Analysis: Can New Zealand be world leading on disclosure?
A group of businesses wants to see New Zealand take the lead in the way we report and share our financial, social and environmental plans and performance. The NZX’s review of its corporate governance reporting requirements within the NZX Main Board Listing Rules is an important step along that path.
There are some outstanding examples and a growing number of New Zealand businesses reporting on non-financial matters and how they add value to business. But overall we still lag well behind many of our international peers, both in our rates of non-financial disclosure and the rules and requirements for reporting.
Every business can get value from having a better understanding of non-financial risks and opportunities. But the question has to be asked: why has New Zealand been slower to move towards good, balanced disclosure of our economic, social, environmental and governance performance?
Good non-financial disclosure sets out how a company manages its material risks like absenteeism, diversity, environmental compliance or health and safety. It also helps identify long-term opportunities so that all stakeholders – including investors – can build a clearer picture of how it will manage and improve performance over time.
A 2014 Smith School of Enterprise and the Environment and Arabesque Asset Management study suggests businesses that adopt sustainability policies and practices significantly outperform their counterparts in the long term, both in terms of stock price performance and operational performance. They are more likely to meet their investors, employees and consumers' expectations. And they generally have better access t and a lower cost of capital.
However, the KPMG 2013 Survey of Corporate Responsibility Reporting New Zealand showed only 17% of large New Zealand businesses disclose their social and environmental performance compared to 71% of large businesses across the Asia-Pacific.
Up until now, our poor rates of disclosure are because businesses haven’t been able to see a clear link to business value. Also, we haven’t faced the same level of external pressure as elsewhere – requirements from regulators, investors or customers and through supply chains.
That looks set to change. New Zealand has an increasingly vocal set of investors and directors who understand the value of good, non-financial disclosure. Many businesses now think there is also an important role for the NZX to play in setting a standard for listed businesses.
International experience shows that financial markets have helped shift the standard for reporting globally. Stock exchanges in Rio de Janeiro, Taipei, Shanghai and Johannesburg all require mandatory reporting of sustainability performance. In the UK, all companies report on their greenhouse gas emissions as part of their annual directors’ report. The ASX in Australia introduced mandatory disclosure of non-financial risks in 2014.
Elsewhere, investors know that improved non-financial performance and disclosure leads to better long-term financial results. And they are starting to shift the way they invest in New Zealand.
Research by the Responsible Investment Association Australasia (RIAA) found the sector grew 10% in 2014 to reach $63.5 billion for assets under management by December 31, 2014. The increase was driven by investors wanting a better option after a number of examples of poor environmental, social, governance and ethical issues in some businesses affected value for shareholders.
The New Zealand Corporate Governance Forum whose members manage more than 15% of the total New Zealand equity market recently released best practice guidelines for corporate governance urging the boards of listed companies to report on non-financial considerations specific to their company so shareholders can understand how a company manages those issues.
We already have some outstanding examples of non-financial disclosure in New Zealand. New Zealand Post and Sanford are at the vanguard of reporting. Both use the internationally recognised ‘Integrated Reporting’ framework. Leading businesses that regularly disclose their non-financial performance, such as Z Energy – which recently lodged a submission to the NZX – are being more vocal about the required changes.
We think it will take all the levers – better disclosure of supply chains, a stronger focus from investors, policy-makers, legislators and financial markets – to increase quality non-financial disclosure.
But we think it’s key to keeping businesses fit for purpose in the future. Better sustainability performance and disclosure support businesses' goals to earn and maintain a social licence to operate, which is vital in today’s increasingly interconnected world.
That’s why the Sustainable Business Council and its members welcome the NZX opening the conversation on what role it might play in supporting New Zealand to move ahead on non-financial disclosure in the future.
Penny Nelson is the executive director of the Sustainable Business Council. The Sustainable Business Council has 85 members, accounting for 70% of the NZX top 10 by market capitalisation.
The Sustainable Business Council has recently submitted on NZX’s review of its corporate governance reporting requirements.