ESG 2023 round-up and trends to watch
Hot on the heels of the general election, now is a perfect time for organisations to reflect on the year and look ahead to what is in store for Environmental, Social and Governance ("ESG") matters in 2024. While some developments will depend on the outcome of negotiations to form a new Government currently underway, it is clear that some regimes (such as the climate-related disclosure regime) are here to stay.
In this update, we provide an overview of the status of key ESG-related legal and policy developments, and signal points to watch as we approach the start of 2024.
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). 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
This year, the Climate Change Commission ("Commission") consulted on draft advice to the Government in relation to New Zealand's second emissions reduction plan, with final advice due by the end of the year (see our update here).
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).
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 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 incoming National-led Government, with potential for the 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?
A key pillar of the outgoing Labour Government's response to climate change in 2023 was the reform of the resource management system, with the Natural and Built Environment Act 2023 and the Spatial Planning Act 2023 being passed in August 2023. While the parties currently negotiating to form a new Government have previously indicated that they would repeal the new legislation, it remains to be seen what the final shape of the deal on resource management reform will be.
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). The future of that legislation is now similarly uncertain.
Future of the Emissions Trading Scheme to be resolved
The future of the ETS will be a matter for the incoming Government to determine. Based on what we know to date:
funding from the Climate Emergency Response Fund, which currently pays for a number of emissions reduction initiatives, is likely to be re-routed into tax relief, and the Government Investment in Decarbonising Industry Fund will probably be scrapped;
the National Party has signalled that it does not propose any significant changes to the ETS, 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; and
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
Earlier this year, the Commerce Commission consulted on draft Collaboration and Sustainability Guidelines, which aim to assist businesses to understand when collaboration with competitors for sustainability objectives may raise competition law concerns, and the final version is scheduled to be released this month (see further discussion in our update on nature issues here). 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.
Looking abroad, litigation in relation to both climate change and wider ESG issues such as biodiversity is continuing to trend upwards. For example, this year has seen several landmark regulatory and private claims involving allegations of greenwashing. 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. 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 28th Conference of the Parties to the United Nations Framework Convention on Climate Change ("COP28") is being held in Dubai from 30 November – 12 December 2023.
A major focus will be the results of the first Global Stocktake, which is likely to reconfirm that the world is currently not on track to meet the goals of the Paris Agreement, further increasing pressure on governments and corporations to do more to bring down emissions. Other key areas of focus will include constructing a framework for the global goal on adaptation, and work on the institutional arrangements for the "loss and damage" fund agreed in principle at COP27.
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 incoming National-led Government is unclear.
 Under the Financial Markets Conduct Act 2013, climate statements are required to be lodged within four months after the balance date of the entity. For some organisations, this creates a "timing challenge" because other reporting obligations mean that they will, in practice, need to lodge their CRDs within three months. The FMA has agreed in principle to a class exemption to resolve this problem for a period of two years.
 These include regulatory action in Australia against Mercer and Vanguard in relation to alleged greenwashing in the funds context and a private claim against EnergyAustralia by activist group Australian Parents for Climate Action.