Effective April 1, 2023, the New Zealand Exchange (NZX) has updated the NZX Corporate Governance Code (Code) and the NZX ESG Guidance Note (ESG Note). There are eight principles that underlie the Code: (1) ethical standards; (2) board composition and performance; (3) board committees; (4) reporting and disclosure; (5) remuneration; (6) risk management; (7) auditors; and (8) shareholder rights and relations. The Code uses a “comply or explain” approach, encouraging issuers to adopt the Code, but requiring them to explain why not if they choose not to. The ESG Note is not a separate disclosure requirement or expectation, but rather, “outlines good ESG practices, and accepted frameworks for issuers to consider adopting when making their ESG disclosures” under the Code. Issuers with financial years that start on or after April 1, 2023 must use the updated version of the Code, while those with financial years that started prior to April 1, 2023 can continue to report for this year using the June 17, 2022 version of the Code or voluntarily use the updated Code, so long as they clarify which version they are using.
One of the biggest changes in the updated Code involves Principle 4 (Reporting & Disclosure), with the addition of a new recommendation 4.4, which requires an issuer to provide non-financial ESG disclosure at least annually. Recognizing that it is impossible to provide an exhaustive list of ESG issues a company should consider, the ESG Note draws from the FTSE Russell ratings model and the United Nations Principles for Responsible Investment guidance to provide a non-exhaustive list of ESG reporting considerations. These include biodiversity, water security, land degradation, labor standards, safe development of medicines, tax transparency, and succession planning. The Code now encourages issuers to disclose “the process by which an issuer has ensured that its non-financial reporting disclosures are materially accurate,” and provide the disclosures in an easily accessible and understandable format.
The Code addresses “Climate-related Disclosure,” noting that: “NZX is a member of the Sustainable Stock Exchanges Initiative, and acknowledges the importance of disclosures relating to an issuer’s climate change risks and opportunities” and “NZX considers that these disclosures will be informative for investors wishing to understand an issuer’s environmental practices, risks and opportunities. NZX’s ESG Guidance Note provides further guidance in relation to making climate-related disclosures.”
Some of the other key changes to the Code and ESG Note are summarized below.
Taking The Temperature: New Zealand has been on the forefront of ESG and climate-related reporting. As explained in the ESG Note, issuers on the NZX must navigate requirements imposed by the Sustainable Stock Exchange, the UN Sustainable Development Goals, the Paris Agreement, the Climate Change Response (Zero Carbon) Amendment Act of 2019, the United Nations Universal Declaration on Human Rights, as well as the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021. Updates to the Code and the guidance provided in the ESG Note help companies model their corporate governance and disclosure practices to the various developing ESG reporting standards.
As we have previously discussed, in our view it is not possible to separate climate or other ESG issues from the obligations owed by companies’ boards and management. Other regulators and organizations are similarly promoting the integration of ESG-related and corporate governance issues. The Task Force on Climate-Related Financial Disclosure’s (“TCFD”) governance pillar emphasizes the importance of board and management focus on climate-related issues. Earlier this year, the FCA published its discussion paper on sustainability-related governance, which considered whether regulated firms (banks, insurers, and asset managers) should be required to incorporate sustainability into their governance strategies. Last fall, the Institutional Shareholder Services (ISS) reported on the “different changes taking place in the corporate governance landscape in light of increasing awareness of sustainability issues,” including a 60% increase of S&P 500 companies that had at least one director with ESG skills, and highlighted “the importance of traditional corporate governance dimensions such as shareholder rights and board attributes to address [environmental and social] issues.” Similarly, we have also discussed the 2023 voting guidelines published by proxy advisory firms Glass Lewis and ISS, which included enhanced board accountability for climate-related issues and oversight of environmental and social issues. Boards looking to adopt or revise governance policies to better integrate ESG-related issues should look to these recommendations and other reports addressing this important issue.