Our Response to Proposed Rollbacks in Corporate Climate Accountability
In response to corporate lobbying, two pillars of New Zealand’s climate corporate accountability framework are now at risk of being dismantled.
The Government is currently considering two significant changes that will affect corporate governance, transparency, and accountability concerning climate change:
Removing directors’ personal liability under the mandatory climate-related disclosures (CRD) regime in the Financial Markets Conduct Act 2013 (FMCA); and
Repealing the newly introduced s 131(5) of the Companies Act 1993, which explicitly provides that company directors may consider environmental, social, and governance matters when considering the “best interests of a company”.
Lawyers for Climate Action NZ has written to the Ministers of Commerce and Consumer Affairs and Climate Change, expressing our concerns and urging the Government to keep these important climate corporate accountability provisions in tact.
Directors’ Liability and Mandatory Climate-Related Disclosures
About climate-related disclosures
In 2021, New Zealand became the first country in the world to introduce mandatory climate-related disclosures. This regime requires large companies, known as Climate Reporting Entities (CREs), to disclose climate risks and opportunities in their annual reports. Over 200 New Zealand companies are impacted.
The goal of the CRD framework is to encourage investment in activities that align with a low-emissions, climate-resilient future. By ensuring investors have the necessary information to assess the impacts of climate change on companies’ long-term performance, the framework also helps CREs identify climate risks and opportunities and demonstrate proactive governance.
CREs are required to report against Aotearoa New Zealand Climate Standards, issued by the External Reporting Board. Under NZ Climate Standard 1, CREs are required to disclose and describe:
Current impacts: Effects the organisation has already experienced due to climate change in the current reporting period.
Climate-related risks and opportunities over the short, medium and long term, using three scenarios: a 1.5℃ scenario, a 3℃ scenario, and a third climate-related scenario of its choice.
Anticipated impacts: Risks and opportunities that could affect the organisation's future financial performance, position, and cash flows.
Transition plans: How the organisation will position itself for a low-emissions, climate-resilient future.
Governance structures for overseeing climate-related risks and opportunities, and the role played by management in assessing and managing those risks and opportunities;
Greenhouse gas emissions, intensity, and reduction targets, with third-party assurance on emissions data in the future.
Directors’ Liability
Directors play a critical role in providing high-level strategic oversight of a CRE’s climate-related disclosures. Directors are tasked with considering climate-related disclosures in the wider context of their entity’s strategy and operations, in the short, medium and long-term. Directors are responsible for dating and signing climate statements and must provide explanations to assurance practitioners regarding greenhouse gas emissions.
Currently, directors face potential civil or criminal liability for failing to comply with climate standards—such as knowingly failing to adhere to an applicable standard or failing to maintain accurate records
Rolling back directors’ liability
Directors’ liability plays an important role in incentivising compliance with the CRD regime. It motivates company directors to approach CRD reporting with care and accuracy.
However, the Government is considering rolling back directors’ liability. This would undermine these incentives - weakening the effectiveness and intended functioning of the CRD framework.
Existing general director duties operate in concert with related fair dealing provisions under the FMCA, and already likely expose directors to the risk profile that the Government is considering winding back. Therefore, removing an express directors’ liability provision:
Fails to address the alleged ‘chilling effect’: Removing liability is unlikely to address concerns that directors may be deterred from their roles, or that companies are hesitant to list on the NZX.
Obscures the extent of director liability. As the climate crisis intensifies, it is likely that directors’ liability will be tested judicially, as has already been the case in other jurisdictions in relation to directors’ duties. There is merit in making this risk clear, having the risk defined by parliament rather than courts, and supporting directors with education (such as regarding how to best manage this risk).
Will harm New Zealand’s reputation on the global stage. As the first country to implement mandatory climate disclosures, New Zealand is seen as a global leader in this space. We will rightly criticised for having cut and run in the first year of directors being required to phase-shift from rhetoric to substantive action in response to corporate lobbying.
Sends the wrong message to company directors: By removing liability, the Government is signalling that careful consideration of climate risks is not as significant a priority as first indicated. a priority. This could have significant opportunity costs for the New Zealand economy, as it may prompt companies to scale back on climate-focused initiatives that would otherwise strengthen our long-term economic position and performance and may discourage international investment in New Zealand companies.
Directors’ Duties and ESG
The Government has also proposed removing a new provision in the Companies Act (s 131(5)), introduced in August 2023. This section explicitly allows directors to take “ environmental, social and governance matters” into consideration when acting in the best interests of the company.
Repealing s 131(5) would be unnecessary and counterproductive, winding back an already soft provision for no clear reason.
The section was introduced following a Member’s Bill sponsored by Hon. Duncan Webb in 2021. It was intended as an "avoidance of doubt" provision. It imposed no new burdens or liabilities on directors, but simply clarified that they may consider ESG matters. The provision maintains directors’ broad discretion to determine what constitutes the best interests of their company.
At the time, Lawyers for Climate Action encouraged the Government to go further, and thought it fell short of its potential to help encourage the material change in corporate behaviour needed to address the climate emergency. Nonetheless, its introduction was a step forward.
The Government’s rationale for repealing s 131(5) is that it is redundant because directors are already required to take ESG factors into account. But this apparent redundancy is a weak justification for removing s 131(5).
Its inclusion helps dispel any lingering misconceptions about the scope of directors’ duties. It sends an important signal to directors that long-term interests —beyond profit maximisation— should be central to decision-making. It also explicitly encourages directors to focus their minds on long-term ESG questions, encouraging them to:
understand the importance of educating themselves on wider, non-financial issues that are relevant to their business - such as climate change;
make decisions that will better support our ability to meet the Paris Agreement goal of limiting temperature rise to 1.5°C and well below 2°C;
consider the wider implications of their decisions, including those for future generations.
Repealing s 131(5) would send a clear and concerning signal to New Zealand directors about the degree of importance the Government considers should be given to ESG factors in corporate decision-making.
But it is also at odds with the Government's climate strategy. At the same time Minister Bayly is set on winding back s 131(5), the Minister for Climate Change is telling New Zealand businesses that they have to pull their weight in the transition to a low-emissions economy. These competing signals are difficult to square.
As the world looks dangerously close to surpassing 1.5°C warming, now is not the time to wind back these important provisions aimed at increasing corporate accountability, strengthening decision-making, and supporting New Zealand businesses to take advantage of international capital.