The latest slanted playing field: capital markets and climate change

Mid-morning this drab Wellington Monday, I had a discussion with a Board member of Skyline Enterprises Limited as part of our usual process surrounding our company assessment reports and subsequent voting intentions. Skyline has a market capitalisation of approximately $630m, and is one of the largest companies listed on “Unlisted” (USX), a recognised alternative exchange for New Zealand issuers. Its core business is very much focused on tourism and entertainment ventures, mostly in New Zealand.

USX is ‘recognised’, perhaps – but not licensed or regulated. Hence the clear disclaimers and notices an investor must agree to before trading on the Unlisted platform. These days, USX has competition, with the development of Catalist. Like the NZX, Catalist is a regulated and licensed securities exchange, albeit with a market capitalisation threshold of less than $60m.

That $60m is an interesting number – more on that later.

Nelson and NZ King Salmon

A chat with Skyline wasn’t the first thing I had done that day. Crunching on my muesli earlier that morning, I had decided to read the Nelson Mail as my random paper of choice (via the Stuff website). The headline that morning read:

NZ King Salmon and NBS undertake mandatory climate disclosure, Sept 4th 2023

This shouldn’t be news to anyone. After all, NZ King Salmon (NZX: NZK) is a listed entity with a market capitalisation of around $100m – greater than the $60m threshold – and Nelson Building Society is a financial institution with total assets of greater than $1 billion. Both fall under the definition of a Climate Reporting Entity (CRE) as enshrined in the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 – which in effect amends the Financial Markets Conduct Act 2013.

The article itself was interesting – it offered a bit of real-world insight as to how listed issuers are dealing with implementing the climate-related disclosure regime.

The $60m threshold has been something of a talking point amongst investment professionals for some time, with various alternative (increased) thresholds being mooted over the last 18 months. The figure is also significant as it neatly excludes company listed on Catalist which is limited to issuers with a market capitalisation of $60m – ie, less than the threshold required to be caught as a climate reporting entity (CRE).

The alternative approach

NZSA took a slightly different view at the time the climate-related standards were developed. While others focused on whether the threshold for a listed company was set at the right number, we were more worried about the fairness of imposing a regime on only one type of company – a listed one.

We had participated extensively in the submission process associated with the climate-related disclosure regime (CRD for short), as part of the External Reporting Board’s (XRB) effort to develop an appropriate framework. In our first submission, in November 2021, we noted that:

NZSA would prefer a single, consistent threshold (perhaps based on total assets) regardless of listing status.

NZSA Submission to XRB, November 2021

The XRB, of course, did not have the power to look at the scope of who comprised a CRE – that is defined within the legislation. We followed up with a range of politicians during 2022 and again during 2023, continuing the same theme. From an October 2022 paper:

[NZSA seeks] A broadening of the required scope of climate reporting entities (CRE’s) under Section 461O to include large unlisted companies, based on a total asset threshold.

We believe the (unintended) consequence of the current CRE scope will negatively impact New Zealand’s capital market, as it offers a disincentive to list on a local exchange.

Briefing Paper, October 2022

It doesn’t seem right that a company that is listed should bear the sole responsibility for transparency when it comes to climate change (or any other environmental risk for that matter). After my Monday morning, NZSA’s concern has a name.

The Skyline effect

Before I go too much further, I want to make it clear that NZSA takes no issue with Skyline, Unlisted, Catalist or NZ King Salmon. Nor does NZSA take issue with climate-related disclosures – that simply adds more insight to investors when it comes to risk. NZ King Salmon is heavily impacted by climate change and had the regime been in place a decade ago, it may have offered investors more insight as to a key underlying business risk that NZK was facing.

It is a fact that under the current definition regime of who constitutes a CRE, despite a $630m market capitalisation and a widespread shareholding base, Skyline is not required to complete any climate-related disclosure. This is because it is not regarded as a listed issuer, with its securities quoted on a non-licensed and non-regulated exchange.

Whereas NZ King Salmon does – even though it is only 15% of Skyline’s market capitalisation – thanks to its listing on the licensed and regulated NZX.

Fair? I think not.

Both companies are likely to experience risks, opportunities and impacts on their future strategy brought on by climate change. This has little to do with their listing status. Climate-related risks impact every business; there is no great or godly arbiter separating the impacts of rising sea levels and global warming to avoid impacting non-NZX companies. From an investors perspective, the regime adds insult to the injury caused by a broken Companies Act that offers scant information and little protection for investors in companies that are not listed on a licensed exchange (we’ve written about that in prior articles).

The regime in its current scope does a dis-service to public capital markets and investors. In the specific case of Skyline, investors are better served by the company itself: to its credit, it makes some voluntary disclosures on climate change impacts and signals an intent to go further in future reports.

NZSA is well known for advocating for a level playing field when it comes to retail shareholders. unsurprisingly, the concept of a level playing field has a broader application in this case. Defining the scope of climate reporting to a few listed entities will only ensure that there are even fewer listed entities in future.

And that is in no-one’s interest – including the planet’s.

Oliver Mander

NZSA made extensive submissions on the climate-related disclosure (CRD) framework – but the scope of its application to individual organisations was never in the hands of the XRB. We hope that whichever flavour of government we receive post-October will take a good look at the threshold settings for the CRD regime.

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