- Climate change analysis from companies is evolving on the back of new reporting regulation.
- Cost of living pressures and labour market tightness are leading to staff pay increases and customer hardship initiatives for some companies.
- Sustainability measures are being increasingly included as key performance indicators (KPIs) in executive pay practices.
Sustainability issues continued to feature prominently in the latest round of company annual reports, especially in light of climate-related events such as the Auckland extreme flooding and Cyclone Gabrielle earlier in the year. Some of the key trends we observed from the sustainability disclosure included progress on climate reporting, the impact of the rising cost-of-living on company employees and customers, and the greater alignment between executive bonuses and sustainability objectives.
Climate disclosures
Climate change remains a top focus for companies in New Zealand, particularly given regulatory developments. Reports on climate change according to a new regulatory framework (External Reporting Board standards) are due to be published from next year for all companies listed on the NZX above a certain size ($60m market capitalisation). This framework provides a more prescriptive, structured approach to reporting on climate issues right from the governance level through to granular metrics and targets.
Many companies noted in their commentary this year that work is underway to comply with these new reporting standards and some are collaborating with peers and/or consulting with external specialists in their respective industries on the challenging aspects like climate scenario analysis. Examples include the Telecommunications Forum Board’s working group that Spark and Chorus have been involved in and a property sector initiative led by the NZ Green Building Council.
In a few cases, like Meridian Energy, Auckland Airport and Mercury Energy, these companies have proactively moved ahead of the regulatory requirements, voluntarily aligning with the climate standards a year before they become mandated. Building on their climate reporting from prior years, these companies were able to provide an in-depth analysis of the climate risks and opportunities facing them and the actions they are taking to address them.
Cost of living
Many companies noted the impact that rising costs of living were having on their employees and customers with some introducing initiatives to help alleviate the burden. For some, this involved setting a higher wage for entry level positions or increasing salaries paid to existing workers, particularly those at the lower end of the pay range facing greater cost pressures. This also ties into the trend of the tightness in the labour market, where companies have needed to remain competitive with their remuneration practices in order to attract and retain talent.
Regarding customer hardship, there was more support provided through initiatives like Meridian Energy’s energy wellbeing pilot programme that helped 130 households over the year most affected by cost-of-living pressures. This is particularly important given power is essential to people’s daily life. The company is further investing in this programme over the next two years with an estimated 5,000 households expected to be supported.
Executive pay and sustainability
We have seen an increasing alignment between companies’ sustainability agendas and their executive remuneration programmes, highlighting the significance of meeting both financial and non-financial objectives. This is often included as part of short-term bonus schemes of the CEO and other senior leaders to incentivise progress towards specific sustainability issues of concern, such as climate change or safety performance.
For example, Air New Zealand has stated that, from next year, its short-term incentive scheme will include progress on the company’s carbon intensity target as one of the KPIs in determining how large the bonus is to be awarded to eligible executives. This is an encouraging development that helps lend credibility to its climate commitments.
There were also other examples of companies increasing the importance of sustainability factors in their overall programme, like Fletcher Building raising the weight to non-financial targets in its short-term incentive scorecard to 35%. Genesis Energy will also be significantly upweighting its KPIs relating to its long-term strategy on decarbonisation over the coming year. These exemplify the growing influence these factors are playing in motivating executive behaviour.
Outlook
Going forward, we envisage climate reporting being the main sustainability priority as regulatory requirements kick in over the coming year. We also see a continuation of other environmental, social, and governance (ESG) trends such as the rising focus on natural capital, initiatives to improve diversity and cultural integration, and evolving governance practices.
We believe that disclosure more generally will improve, especially given the emergence of global sustainability standards from the newly established International Sustainability Standards Board. This may catalyse a more structured and comparable approach to non-financial reporting.
Harbour’s investment process captures a comprehensive range of ESG factors, and we will continue to favour companies demonstrating leading and improving performance in this space. We believe sustainable businesses are on average more likely to deliver better outcomes for investors over the long term.
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This publication is provided for general information purposes only. The information provided is not intended to be financial advice. The information provided is given in good faith and has been prepared from sources believed to be accurate and complete as at the date of issue, but such information may be subject to change. Past performance is not indicative of future results and no representation is made regarding future performance of the Funds. No person guarantees the performance of any funds managed by Harbour Asset Management Limited.
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