Shake-up: Updated NZX rules deliver mandate for long-term value creation and robust sustainability reporting
The NZX launched its updated Corporate Governance Code for listed companies in New Zealand in May 2017, the first major update since 2003 and a big shakeup for non-financial reporting.
The New Zealand Stock Exchange (NZX) launched its new NZX Corporate Governance Code in May 2017, a code covering the corporate governance best-practices of listed companies. The new code specifies, amongst other things, the reporting of non-financial information by companies and explicitly refers to the use of the Global Reporting Initiative (GRI) Sustainability Reporting Standard.
- “Financial reporting should be balanced, clear and objective. An issuer should provide non financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks. It should explain how it plans to manage those risks and how operational or non financial targets are measured.”
- NZX Code – Recommendation 4.3
This is the first update to the code since 2003 and a significant shake up for non-financial reporting in New Zealand. It is also a move away from the NZX specifying an increasing number of required non-financial disclosures. The key underlying plank of the GRI Standard is its materiality principle and by referring to the GRI Standard, the NZX is signaling the ability of listed companies to determine which non-financial topics are material to them and to report on them according to the GRI’s other principles of report content and quality.
Existing New Zealand reporters of sustainability disclosures are already providing their shareholders and key stakeholders with useful non-financial information with which to make assessments. The process itself of transparent and accountable reporting underpins valuable engagement around important sustainability issues, which focuses attention and investment in better solutions. And, while many of the benefits of reporting arise internally for organisations through this process, it is pleasing to see the reporting output being recognized by NZX and others as a valuable outcome in its own right.
The updated Code also includes a recommendation similar to changes introduced for performance reporting by charities in 2015, an approach which recognises the benefit of accountability for achieving strategic objectives and the efficacy of business models to deliver desired results. Combined with the focus on sustainability reporting as a package of non-financial reporting, these changes are likely to raise a number of valuable questions that enable companies to reflect more deeply on overall performance, whilst enabling more considered assessment by external stakeholders.
The changes include amendments to the NZX Listing Rules which insert a ‘report or explain’ requirement for companies that choose not to follow the Code’s recommendations. Whilst placing an emphasis on companies to justify a decision not publish non-financial disclosures, it also provides for some flexibility and allows alternative governance practices that might arguably serve the intended objectives.
Finally, it’s worth noting that the Code provides a specific justification for non-financial reporting as being ‘a step towards long term value creation’. This is an important connection because the whole sustainability debate is really all about a more holistic perception of value, and ensuring our economic activities are not creating financial value at the expense of less tangible social and ecological value.
Overall, our view is that the updated NZX Code strikes a good balance. It’s a timely and important shift for corporate governance, and a strong reminder that the economy is about lifting and sustaining living standards, rather than simply creating jobs and wealth with a short term focus.