;

● Provide issuers with resources for accessing more information about how to report on ESG factors; and

● Help issuers communicate their strategies for managing ESG opportunities and risks to stakeholders and investors.

Among the ideas discussed in the guidance note include ESG reporting factors, investor interest, New Zealand’s commitments, leading frameworks such as Global Reporting Initiative (GRI), integrated reporting, and B-Corp certification, what should be reported, climate-related disclosures, reporting formats, and communication with shareholders

Stewardship Code

In 2022, New Zealand released their first Stewardship Code to give investors a clear framework on how to guide their companies on ESG issues. Following this code is optional, and Signatories that choose to follow the code report under a “comply or explain” basis. The code follows nine principles:

1. Be committed

2. Establish and maintain policies

3. Incorporate material ESG matters

4. Be engaged

5. Vote responsibly

6. Manage conflicts of interest

7. Collaborate and advocate for change

8. Measure and report

9. Educate and improve

The code does not mandate disclosure on specific ESG topics, but rather provides guidelines on how to engage more responsibly in ESG issues. Approaching 2025, the code is expected to shift to an “apply or explain” basis where companies can thoroughly explain how their practices are achieving effective stewardship rather than just “tick the box.”

Corporate Governance Reform Bill

In June 2018, the Ministry of Business, Innovation, and Employment introduced a new initiative to improve the transparency of beneficial ownership of companies and limited partnerships. After asking for feedback, they released a Cabinet paper in March 2022, anticipating that companies and limited partnerships will be expected to provide key identifying information about beneficial owners, focusing on people with “significant control.” Additionally, directors, partners, and beneficial owners may be required to apply for a unique identification number for ease of due diligence and detection of potentially unlawful activities.

These changes are expected to be contained in a new Corporate Governance Reform Bill. The government anticipated releasing a draft in late 2022 or early 2023 for public consultation, but has yet to do so.