NZ listed companies must respond to the global investor demand for better environmental, social and governance (ESG) reporting, according to NZX head of policy, Hamish Macdonald.
Macdonald said NZ corporates need to come “up to speed” in ESG disclosure, which is increasingly seen as standard practice in other jurisdictions.
“A few of NZ’s largest companies are reporting ESG issues really well,” he said, name-checking a handful such as Z Energy, Air NZ, Sanford and Tourism Holdings. In general, though, the NZ market, with its long tail of smaller companies, has not to date engaged with ESG reporting.
However, offshore investors, who have a significant presence in the NZ stock market, now expected ESG reporting as a matter of course, Macdonald said.
He said local institutions, including those supporting the NZ Corporate Governance Forum, were also demanding better ESG data from NZX companies.
Against the backdrop of increasing investor demand and a recommendation in its recently-released corporate governance code, the NZX last week published new ESG guidelines for member firms.
“All over the world, companies and entities are coming to report on ESG and responsible investment,” the NZX guide says. “These trends reflect the need to shift to a low carbon economy, increasing business vulnerability to the effects of climate change and other environmental and social factors, a generational changeover and institutional forces.”
John Berry, Pathfinder director, said it was “surprising” that NZ corporates had to play catch-up on ESG reporting given the generally progressive environmental and social credentials of the country.
However, Berry said the new NZX guide provided some useful details on the scope of ESG factors consumers and investors were looking for.
“It’s helping NZ companies make better decisions by taking account of non-financial risks – that can turn into financial risks over the long term,” he said. “It also puts the long-term issues such as climate change on the corporate agenda.”
Pathfinder recently rebranded under the ‘invest responsibly’ tag-line to focus on “socially responsible investment in global asset classes”.
Macdonald said the ESG guidelines were not “black letter law” but intended as a roadmap for those NZX firms looking to enter the ESG age.
As well as highlighting global demand the NZX guide shows how local companies could include ESG reporting and “identifies established global frameworks”, he said.
“We’re conscious that our market has a large number of small companies and ESG may be the furthest thing from their minds,” Macdonald said. “But we’re saying that ESG reporting is seen as valuable by investors and if you choose to respond here’s some resources to help you.”
He said the NZX recommendations also take a broader view of ESG reporting than across the Tasman where the focus is more on containing risk.
“The ASX corporate governance principles describe ESG reporting as a risk management factor,” Macdonald said. “But we think NZ companies can use ESG reporting as a positive part of their story – it’s a marketing opportunity not just a risk management exercise.”
The NZX guidelines further lay out how NZ issuers should structure so-called ‘green bonds’ – or fixed income securities “where proceeds are used to finance or refinance climate-friendly or environmental projects”.
Macdonald said NZ was well-placed to participate in the burgeoning global green bond market that has grown from scratch in 2008 to over US$100 billion of issued securities in 2017.
“NZ should have a particular advantage over other markets,” he said. “For example, our energy companies generate a high proportion of electricity through renewable sources – there’s an opportunity there to tap into a huge demand offshore.”
While the NZ market has seen a couple of green bond issues – such as a recent Contact offer – Macdonald said there was scope for many others to broaden their investor base in a similar fashion.
“And over time we expect there should be a pricing premium [for green bonds],” he said.