NZX releases guidance on ESG disclosure
NZX has released guidance on environmental, social and governance (ESG) disclosure reporting. The guidance note can be found here.
As is highlighted in the guidance, there is an increasing focus on ESG reporting by companies globally. The NZX guidance is therefore timely as New Zealand issuers turn their minds to whether and how they can best report on ESG factors.
Investors are also showing increased interest in businesses' commitment to sustainable development. Notably, in Australia, this "investor interest" recently culminated in two shareholders issuing proceedings against Commonwealth Bank of Australia for alleged failures to report on climate change risks in its 2016 Annual Report. While that litigation has now been withdrawn, it highlights the developing interest in this area.
The NZX guidance follows the recently introduced NZX Corporate Governance Code (Code). In particular, Recommendation 4.3 of the Code specifies that issuers should provide non-financial disclosure at least annually, including regarding exposure to environmental, economic and social sustainability risks. This guidance will be a useful tool to help issuers comply with Recommendation 4.3 (or, in accordance with the overarching reporting regime under the Code, explain why they have not complied).
What is ESG?
ESG (also known as non-financial reporting or corporate social responsibility) is made up of three main elements that help businesses measure their sustainability:
- environmental criteria, such as climate change and pollution;
- social criteria, such as labour standards and health and safety; and
- governance criteria, such as anti-corruption and risk management.
There is no definitive list of ESG issues, which can be sector specific and change over time.
NZX notes that it does not prefer any single framework for reporting, but has short-listed three that are commonly used in Australia and New Zealand:
NZX recommends that issuers who do not find the above frameworks viable should still consider providing ESG information, accompanied by an explanation as to why these frameworks are inappropriate for that issuer.
As noted above, reporting should be at least annually and the guidance note provides that this can be via a link on the issuer's website or a standalone report, which should also make up part of the issuer's Annual Report.
The guidance note also includes information on "green bonds", which it defines as a bond where proceeds are used to finance or refinance climate-friendly or environmental projects. Green bonds have grown in popularity in recent years. Development of the green bond market in New Zealand is an increasing focus for NZX, as also reflected in their recent NZX Listing Rule Review discussion paper.
The guidance note sets out and summarises the two most prominent standards that issuers can comply with when issuing a green bond. These are the Green Bond Principles and the Climate Bonds Standard.
NZX suggests that issuers of green bonds could consider disclosing information about internal assurance processes or consider independent external assurance to provide investors with a greater degree of comfort over the integrity of information disclosed.