New Zealand ESG newsletter - February 2023

Welcome to the New Zealand ESG newsletter, a monthly newsletter focusing on ESG legal updates and trends from New Zealand prepared by Dentons Kensington Swan.

Climate-change related natural disasters

Cyclone Gabrielle has had devastating effects on the North Island, causing loss of life, homes, and businesses, just two weeks after a large storm caused widespread flooding in Auckland and Northland.

While Aotearoa’s variable weather patterns make it difficult for scientists to directly attribute individual storm events to climate change, there is a growing body of evidence that climate change impacts extreme weather events’ frequency and intensity. Scientists at NIWA found that climate change is likely responsible for 10-20% of the rain that flooded Auckland and Northland .

The disruption caused by the initial floods and the subsequent Cyclone, have reignited discussions about the accuracy of natural hazard data held by local councils and changes that may be required to emergency management laws in light of the Mayor’s delayed actions in response to the Auckland floods. Such information would be needed in the upcoming rebuild, to help build long term resilience , with both Minister Shaw and the Prime Minister looking at short term solutions that can be put in place to achieve this.

Following these extreme weather events, there are increased discussions of longer terms issues:

• such as how climate change can become a primary risk factor in planning, consenting and housing people
• who is best place to lead the rebuild, whether it is a national reconstruction authority and the level of involvement of the local community in the long term decisions affecting the rebuild.
• managed retreat is also back on the agenda, with Minister Shaw wanting to introduce a bill on Climate Adaption before the election . This is the third bill of the resource management reform, and it is hoped it would include provisions on processes that lead to managed retreat, including financing. The Environmental Defence Society released a working paper on managed retreat.
• forestry slash is seen as a contributing factor in the damage caused by flood waters. The Government announced a ministerial inquiry into forestry slash which will also address possible regulatory and policy settings.

RMA Reform

The first two bills in the resource management reform package, the Natural and Built Environment Bill and the Spatial Planning Bill , are currently before the Environment Select Committee. This follows what some submitters considered to be a very short consultation period .

Submitters have raised a range of concerns, including:

• several local councils have submitted that the reforms will lead to additional complexity and limit local voices , with the Minister’s proposed powers increasing the risk of central government political interference .
• Freshwater Iwi Leaders Group and Te Wai Māori Trust believe that the reform falls short and significantly impacts on the rights and interests of iwi and hapū under Te Tiriti o Waitangi.
• Infrastructure New Zealand is generally supportive of the Bills and the objectives of the reforms to enable infrastructure, but submitted that the approach does not address incentives and integration.

Hearings continue, and the Select Committee ’s report is due on 22 May 2023.

Policy reprioritisation due to Cabinet reshuffle

New Prime Minister Chris Hipkins is focusing on the ‘bread and butter’ issues like the cost of living, education, health, housing and keeping communities and businesses safe. This has led to a policy reprioritisation, with some policies set aside or delayed:

• first in line for the ‘policy purge ’ was the merger of TVNZ and RNZ into a single public media entity.
• the income insurance scheme is also not proceeding until New Zealand saw a significant improvement in economic conditions.
• the biofuel mandate, which would have required petrol and diesel to contain a percentage of biofuel made from renewable sources, was put on hold. The mandate would have increased the price of fuel and was not something Prime Minister Hipkins was prepared to do at this time . In an earlier announcement , the Prime Minister had extended the fuel tax cut and the half-price fares for public transport until 30 June 2023, a move criticised for leaving New Zealand with no policy to reduce emissions from petrol and diesel vehicles.
• the introduction of hate speech law was also postponed, pending consideration by the Law Commission . The hate speech law had been prompted by a recommendation from the Royal Commission of Inquiry into the Christchurch Mosque attacks which had identified gaps in the current laws that leave persons facing regular abuse with no legal recourse. A new Crimes Act offence was recommended, making it illegal to intentionally stir up hatred against racial or religious groups. The proposed legislation was highly contentious and political consensus was unlikely in its current form.
• Cabinet is yet to announce any changes to the Three Waters project. Hipkins recognised that the need for reform was unquestionable, in light of the recent flooding in Auckland and subsequent cyclone. Indications to date were that water infrastructure reform would continue, possibly in a reduced format. This reform is closely watched by commentators and credit agencies , keen to understand how the underlying water infrastructure works would be financed.?The National Party has recently announced that it will scrap three waters if successful in the election later this year.

Trustees' ability to make ESG investments

One question that continues to be debated, is whether trustees, who hold money or assets under a fiduciary duty, meaning they must always act in the best interests and for the benefit of the beneficiaries of the trust, can make investment decisions projected to have lower returns. This would be the case if they preferred ESG weighted investments. ?

Under the Trusts Act 2019 in New Zealand, trustees have a default duty to invest prudently. This is further complicated in the case of charitable trusts, who may be under an additional duty not to invest in assets which directly contravene the charitable purpose of the trust, leaving some charitable trustees subject to competing obligations with regard to ESG investments.

The English High Court’s decision in Sarah Butler-Sloss and Ors v The Charity Commission and Attorney General case concerned two charitable trusts who wished to adopt a new investment policy excluding any investments incompatible with the Paris Climate Agreement. The judgement found there is no obligation on trustees to exclude financially sensible investments which contravene the charitable purpose. Trustees were cautioned from making investment exclusion policy based on moral judgement. However, despite being a general-purpose charity, the court found that trustees were able to adopt more specific investment policies in line with the more general purposes. Trustees can create investment policies which exclude potentially lucrative investments so long as the decision to do so is properly and reasonably considered having taken into account all relevant factors.

Directors’ duties

Two interesting developments have arisen in the director’s duties’ space.

The Companies (Directors Duties) Amendment Bill , introduced by Dr Duncan Webb, proposes to amend section 131 of the Companies Act 1993 (duty to act in good faith and in the best interests of the company).

The Bill, as currently drafted, provides that directors may, in determining the best interests of the company, consider ‘recognised ESG factors’, such as Te Tiriti o Waitangi principles, reducing adverse environmental impacts, upholding high standards of ethical behaviour, equitable employment practices and wider community interests. Rather than being new mandatory considerations, these additional factors would be optional extras for directors in determining the best interests of the company.

Submissions on the Bill closed in January 2023, with the Economic Development, Science and Innovation Committee due to report back on the Bill on 9 May 2023.

Some submitters have questioned the Bill’s purpose given its optional nature and the fact that directors are not currently prevented from considering ESG factors (or any other factor) so long as they act in the best interests of the company. A range of submitters also criticised the Bill for unnecessarily increasing uncertainty in the law while not changing the status quo.

The Bill has generated discussion around what ‘recognised ESG principles’ are and to what standard they would be measured, as well as debate about what directors should or should not be considering when determining what the best interests of the company are. Some have even gone as far as suggesting it may be time for a review of the whole Companies Act

In a separate development in this space, our colleagues detail in an Insight the duty of directors to take into account creditors’ interests .

For further information on ESG, please visit our Global ESG Hub where you can find updates from many jurisdictions, including New Zealand or reach out to Partner Nicky McIndoe .?