Stock markets are mainstreaming non-financial reporting. Are New Zealand companies ready?

Transcription

1 Stock markets are mainstreaming non-financial reporting Are New Zealand companies ready?

2 Contents How are investors redefining who the winners are? 3 What changes are in store for NZX listed companies? 3 NZX Corporate Governance Code Globally recognised non-financial reporting frameworks and guidelines 5 Are New Zealand companies ready to respond? 6 8 How can New Zealand businesses get the most value from non-financial reporting? 9 10

3 Introduction Investors and wider stakeholders are demanding that NZ organisations increase disclosures around environmental, social and governance aspects at an increasingly rapid rate. At the same time, governments, standards setters, and regulators are increasing the rules surrounding non-financial disclosures. How are investors redefining who the winners are? With intangible assets now contributing to the vast majority of business value 1, there is an increasing recognition of the need for greater corporate transparency and accountability around non-financial risks, impacts, and opportunities. By offering a holistic lens through which to view business performance, the disclosure of non-financial information provides companies and investors the necessary insights to manage economic uncertainties and build resilience to environmental, social and market changes. Over the last few years we have seen a steady shift in investors attitudes towards environmental, social and governance ( ESG ) aspects of a company s performance. This is evidenced in EY s third annual Global Investor Survey, which identifies the increasing level of influence and importance that ESG information plays in investment decision making. Published in April 2017, the survey of 320 global institutional investors shows that over 80 percent of investors agree that businesses have for too long ignored the risks and opportunities presented by ESG factors. 2 With the demand for consistent and comparable non-financial business disclosures set to increase over the coming decade, there are many strategic opportunities for New Zealand companies, both listed and non-listed, to position themselves ahead of these trends. What changes are in store for NZX listed companies? Following on the heels of a number of international listings agencies, in May 2017 the New Zealand Stock Exchange ( NZX ) released its updated Corporate Governance Code ( NZX code ) within the NZX Main Board Listing Rules. Coming into effect on 1 October 2017, the updated NZX Code aligns with current international best practice 3 by improving the overall transparency and consistency of disclosures produced by listed companies. The updates include a number of recommendations for NZX listed companies to disclose ESG-related issues and how they are being managed. These recommendations are to be implemented on a comply or explain why not basis. The recommendations do not specify if disclosures should be based on commentary or quantified environmental, social, and governance metrics. Will this be enough to meet investor and stakeholder demand for greater ESG disclosure? And are New Zealand businesses even ready? 1 In 2015 intangible assets contributed to 87% of S&P Market Value 2 EY 2017, Tomorrows Investment Rules 2017: is your nonfinancial performance revealing the true value of your business to investors? 3 As benchmarked by the Sustainable Stock Exchange Initiative 3

4 The NZX Corporate Governance Code 2017 The NZX code is structured under eight overarching principles which include: Code of Ethical Behavior, Board Composition & Performance, Board Committees, Reporting & Disclosure, Remuneration, Risk Management, Auditors and Shareholder Rights & Relations. The recommendations falling under each of these principles are implemented on a comply or explain basis. This means that companies are required to provide a governance statement on the extent to which it has followed the NZX Code recommendations or explain why not. Issuers are entitled not to adopt a recommendation, but must explain in sufficient detail so that the market understands why not, what alternative practice was employed, and why it is more appropriate. The recent updates to NZX Code include a number of recommendations for listed New Zealand equity issuers to be more transparent about environmental, social and governance matters. Key NZX updates relating to ESG disclosers and management: Board composition & Performance Recommendation 2.5 encourages companies to disclose a written diversity policy, which at a minimum addresses gender diversity and sets responsibilities for setting and progressing the company toward measurable diversity objectives. Recommendations 2.6 and 2.7 encourage board Directors to undertake appropriate training and for companies to establish procedures to regularly assess director, board and board committee performance, respectively. Reporting & Disclosure Recommendation 4.3 encourages issuers to provide non-financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks, how it plans to manage those risks, and how targets are measured. Recommendation 4.2 compels issuers to make its code of ethical standards, board and committee charters and financial product dealing, diversity, remuneration, continuous disclosure and other policies available on their website. In order to foster comparability for investors, the NZX has suggested that issuers report against an internationally recognised sustainability reporting framework, such as the Global Reporting Initiative ( GRI ) or Integrated Reporting. Risk management Recommendation 6.2 encourages companies to disclose its health and safety risks, performance and management. The full NZX Corporate Governance Code 2017 is available from The proposed NZX changes follow a trend of increasing non-financial reporting requirements for listed companies around the globe. Examples include: The EU Directive on Non-Financial Reporting. Mandated Integrated Reporting for companies listed on the Johannesburg Securities Exchange, and similar requirements for companies listed in São Paulo, Kuala Lumpur and Copenhagen. The ASX (Australian Stock Exchange) requirement to disclose material exposure to economic, environmental, and social sustainability risks and management approach. In addition to this, the reporting frameworks and guidelines that support robust non-financial reporting practices are also evolving. With a strong focus on materiality these frameworks and guidelines, such as GRI or integrated reporting, facilitate the delivery of much more targeted and relevant sustainability reports. This is achieved by aiding organisations to focus in on what is most significant or material to the individual business and its stakeholders. Reporting against established frameworks also adds a greater level of consistency across market disclosures. This increases the capacity for benchmarking and performance comparisons to be made both within and across industries. Major Asian stock exchanges (including China, Hong Kong, Taiwan, and more recently Singapore) implementing regulations around the disclosure of environmental, social and governance ESG information. 4 Stock markets are mainstreaming non-financial reporting

5 Globally recognised non-financial reporting frameworks and guidelines The Global Reporting Initiative (GRI) GRI is an international independent organisation that has pioneered corporate sustainability reporting since 1997 and provides the world s most commonly adopted guidance for non-financial reporting. Since its initial launch in 2000, The GRI guidelines have been through several iterations. The latest iteration, GRI Standards replaces the previous G4 guidelines. The GRI Standards rearranges the GRI G4 guidelines content into a set of modular interrelated standards that can be updated independently or added to without revising the whole set. This makes for a more responsive framework that remains up-to-date and relevant for reporting organisations. The International Integrated Reporting Council (IIRC) The IIRC was established in 2010 and released their International Intergraded Reporting Framework in December Integrated Reporting focuses on value creation across six capitals financial, manufactured, intellectual, human, social and relationship and natural. Integrated reporting is more than merging financial and non-financial reporting information it s about generating value, and enabling integrated thinking within organisations. Central to this approach is the view that today, value is increasingly shaped by intangible assets and other factors external to the organisation. Integrated Reporting enables companies to communicate how they create and plan to create value in a single report. The Sustainability Accounting Standards Board (SASB) The SASB was established at Harvard University in 2011 and is aimed at developing sustainability accounting standards which include analysis of material aspects for a range of industries. SASB integrates its standards into the U.S Securities and Exchange Commission existing filing requirements. The SASB aims to be industry specific to create comparable benchmarks across 10 sectors and over 80 industries. 5

6 Are New Zealand companies ready to respond? To understand how well positioned New Zealand companies are to meet the changing trends in non-financial reporting, EY examined the non-financial disclosures of NZX 50 listed companies. 4 The non-financial disclosures of a further 98 of New Zealand s top performing companies, both NZX listed and nonlisted, were also analysed, bringing our research sample number to a total of 148 companies. Our research took the form of a desktop analysis in which we examined publicly available annual reports, sustainability reports, corporate governance statements and company websites. 5 For the purposes of this research, the terms non-financial disclosures and sustainability reporting both refer to information provided on environmental and social impacts, risks, opportunities, and associated management approaches and organisational activities. This may include impacts on financial performance or broader economic outcomes. Our findings show that disclosure of non-financial information amongst New Zealand companies is currently a long way from the leading practice seen in other geographies. Generally speaking, apart from a selection of leading organisations, the non-financial information being disclosed in New Zealand is compliance or risk focused, and lacks a level of maturity that adds value. Key findings from our research shows that: The majority of New Zealand companies are failing to align their non-financial disclosures to what is most material to the individual business and its stakeholders. Most New Zealand companies are not including stakeholders in the non-financial reporting process. There is a limited amount of quantitative metrics and measurements being applied to the non-financial disclosures and targets of New Zealand businesses. Only a limited number of New Zealand businesses are reporting against universally established reporting frameworks or guidelines. The majority of New Zealand companies are failing to align their non-financial disclosures to what is most material to the individual business and its stakeholders. A business aspect or issue is considered material if it influences the decisions, actions and performance of an organisation or its stakeholders. To understand the degree to which New Zealand companies are communicating their most material non-financial issues, we examined the range and relevancy of non-financial topics disclosed and the methods and processes applied in determining these topics. Our findings show that the majority of New Zealand businesses are failing to focus their non-financial disclosures on key material issues. Specifically we found that only 22% of the NZX50 and 15% of our entire research sample supported their non-financial disclosures with evidence of a process to identify their core non-financial business issues. Most New Zealand companies are not including stakeholders in the non-financial reporting process. Understanding stakeholder s needs is critical to a robust materiality process and yields rich information that can inform strategic thinking. We found that only 14% of both the NZ50 and our entire data sample, had evidence of stakeholder input into the materiality or reporting process. Figure 2 illustrates the levels non-financial disclosure, materiality and stakeholder engagement, by businesses in the NZ50. Figure 2 Disclosure of material issues and processes by NZX 50 Materiality process disclosed 36% No non-financial reporting 8% No stakeholder input 32% Non-financial disclosure without material issues 10% Material issues disclosed 14% Stakeholder input 4 NZX 50 list as at 29/02/ The information contributing to this research was reviewed over the 2017 financial year. 6 Stock markets are mainstreaming non-financial reporting

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8 There is a limited amount of quantitative metrics and measurements being applied to the non-financial disclosures and targets of New Zealand businesses. The measuring and reporting of quantitative data is important as it allows companies to manage non-financial risks by measuring and tracking their sustainability performance year on year. Our research revealed that only 52% of both data samples included quantitative data as part of their non-financial disclosures. Furthermore, only 18% of businesses had future focused quantitative targets for improvement. Only a limited number of New Zealand businesses are reporting against universally established reporting frameworks or guidelines. The amount of New Zealand companies currently disclosing non-financial information against universally recognised frameworks is limited. Our research indicates that onl14% of the NZX 50 and 13% of our entire data sample are utilising non-financial reporting frameworks or guidelines. GRI was the most commonly applied reporting framework in New Zealand, with only one organisation using integrated reporting. 8 Stock markets are mainstreaming non-financial reporting

9 How can New Zealand businesses get the most value from non-financial reporting? It is clear from the research insights that many New Zealand companies are not currently in line with the level of transparency and maturity the updated NZX Code points to. In order to move beyond sustainability as compliance and risk mitigation, companies need to identify the issues that matter most and devise strategies to address them that generate additional value. The following diagram depicts the different stages of strategic maturity that a company can progress through in realising this added value. Sustainability Maturity Model Definitions Industry Leader Industry Leader Sets the direction of industry with respect to sustainability. Strategic Differentiator Maturity of Response Risk Mitigator Operational Proficiency Strategic Differentiator Invest in key areas of importance to stakeholders to differentiate in the market. High level of performance in other material areas, and transparency of performance to stakeholders. Operational Proficiency Good performance across material areas, and engagement with stakeholders on these areas. High level of risk and compliance management. Risk Mitigator Compliance Aware of and actively managing material areas. Compliant with minimum requirements of key stakeholders. Value Protection Value Add Compliance Meeting minimum expectations of government and other key stakeholders (e.g., responding to community expectations). 9

10 For New Zealand businesses to further develop the maturity of their sustainability strategies, align themselves with the new NZX Code and leverage non-financial reporting as a value generator, we recommend the implementation of the following six key steps. Understand your key 1 sustainability issues Apply appropriate 3 measures and metrics Link materiality issues and 5 business strategy A materiality assessment is an essential part of a robust and meaningful reporting process. It enables an organisation to determine the most critical sustainability topics upon which to focus their business strategies, and subsequent disclosures. A sustainability topic is considered material if it influences the decisions, actions and performance of an organisation or its stakeholders. 2 Engage with stakeholders Including stakeholders in the reporting process enables businesses to gain a different set of perspectives into their core strengths and weaknesses. Such perspectives can often provide insight into strategic opportunities and emerging trends and issues. Stakeholder engagement can also contribute to building positive stakeholder relationships, and open up opportunities for new products and services or shared value approaches. One of the key purposes of non-financial reporting is to deliver to the reader a more complete story of how your business creates value over time. Rather than simply summarising past sustainability performances, a meaningful sustainability report will use appropriate measures and metrics to track progress towards long-term sustainability goals and outcomes. This communicates to key stakeholders, including investors, how a company is considering longer-term risks and opportunities beyond the timeframe more usually thought of in a strategy context, providing confidence to investors and employees that the business has a sustainable future. 4 Leverage universally recognised reporting frameworks and guidelines Reporting frameworks and guidelines such as the GRI or Integrated Reporting provide reporters and investors with a higher level of quality and consistency across market disclosures. This increases the capacity for benchmarking and performance comparisons to be made both within and across industries. Benefits of this can include raising industry standards and increasing investment opportunities. It can also lead to increased levels of business innovation through supporting a measurable and transparent operating environmental that is supportive for strategic collaborations to address industry specific sustainability challenges. For a business to get the most value out of its sustainability reporting, it should be able draw appropriate linkages between its material sustainability topics and business strategies. This demonstrates to stakeholders that resources are being focused where there is most opportunity for value protection and creation. 6 Move towards a greater integration of financial and non-financial disclosures As sustainability reporting continues to evolve, it will become increasingly aligned and integrated into financial reporting and business strategy. This approach, known as Integrated reporting helps investors, and other stakeholders, to understand an organisation s past and current performance, and future resilience. The Integrated Reporting approach will increasingly lead to integrated thinking within organisations. This is where nonfinancial and longer term perspectives are embedded into traditional business functions, and greater cross-business collaboration is enabled. New Zealand businesses that use this approach will be strategically positioned to address longterm non-financial risks and opportunities in their operations, and will likely find themselves at a significant advantage when facing the environmental and social disruptions of the coming decades. 10 Stock markets are mainstreaming non-financial reporting

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12 Let s continue the conversation. For more insights or to browse our archive of webcasts and videos, visit ey.com/au/sustainability. Sustainability on the go Access our thought leadership anywhere with EY Insights, our new mobile app. Visit eyinsights.com. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organisation, please visit ey.com Ernst & Young, New Zealand. All Rights Reserved. EY Asia-Pacific Mathew Nelson mathew.nelson@au.ey.com Melbourne Rebecca Dabbs rebecca.dabbs@au.ey.com Terence Jeyaretnam terence.jeyaretnam@au.ey.com Christopher Thorn christopher.thorn@au.ey.com EY Oceania Matthew Bell matthew.bell@au.ey.com Sydney Andi Csontos andi.csontos@au.ey.com Adam Carrel adam.carrel@au.ey.com APAC No. NZ PH ED None This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Ernst & Young ABC Pty Limited (ABN: ); Australian Financial Services Licence No: ey.com Brisbane Elizabeth Rose elizabeth.rose@au.ey.com Perth Lynsay Hughes lynsay.hughes@au.ey.com New Zealand Tracey Ryan tracey.ryan@nz.ey.com 12 Stock markets are mainstreaming non-financial reporting