ESG 2023 round-up and trends to watch

ESG 2023 round-up and trends to watch

With the dust settling on coalition negotiations, new Ministers sworn in, Parliament resumed and the National-led Government's 100-day plan in motion, now is a perfect time to reflect on what has changed and what stays the same in Environmental, Social and Governance (ESG) law and policy as we approach the start of 024.

With that in mind, we have updated our November insight "ESG 2023 round-up and trends to watch" to reflect key developments in the last month, including policy changes signalled by the new Government, developments from the COP28 climate summit and the Climate Change Commission's advice on the second emissions reduction plan.

There is a lot happening in this space, and the Russell McVeagh team is here to help. Get in touch if you would like to discuss further.

New Government signals significant changes in approach to climate change issues

Much has changed in the first few weeks of the new Government, with Coalition deals formed and the National-led Government's 100 Day plan being progressed under urgency in the House. While the new Government has retained a high-level commitment to Net Zero, the new Government's 100-day plan includes a number of changes of direction on climate policy, including commitments to:

• Begin efforts to double renewable energy production, including by working to issue a National Policy Statement for Renewable Electricity Generation.

• Repeal the twin resource management reform Acts, the Natural and Bult Environment 2023 and Spatial Planning 2023, and introduce a fast-track consenting regime. This repeal is set to be progressed through the House this week.

• Repeal the ban on offshore oil and gas exploration.

• Cancel fuel tax hikes.

• Stop work on the Lake Onslow pumped hydro scheme.

• Withdraw central government funding from Let's Get Wellington Moving.

• Repeal the Clean Car Discount scheme by 31 December 2023.

• Stop central government work on the Auckland Light Rail project.

Other changes signalled (including in Coalition agreements) include changes relating to the New Zealand Emissions Trading Scheme (ETS) (addressed further below) and a commitment to review the methane targets in 2024 for consistency with "no additional warming from agricultural methane emissions".

For a comprehensive overview of the new Government's policy priorities in this Parliamentary term through to 2026, see our Watching Brief matrices available here.

Update on international sustainability reporting landscape

Climate-related disclosures (CRDs) are continuing to gather steam in New Zealand and overseas, reflecting both market pressure to voluntarily report and the introduction of mandatory regimes in several jurisdictions. In New Zealand, organisations are hurtling towards the due date for the first round of reports under the mandatory CRDs regime (April 2024 for organisations with a 31 December balance date).^[1] Significant progress has been made throughout 2023 on organisational readiness to report, with key developments including the release by several sector groups of reference scenarios for use in undertaking scenario analysis and the release of various pieces of guidance by both the External Reporting Board (XRB) and the Financial Markets Authority (FMA) (see our earlier update here).

Other particularly significant (and ongoing) developments in the reporting landscape include:

• The release of the International Sustainability Standards Board's (ISSB) inaugural standards IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (see the XRB's comparison document against the New Zealand Climate Standards here). While the XRB has not adopted the ISSB standards for New Zealand, it is due to commence a post-implementation review of the Aotearoa New Zealand Climate Standards in December 2025, which will include considering alignment with international standards.

• In Australia, the Government consulted on proposals for a mandatory CRDs regime, and the Australian Accounting Standards Board is now consulting on three draft reporting standards. That regime is proposed to commence for certain large organisations from 1 July 2024, with other organisations brought into scope over time, however, this timing is dependent on the necessary legislation being passed in time.

• In Europe, the Corporate Sustainability Reporting Directive (CSRD) became binding in January, and the European Commission has subsequently developed the European Sustainability Reporting Standards (ESRS). In-scope organisations are required to publish sustainability statements in line with ESRS from the 2024 financial year.

• In the UK, the Transition Plan Taskforce (TPT) published its final disclosure framework to support organisations to report on their transition plans either voluntarily or in accordance with relevant standards (eg ISSB and ESRS). The UK is also developing UK Sustainability Disclosure Standards based on the ISSB standards, which are due to be introduced from 2024.

While international alignment was a key focus for the XRB in developing the Aotearoa New Zealand Climate Standards, differences with overseas regimes remain and organisations operating in international markets should pay careful attention to those differences as reporting continues to evolve in 2024.

A full work programme for the Climate Change Commission

Following consultation earlier in the year, the Climate Change Commission (Commission) released its 2023 Advice on the direction of policy for the Government's second emissions reduction plan on 12 December 2023 (available here).

Many of the recommendations remain similar to those released as part of its draft advice (see our earlier update here), although some new or revised recommendations did emerge from consultation. The changes include recommendations that aim to:

• align regulatory outcomes between all levels of government and across all sectors of the economy;

• increase the role of Te Tiriti o Waitangi throughout emissions reduction measures;

• improve public and private investment, alongside more effective targeted investment to achieve 2050 emissions targets;

• strengthen product stewardship responsibilities; and

• address construction material wood waste to reduce emissions from construction and demolition.

It is worth noting that the Commission's advice was developed on the basis of the previous Government's policy-platform and long-term direction. How it will be received by the new Government as it prepares to release New Zealand's second emissions reduction plan by the end of 2024 remains to be seen, although if the Government continues with implementing its current climate plans there will be a number of areas where it departs from the Commission's advice (for example, in relation to agricultural emissions pricing and reforming the ETS).

Outside of that advice, the Commission has a full work programme for 2024, with three particularly important pieces of work due by the end of 2024:

• The inaugural independent review of the split-gas emissions reduction target in the Climate Change Response Act 2002 (which includes both the biogenic methane target, and the "net zero" target for other gases), following which the Commission will advise the Government as to whether any changes should be made to the target (eg what the target is, what gases it applies to, when it has to be met by, and how the target must be met).

• A report on whether emissions from international shipping and aviation should be included in the 2050 target.

• Advice to the Government in relation to the fourth emissions budget (for the years of 2036 to 2040).

In addition, the Commission will be advising in 2024 on emissions trading scheme (ETS) unit limit and price control settings for 2025-2029 (by March 2024), preparing progress reports on emissions reduction goals (by mid-2024), the National Adaptation Plan (by August 2024), and preparing advice to inform the second Nationally Determined Contribution (by December 2024).

Modern slavery reform

In July 2023, the outgoing Labour Government announced plans to establish a public register to require transparency over organisations' supply chains (see our earlier update on this here). If this proposal eventuates, organisations with more than $20m in revenue will be required to report on their actions to address the risk of exploitation in their operations and supply chains.

Given the National party's previous support for the introduction of modern slavery legislation and commitments made by New Zealand in international agreements to take steps to prevent modern slavery, we expect the proposals will continue to progress in some form under the National-led Government. The exact timing of any potential action is yet to be determined, but there is a potential for legislation to be introduced in the first half of 2024.

Continued focus on best-practice governance of ESG issues

Governance of ESG-related matters was a key focus for boards in 2023, with the climate-related disclosures regime requiring disclosure of climate-related governance, a revised NZX Corporate Governance Code and ESG Guidance Note released by NZX, and amendments to the Companies Act to directors' duties in relation to ESG matters coming into force. Directors' duties are also increasingly being understood in light of both climate- and nature-related issues.

We expect this focus to continue next year, including as companies continue to develop climate change transition plans.

Nature-related issues are likely to continue to receive attention in 2024 following significant developments this year (see our update here).

What next for resource management reform?

As expected, the National-led Government is prioritising a repeal of the Natural and Built Environment Act 2023 and the Spatial Planning Act 2023 - a key pillar of the outgoing Labour Government's response to climate change in 2023. The Government has announced an intention to introduce the Natural and Built Environment and Spatial Planning Repeal Bill and progress it under urgency this week (being the final week of Parliament for 2023).

To begin with, at least, the Resource Management Act 1991 (RMA) will be reinstated. From there, the National-led Government has signalled an intention to further reform the RMA, including by:

• introducing a fast-track consenting regime within the first 100-days;

• removing, reducing, or expediting consenting requirements for EV charging points, non-hydro renewable energy projects, and projects of regional and national significance;

• extending minimum consent durations for renewables to 35 years; and

• reforming the Public Works Act and Reserves Act to better support the RMA.

The Labour Government had also proposed a Climate Adaptation Act to address issues related to managed retreat (the strategic relocation of assets and infrastructure away from intolerable risk). While National has previously indicated support for a managed-retreat law, ACT has not (and New Zealand First's position remains unclear). The future of any potential legislation in this area accordingly remains uncertain.

Future of the Emissions Trading Scheme to be resolved

The exact future of the ETS is to be determined, but based on what we know to date the approach to emissions pricing is likely to differ substantially under the new Government than under its predecessor. Specifically:

• funding from the Climate Emergency Response Fund, which currently pays for a number of emissions reduction initiatives, is likely be re-routed into tax relief, and the Government Investment in Decarbonising Industry Fund scrapped;

• the National-led Government has confirmed its intentions to stop the current review of the ETS and largely maintain the status quo - so proposals advanced by the outgoing Labour Government to improve incentives for gross emissions reduction and potentially restrict the ability for exotic forests to receive emissions units (see our update here) are unlikely to progress in their current form;

• agricultural emissions will likely remain un-priced for now, with the National Party's 100-point Fiscal Plan (forming a core part of the National-led Government's policy platform) committing to implementing a pricing system by 2030; and

• the National-led government has signalled an intention to ban farm-to-forest conversions by overseas buyers for the purposes of carbon farming.

In August 2023, the Labour Government released a cabinet paper recording agreement to improve the market governance of the ETS, including by establishing oversight of the ETS market. It remains to be seen how these proposals will be progressed under a new Government.

Competition law remains front and centre in ESG initiatives

On 30 November 2023, the Commerce Commission published its final Collaboration and Sustainability Guidelines, which aim to assist businesses to understand when collaboration with competitors for sustainability objectives may raise competition law concerns. We expect to see competition law remain a key consideration for organisations looking to advance systems-level proposals in 2024.

Government decision-making in the spotlight

Recent history has shown that government decision-making is likely to be subject to significant scrutiny in the climate space. For example, in 2023 a judicial review challenge of the Labour Government's decision-making in relation to ETS pricing caused the Government to change its approach (see our update here). This scrutiny is likely to continue in 2024, particularly if the incoming Government implements policies that environmental groups consider are insufficient to meet New Zealand's international commitments.

ESG litigation continuing to trend upwards

Climate change continues to be a focus of litigation in New Zealand. Following a hearing in August 2022, a decision from the Supreme Court is awaited as to whether Smith v Fonterra (the first tort-based climate change case in New Zealand) can proceed to trial. If the matter proceeds, this could have ramifications beyond the parties to the proceedings, with the door left open for similar claims to be brought against other emitters.

2024 will be another significant year for climate and ESG-related litigation. For example:

• An appeal against the High Court's decision of Lawyers for Climate Action New Zealand Incorporated v the Climate Change Commission, which relates to the approach adopted by the Climate Change Commission in its May 2021 advice to the Government, is being heard this month, with the decision in that case unlikely to be released this year.

• The Court of Appeal has recently heard an appeal on the question of whether a second Smith litigation can proceed to trial. This time, the case is brought against the New Zealand Government and alleges that the Government's response to climate change has breached human rights, including under Te Tiriti o Waitangi. Again, a judgment is unlikely to be delivered this year.

• Following trends overseas, a significant greenwashing claim has been lodged in the New Zealand courts, raising allegations in relation to climate change.^[2] Consumer NZ, the Environmental Law Initiative, and Lawyers for Climate Action New Zealand Incorporated are together seeking declarations that Z Energy has breached the Fair Trading Act by misleading New Zealanders with its public claims on emission reduction and climate change mitigation. The full statement of claim is available here.

• Looking abroad, litigation in relation to both climate change and wider ESG issues such as biodiversity is continuing to trend upwards. In addition to the landmark regulatory and private law claims relating to greenwashing mentioned above, nature issues are also receiving increased attention, including a claim lodged earlier this month against ANZ in Australia in relation to its management of both climate and biodiversity-related risks.³ The UK Court of Appeal has, however, declined to allow a landmark case to proceed against Shell's directors for breaches of directors' duties in relation to climate change, on the basis that the claim would have no reasonable prospect of success (see our earlier update on a preliminary High Court decision here).

Sustainable finance - taxonomies and market trends

There is an increasing trend internationally towards the development of sustainable finance taxonomies, which are tools designed to define when economic activities are environmentally sustainable and mitigate against greenwashing. The European Union was an early adopter, with its EU Taxonomy Regulation having already come into force. Other jurisdictions are looking to follow suit.

In Aotearoa, the Labour Government included a recommended action in the National Adaptation Plan in 2022 to develop definitional tools for green finance, and it subsequently committed to trans-Tasman alignment on taxonomies during the Climate-Finance Ministers' dialogue in June 2023. Throughout this year, Ministry for the Environment has been collaborating with the sustainable finance industry (via the Centre for Sustainable Finance) on the initial stages of a taxonomy, however it remains to be seen what any resulting regulatory model might look like, if one emerges.

More generally, the market for sustainable finance products in New Zealand continues to grow, reflecting incentives for both financial institutions and borrowers to look for ways to drive decarbonisation and other sustainability goals through their value chains. 2023 has seen a number of developments, including the launch by LGFA (one of New Zealand's largest borrowers) of an innovative Sustainable Financing Bond Framework and the issuance of $1.6bn of sustainable financing bonds.

COP28 and the Global Stocktake

The 28^th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP28) was held in Dubai from 30 November - 12 December 2023. It was set against the backdrop of the first "global stocktake", which concluded at COP28 and reconfirmed that the globe is not on track to limit warming to 1.5°C.

In a COP marred by controversy, the most significant outcome was the emergence of a deal between the 198 attending parties, which included agreement to "transition away from fossil fuels". While this agreement is being hailed by some as a significant step forward, others consider it a failure that the agreement did not include the "phase out fossil fuels" language favoured by some parties (including New Zealand). Progress was also made on matters relating to adaptation and "loss and damage", and 130 countries signed a voluntary pledge to triple renewable energy by 2030.

Building Act changes up in the air

During 2022 and 2023, the Labour Government released policy decisions relating to proposed changes to the Building Act 2004 in relation to sustainability. The proposals put forward by the previous Government include:

• making it mandatory for new and existing public, industrial and large-scale residential buildings to hold energy performance ratings;

• requiring those intending to undertake certain building or demolition work to have a waste minimisation plan and principles; and

• amending the purpose of the Building Act to clarify that climate change is a key consideration.

The future of these proposals under the new Government is unclear.