New Zealand ESG newsletter - February 2024

Supreme Court allows novel climate change claim to proceed

The Supreme Court has granted the climate change spokesperson for the Iwi Chairs Forum, Mike Smith, the right to sue some of New Zealand’s top greenhouse gas emitters for their contributions to climate change.

In Smith v Fonterra, Mr Smith claims his interests in Māori customary land and way of life are at risk from the effects of climate change. Mr Smith has argued that the companies, collectively responsible for up to a third of all New Zealand’s greenhouse gas emissions, owe a general duty to cease their activities. His claim asks the Court to make a declaration that the companies have individually and/or collectively breached a duty owed to him. This is a novel case, as no such general duty currently exists. The claim also includes causes of action in public nuisance and negligence.

The Court of Appeal struck out Mr Smith’s claim and deemed that the complex issues of climate change were matters for national and international politics. The Supreme Court has now reversed that decision, and the claim will proceed to a substantive hearing. While the matter is still to be fully decided, the Court has paved the way for the highest level of the judiciary to consider the existence of a brand-new climate change tort. This is a strong message from the Supreme Court that both tikanga and environmental responsibility are matters to be taken seriously. The Court declined to strike out Mr Smith’s claim in public nuisance, noting that the tort needed to be considered in a 21st century context where climate change presents an ‘all-embracing’ issue.

Shane Jones from NZ First has criticised the recent Supreme Court decision as ‘undemocratic’ and stated that such matters should be dealt with by the elected representatives rather than unelected judges.

For further discussion of Smith v Fonterra read our Insight.

“Local Water Done Well” – the future of three waters?

Earlier this month, the Government passed under urgency a bill to repeal Labour’s Three Waters legislation.

The Water Services Acts Repeal Bill, which was promised as part of the coalition’s 100-day plan, repeals the Water Services Entities Act 2022, Water Services Legislation Act 2023, and Water Services Economic Efficiency and Consumer Protection Act 2023. Other water legislation (the Water Services Act 2021 and Taumata Arowai–the Water Services Regulator Act 2020) remains in place for the time-being.

The Government will now set about implementing its new plan, branded ‘Local Water Done Well’ (LWDW), which will retain council ownership and control of water services, as well as the responsibility for delivery. LWDW will be implemented by progressing two bills through Parliament.

The first bill is intended to be passed by the middle of this year and will set out provisions relating to council service delivery plans and transitional economic regulation. In a nutshell, this bill will give councils the option to separate out their water services into council-controlled organisations (CCOs) if they want to. Some local councils already have CCOs set up, such as Wellington Water and Watercare in Auckland, so in these regions the future entities could be cosmetically similar but with different funding structures (including access to long term debt funding).

The second bill, to be introduced in December 2024 and passed by the middle of 2025, will provide for the long-term replacement regime. Minister Simeon Brown says this bill will set out provisions relating to long-term requirements for financial sustainability, provide for a complete economic regulation regime, and a new range of structural and financing tools, including “a new type of financially independent council-controlled organisation.” ‘Regulatory backstop powers’ will also be built into the legislation, to be used when required to ensure effective delivery of financially sustainable or safe water services.

Minister Brown also announced the establishment of a new Technical Advisory Group (TAG) to advise the Government on the implementation of the new legislation. “The TAG will be focussed on providing advice and assurance on policy and legislative settings that will enable local councils to appropriately recover costs and access the long-term debt needed to fund the required investment in water infrastructure”, Minister Brown says.

Opposition to LWDW have questioned whether it will achieve true ‘balance sheet separation’ and whether there is a risk of rate hikes for ratepayers as central government is not intending to provide funding or underwrite any new borrowing.??

The legislation required for LWDW is expected to be passed by mid-2025, just ahead of the local government elections in October 2025. For further discussion, read our Insight.

International obligations around climate

The Government is on track to ratify the European Union Free Tree Agreement (FTA) as the European Union Free Trade Agreement Amendment Bill seeks to align New Zealand’s legal and policy regime with obligations in the FTA. The FTA contains ambitious outcomes on climate action – New Zealand has promised to “effectively implement” our 2030 climate targets under the Paris Agreement, meaning reducing net greenhouse gas emissions to half of 2005 levels by 2030 (roughly 150 million tonnes less emissions over a decade).

New Zealand will find itself in breach of the FTA if it does not comply with its commitments under the Paris Agreement, triggering state-to-state dispute resolution. The EU could even push for compensation if New Zealand is found to “materially defeat” the object and purpose of the Paris Agreement.

The Bill comes after some reluctance from the coalition parties, with both National and NZ First being reluctant to commit to spending large sums buying climate action from overseas, while ACT raised the possibility of reneging on the pledge altogether.

Meanwhile, the Climate Change Minister has been told New Zealand is not on track to meet its 2030 climate targets. The Ministry for the Environment (MfE) briefing informed the Minister that meeting our 2030 target requires significantly greater emissions reduction than our domestic climate legislation currently requires. MfE warns that decisions need to be made about how to meet the commitment, including whether to pursue scaled up domestic action and/or progress international negotiations to invest in mitigation in other countries. Treasury has put the cost of buying credits from overseas at $500 million NZD a year between now and 2030, at the lower end. The Climate Change Commission has estimated buying credits from overseas would still be cheaper and easier than making quick changes inside New Zealand.

Decarbonising the economy is another plan of action to achieve the 2030 target. In a briefing to the Energy Minister, the Ministry of Business, Innovation and Employment (MBIE) notes the ban on oil and gas exploration (which the Government aims to repeal) has already changed the landscape for the fossil fuel industry – it urges the Minister to come up with a clear plan to both secure energy supply and cut emissions. MBIE also notes that major international markets, like the EU and US, as well as large multinationals, increasingly expect imported products to be low or zero emissions.

Data breach class actions: Manage your risk

We are now over one year on from the Medibank and Optus data breach incidents that marked an escalation in data breach action class filings across the ditch in Australia. While a data breach class action is yet to be filed in New Zealand, due to the dynamic nature of cybercrime – it is unfortunately just a matter of time. Across the five class actions filed in Australia in 2023, a common denominator is that:

• The defendant made promises and representations to consumers in privacy policies, contracts and other material about the systems and processes it had in place to comply with data handling and cyber security obligations; and
• These promises and representations made were false.

The biggest class action risk that companies need to manage is the statements they release about their own security and data handling processes. Entities that have a wide exposure to this risk are generally consumer facing and gather a large amount of sensitive data such as NZX listings, financial services and healthcare providers.

So, how can you effectively manage the risk? Proceed with extreme caution when making statements in two situations in particular; post disaster statements and historical statements.

Companies should have in place a robust incident communication plan. Statements made in immediate response to an incident are often incorrect. This is due to the fact it can take some time to uncover the nexus of the issue. Despite this, companies are pressured to notify with urgency post incident. It is necessary for companies to remain transparent; they also need to avoid making statements that they will need to take back as the situation unfolds. It is important for companies to clearly communicate the aspects of the situation that are confirmed, that remain unknown and what those impacted can expect to see happen. All statements released should be reviewed by a legal advisor before release.

Regarding historical statements, companies should maintain a statement inventory. In the aftermath of a data breach, class actions have historically led to investigations of statements made about data security broadly in the course of business. This includes all statements made on websites, marketing material, reports policies and beyond. A record of all statements provides companies with the ability to regularly review and update statements made, reducing the risk that anything slips through.

Reducing your exposure to data breach class actions is a team effort from legal advisors, governing boards and risk and compliance officers. If you require legal advice to assist with your data breach class action risk minimisation, we would love to hear from you.

WHO releases AI ethics and governance guidance for large multi-modal models

The World Health Organisation (WHO) is releasing guidance on the ethics and governance of large multi-modal models (LMMs) – a type of fast growing generative artificial intelligence (AI) technology with applications across health care.

LMMs can accept one or more type of data inputs, and generate diverse outputs not limited to the type of data inputted. LMMs are considered unique in their ability to mimic human communication and to carry out tasks they were not explicitly programmed to perform – this is attractive and has resulted in LMMs being adopted faster than any consumer application in history.

Unfortunately, LMMs are not without risk. A key one being the production of false, inaccurate, biased, or incomplete statements which if relied on could cause harm. This is especially likely if an LMM is trained on poor quality data (e.g., biased whether by race, ethnicity, sex, gender identity, or age). The guidance details broader risks to health systems, such as accessibility and affordability, and LMMs encouraging ‘automation bias’ by healthcare professionals and patients, whereby errors are overlooked that would otherwise have been identified. Further, like all forms of AI, LMMs are also vulnerable to cybersecurity risks.

Dr Jeremy Farrar, WHO Chief Scientist said, “we need transparent information and policies to manage the design, development, and use of LMMs to achieve better health outcomes and overcome persisting health inequities.” The guidance contains over 40 recommendations for governments, technology companies, and health care providers with the goal to ensure appropriate use of LMMs to promote and protect the health of populations.

Director’s right to privacy

The Companies (Address Information) Amendment Bill was introduced to Parliament, which aims to permit the removal of certain directors’ residential addresses from the publicly accessible Companies Office website.

The Bill will allow directors to substitute their residential address for an address for service. However, to be able to do so, a director will first have to make an application to the Companies Registrar, which includes a statutory declaration, stating that the publication of their home address is likely to result in physical or mental harm to themselves or someone they live with.

While the Bill represents a step in the right direction for supporting and upholding a directors’ right to privacy, the high threshold may obstruct directors from resolving their legitimate concerns for their privacy or protection. In our Insight we look at what other jurisdictions have adopted in relation to this issue and what we think may be the best approach for New Zealand to take.?

New Zealand ESG companies steadfast into 2024

Forsyth Barr’s latest ESG report identified New Zealand companies’ resilience despite backlash from the USA against environmental, governmental and social initiatives. United States’ response is not unrelated to the presidential election this year and we can expect to see this response evolve as the election draws nearer.

This year a majority of NZX listed companies and other climate reporting entities (CRE’s) will release their first climate report under the Financial Markets Conduct Act 2013. Forsyth Barr report that potential regulations on modern slavery and nature-based risks have kept New Zealand businesses on the ESG pathway. New Zealand companies are showing no indication of doubling back, maintaining their ESG focused goals despite potentially derailing pressures on supply chains, higher interest rates and dampened economic growth. More enthusiastic companies’ resilient ESG engagement is driven by changing consumer and investor preferences, whereas those more reluctant are engaging by compliance. Whatever the reasoning, New Zealand Companies remain solid in their ESG stance which is to be commended.

International commercial pressures are set to intensify in 2024, such as from international customers like Nestle and Tesco seeking an authentically green supply chain. Companies can also expect to be held to a higher account in respect of their greenhouse gases emissions requiring reductions. In late 2023, Fonterra announced a target 30% reduction of on-farm emissions by 2030. This announcement was pushed by its prominent customer Nestle who incentivised the target by showing support for a higher purchase price to support the initiative.

New Zealand companies can expect to benefit from their ESG resilience in light of these tightening international conditions, considering the direction of international leaders such as Nestle and Tesco.

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This newsletter contains contributions from: Samantha Fowler, Hermione Kemp, Breigh Lawson-Stanley, Melissa Tahere, Caleb Turnbull, and Jori Whitfield-Topp.

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