|
|
Home
| Databases
| WorldLII
| Search
| Feedback
University of Otago Law Theses and Dissertations |
Last Updated: 13 April 2024
The Inevitability of Greenwashing:
An Analysis of the Incoherence within New Zealand’s Environmental Disclosure Regime
Clementine Rose
A dissertation submitted in partial fulfilment of the requirements of the degree of Bachelor of Laws (with Honours) at the University of Otago, Dunedin, New Zealand – Te Whare Wananga o Otago.
October 2023
Acknowledgements
To my supervisor, Shelley Griffiths, for your guidance, support and enthusiasm in relation to both my dissertation and SOULS. I have thoroughly enjoyed working with you. Thank you for replying to my emails and zoom calling me during your weekends in Invercargill and
summer trips to London!
To my family, for your endless love and encouragement. Thank you, Mum and Dad, for always picking up my late-night calls.
To the flat at 130 Cargill Street, for all the laughs and nights spent watching The Chase.
To the SOULS community, for your energy and encouragement throughout this rollercoaster of a year.
To all the friends I have made in the last five years. Thank you for making my time in Dunedin so special.
List of Abbreviations:
FMCA: Financial Markets Conduct Act 2013 FRA: Financial Reporting Act 2013
NZX: New Zealand Stock Exchange FMA: Financial Markets Authority
ASIC: Australian Securities and Investments Commission SEC: Securities and Exchange Commission (USA)
PDS: Product Disclosure Statement KIS: Key Information Summary XRB: External Reporting Board
GRI: Global Reporting Initiative Standards
ISSB: International Sustainability Standards Board IFRS: International Financial Reporting Standards
TCFD: Task Force on Climate-related Financial Disclosures NZ CS: Aotearoa New Zealand Climate Standards
CRE: Climate Reporting Entity
Table of Contents
Introduction
The world is facing an international climate emergency.1 Global emissions must fall by approximately 45% by 2030 to avoid a rise in global warming that exceeds 1.5°C.2 Companies are increasingly being recognized as playing a vital role in climate change mitigation. In the financial markets, the idea that ‘money talks’ is being harnessed to put the climate crisis in a language that investors and businesses understand.3 The primary means through which companies are required to consider their environmental impact is disclosure. The role of securities market regulation in this area is to require the publication of climate-related information and ensure its accuracy and comparability. The subsequent rise in climate-related disclosure has led to the emergence of the ‘sister trend’ of greenwashing.
This paper contributes to legal research in securities market regulation by exploring how New Zealand’s climate disclosure regime provides an opportunity for greenwashing. This question is answered through a real time examination of the theoretical incoherence within the regulatory regime, the resulting potential for intentional and unintentional greenwashing in the financial markets, and the impact of this on enforcement. Chapter I gives a summary of the general disclosure framework, the climate disclosure regime and greenwashing regulation in New Zealand. Chapter II analyses the first layer of incoherence within the regulation, in which the target audience of disclosure and thus the required substance of disclosure remains unclear. Chapter III provides a second layer of incoherence by examining the legal content and how this gives rise to a regulatory jungle that businesses must navigate through. Chapter IV applies these two layers of incoherence to the enforcement regime and evaluates the effectiveness of the FMA’s likely response to greenwashing.
1 Mark Harvey Climate Emergency: How Societies Create the Crisis (Emerald Publishing, United Kingdom, 2021) at 1.
2 United Nations Framework Convention on Climate Change UN Climate Change Annual Report 2018 (2019) at 2.
3 Dr Amelia Sharman, Director Sustainability Reporting at the External Reporting Board “Transformation through Reporting: External Reporting Board” (Business for Good Seminar 2023, Otago Business School, Otago, 15 September 2023).
Chapter One: Climate Disclosure and Greenwashing
I. The Disclosure Framework in New Zealand
Disclosure is considered to be the “cornerstone” of securities regulation.4 The disclosure of relevant and material information provides investors with sufficient information to make decisions, and subjects information to the “glaring light of publicity.”5 This ensures that true information is conveyed to market participants. The Efficient Market Hypothesis (‘EMH’) states that competition between market participants will result in the prices of financial products and services reflecting all available information.6 It is generally accepted that the New Zealand market exhibits the semi-strong version of the EMH, which occurs when current prices reflect past prices and all publicly available information.7 When all material information is disclosed to the market, the market value of a listed company is similar to its intrinsic value. Louis Brandeis supports the EMH by arguing that “sunlight is the best of disinfectants” and electric light is “the most efficient policeman.”8 The Securities Commission aligned itself with Brandeis’ school of thought by deciding that investors should have access to material information.9 It did not matter whether every investor understood the information as enough investors would understand, and this would flow through to the general body of investors.10
The Financial Markets Conduct Act 2013 (‘FMCA’) is the foundation of New Zealand’s disclosure framework. The FMCA regulates the sale of financial products in the primary and secondary markets. The creation of the FMCA was largely a response to the adverse effects of the Global Financial Crisis, and amalgamates the Securities Act 1978 (‘SA’) and the Securities Market Act 1988 (‘SMA’).11 While the SMA’s provisions were essentially transplanted into the FMCA, the primary market regulation changed significantly. In contrast to the SA, the
4 New Zealand Securities Commission Proposals for the Enactment of Regulations under the Securities Act 1978 (1980) at 13.
5 William Douglas “Protecting the Investor” (1934) 23 Yale L.J. 522 at 523.
6 Carla Natalia Gargiulo “Comparison of New Zealand and United States Securities Markets through the Looking Glass of the Efficient Market Hypothesis” (LLM Thesis, University of Georgia Law School, 2004) at 3.
7 Gargiulo, above n 6, at 3.
8 New Zealand Securities Commission, above n 4, at 15. 9 New Zealand Securities Commission, above n 4, at 21. 10 New Zealand Securities Commission, above n 4, at 21.
11 Shelley Griffiths “History, Policy and Structure of New Zealand Securities Law” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomas Reuters New Zealand Ltd, Wellington, 2018) 1101 at 1109.
FMCA provides a precise set of definitions.12 The FMCA emphasises public enforcement, provides regulatory oversight and refers to “financial products” rather than “securities.”13 Additional disclosure obligations are set out in the Companies Act 1993 (‘Companies Act’), the Financial Reporting Act 2013 (‘FRA’) and the New Zealand Stock Exchange (‘NZX’) Listing Rules. The applicable disclosure rules in a given situation will depend on the type of entity being regulated. The following analysis of New Zealand’s disclosure framework is not exhaustive, rather, it summarises key areas of disclosure in the primary and secondary markets that relate to environmental reporting.
The main document in the primary market is the product disclosure statement (‘PDS’).14 Entities who want to make a regulated offer of a financial product must provide a PDS. If an offer is made to at least one investor who requires disclosure, regardless of whether exclusions in Schedule 1 of the FMCA apply to other offerees, the offer is regulated.15 This document exists to provide information that is likely to assist a prudent but non-expert person when deciding whether to acquire the financial products.16 The PDS must begin with a Key Information Summary (‘KIS’), which sets out the most significant aspects of the offer that are relevant to a prudent but non-expert person’s investment decision.17 This is complemented by an online register.18 The investor must have been given the PDS before they can purchase a financial product.19
The PDS has to be clear, concise and effective.20 Materiality is relevant in determining what issuers should disclose. Moreover, the issuer must ensure that the PDS contains all information required by the Financial Markets Conduct Regulations 2014 and that the online register entry
12 Griffiths, above n 11, at 1109.
13 Shelley Griffiths “Securities Regulation, Securities Law and Financial Markets Law: From Investor Protection to Consumer Protection in New Zealand, 1985 – 2016” in Susan Watson (ed.) The changing
landscape of corporate law (Centre for Commercial & Corporate Law Inc, Christchurch, 2017) 289 at 289.
14 Shelley Griffiths “Regulated Offers of Securities in the Primary Market” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomas Reuters New Zealand Ltd, Wellington, 2018) 1133 at 1144.
15 Financial Markets Conduct Act 2013, s 41.
16 Financial Markets Conduct Act, s 49.
17 Financial Markets Conduct Regulations 2014, ss 26 and 27.
18 Shelley Griffiths “The Secondary Market” in John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) 1185 at 1186.
19 Griffiths, above n 14, at 1145.
20 Financial Markets Conduct Act, s 61.
includes all material information that is not already in the PDS.21 In relation to Part 3 of the FMCA, material information is defined as information that a reasonable person would expect to, or to be likely to, influence persons who commonly invest in financial products in deciding whether to acquire a product.22 Materiality is a contextual assessment. This information must relate to the particular financial products on offer or the particular issuer.23
Entities cannot offer, or continue to offer, financial products under a regulated offer if a statement in the PDS is false or misleading, likely to mislead, there are omissions, or new matters arise that require disclosure.24
Periodic and continuous disclosure obligations arise in the secondary market. The periodic disclosure requirements are contained in the FMCA, the FRA and the Companies Act. Listed issuers also have continuous disclosure obligations, which are set out in the FMCA and the NZX Listing Rules.
FMC reporting entities must keep accounting records and prepare, audit and lodge financial statements.25 The definition of a FMC reporting entity includes issuers of regulated products, licensers, listed issuers, registered banks and licensed insurers.26 The financial reporting standards are prepared and issued by the External Reporting Board (‘XRB’), an independent Crown entity.27 New Zealand has a tiered regime for financial reporting which is reflected in the XRB’s standards.28 FMC reporting entities that are considered to have a high degree of public accountability29 must comply with all disclosure obligations, such as compliance with NZ International Financial Reporting Standards (‘IFRS’), which provides a framework for
21 Financial Markets Conduct Act, s 57.
22 Section 59.
23 Section 59.
24 Financial Markets Conduct Act, s 82. 25 Financial Markets Conduct Act, s 450. 26 Section 451.
27 Financial Reporting Act 2013, s 12.
28 Financial Reporting Act, s 29.
29 Financial Markets Conduct Act, s 461K.
reporting events and transactions in financial statements.30 In contrast, FMC reporting entities that are deemed to have lower public accountability abide by a reduced disclosure regime.31
Annual reports must be prepared by large companies, public entities, FMC reporting entities and companies with 10 or more shareholders.32 The report must describe material changes in the accounting period related to the nature of the business of the company and its subsidiaries, or the classes of business in which the company has an interest.33 It also includes information such as the entity’s financial statements, auditor’s report and climate statements.34
Continuous disclosure obligations require listed issuers to inform the market of developments and events on a timely basis.35 The specific rules are set out in the NZX Listing Rules and are supported by the FMCA and the FMA’s enforcement mechanisms.36 A listed issuer is subject to the continuous disclosure rules when the listed issuer is a party to a listing agreement, the disclosure provisions require the information to be notified, and it is material information37 that is not generally available to the market.38 The rule set out by the NZX is that an issuer must immediately release material information when it becomes aware of it.39 An issuer is considered to have “become aware of” information if a director or executive officer, through performing their duties, has come to possess the information.40
It is therefore clear that disclosure regulation permeates through New Zealand’s primary and secondary markets. Moreover, there is a demonstrated ‘hierarchy of entities’ within the financial markets that determines what disclosure obligations each kind of entity must follow. Disclosure can be transplanted to new areas of the law, and has recently been adopted as a tool to deal with ESG considerations, and in particular, environmental information.
30 Financial Markets Authority “Financial Reporting FAQs” (3 May 2019)
<https://www.fma.govt.nz/library/guidance-library/faqs/>.
31 Financial Markets Authority, above n 30.
32 Companies Act 1993, s 208.
33 Companies Act, s 211.
34 Companies Act, s 211.
35 Shelley Griffiths “Trading Securities on Markets” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomas Reuters New Zealand Ltd, Wellington, 2018) 1159 at 1169.
36 Griffiths, above n 35, at 1169.
37 Financial Markets Conduct Act, s 231 – information that a reasonable person would expect to materially affect the price of quoted financial products and relates to particular products or listed issuers.
38 Financial Markets Conduct Act, s 270.
39 New Zealand Stock Exchange Listing Rules (1 April 2023), r 3.1.1(a).
40 New Zealand Stock Exchange Listing Rules at page 10.
II. Climate Disclosure
‘ESG’ refers to the environmental, social and governance considerations in a business.41 Companies are experiencing an unprecedented amount of stakeholder scrutiny regarding their management of these factors.42 While the principles underpinning ESG are thought to be decades old, a modern articulation of the concept was set out by the United Nations in 2004.43 The report Who Cares Wins states that successful investment was dependent on a vibrant economy, which relies on a healthy civil society. This society is sustained by the environment.44 Therefore, participants in the securities market had an interest in contributing to ESG impacts as they could advance societal development and encourage stable markets.45
Many scholars argue that the environment is the most important ESG pillar.46 Environmental information is of particular interest to shareholders and has been coined the ‘first area of focus’ for companies.47 Environmental degradation tangibly impacts on investor’s personal and business lives to a larger extent than social and governance consequences, and therefore should be propelled to the forefront of investor priorities. Environmental impact can also, to some extent, be quantified, and therefore has a higher degree of measurability than social and governance considerations.
In response to investor demand for environmental information, businesses began to disclose environmental information.48 While this disclosure was ostensibly voluntary, an analysis of the general disclosure framework suggests that climate-related risk information may have been required under the existing provisions. Climate information could fall within the content requirements of the KIS, which must include the significant aspects of an offer that are relevant
41 Patrizia Tettamanzi, Giorgio Venturini and Michael Murgolo “Sustainability and Financial Accounting: a Critical Review on the ESG Dynamics” (2022) 29 Environ. Sci. Pollut. Res. 16758 at 16758.
42 Ellen Pei-yi Yu, Bac Van Luu and Catherine Huirong Chen “Greenwashing in environmental, social and governance disclosures” (2020) 52 RIBAF 101192 at 101192.
43 The United Nations Global Compact Who Cares Wins: Connecting Financial Markets to a Changing World
(United Nations Environment Programme Finance Initiative, 2004).
44 The United Nations Global Compact, above n 43, at 3.
45 The United Nations Global Compact, above n 43, at 3.
46 Lloyd Freeburn & Ian Ramsay “An Analysis of ESG Shareholder Resolutions in Australia” [2021] UNSWLawJl 40; (2021) 44 UNSW Law Journal 1142.
47 Pricewaterhouse Coopers ESG Reporting in Australia - the full story, or just the good story? An in-depth analysis of the maturity of ESG Reporting Across Australia’s top 200 companies (2021) at 10.
48 Charles Cho and Dennis Patten “The role of environmental disclosures as tools of legitimacy: A research note” (2007) 32 Account. Organ. Soc. 639 at 646.
to a prudent but non-expert’s decision to invest.49 For investors who have a long-term investment strategy, a company’s environmental sustainability is relevant to whether they will receive an adequate return.50 The PDS must also set out the risks of investing, which may include climate risks.51 Moreover, a company’s annual report must include any change during the accounting period that the board believes is material to the shareholders.52
New Zealand lacks a definitive legal statement regarding whether climate information is included within the concept of material information. The general test for materiality is that it includes circumstances that are truly significant.53 A recent articulation of the concept in New Zealand is that material information is information that, if disclosed, would have made a difference to the investment decision.54 In the Australian case of Abrahams v Commonwealth Bank of Australia, a shareholder argued that material climate risk had not been disclosed in CBA’s 2016 annual report.55 The omission of climate information meant that CBA had failed to give a ‘true and fair’ representation of their financial position56 and investors could not make an ‘informed assessment’ on the basis of the director’s report.57 This case was settled and CBA disclosed its climate related risks in the 2017 annual report.58 In Mark McVeigh v Retail Employees Superannuation, a fund member argued that Retail Employees Superannuation Trust (REST) had not disclosed sufficient climate risk information, nor its risk mitigation plan.59 Settlement was reached before trial, and REST acknowledged that climate change was a material risk. Both of these cases were settled and thus no definitive statement of law has been issued by the Australian courts regarding the materiality of climate information. However, it can be argued that environmental risk may fall within the scope of material information as climate degradation impacts the long-term sustainability of a company.60 For investors who have a long-term investment strategy, the sustainability of a company is relevant to whether
49 Financial Market Conduct Regulations, s 27.
50 International Federation of Accountants Investor Demand for Environmental, Social and Governance Disclosures: Implications for Professional Accountants in Business (February 2012) at 9.
51 Financial Market Conduct Regulations, s 3(1).
52 Companies Act, s 211.
53 Coleman v Myers [1976] NZHC 5; [1977] 2 NZLR 225 (CA) per Cooke J.
54 R v Moses HC Auckland CRI-2009-004-1388, 8 July 2011; Saunders v Houghton [2016] NZCA 493, [2017] 2
NZLR 189.
55 Abrahams v Commonwealth Bank of Australia (2017) FCA VID879.
56 Corporations Act 2001 (Cth), s 297.
58 Simmons & Simmons “Decision in Abrahams v Commonwealth Bank of Australia” (11 November 2021) < https://www.simmons-simmons.com/en/publications/ckvv7c8ao1hfn0b366u5ed5xr/decision-in-abrahams-v- commonwealth-bank-of-australia>.
59 Mark McVeigh v Retail Employees Superannuation (2019) FCA 14.
60 New Zealand Productivity Commission Low Emissions Economy (August 2018) at 222.
they will receive an adequate return.61 This indicates that environmental information could be considered material.
Moreover, information of a similar nature to climate information is regulated by the general disclosure framework. Financial forecast disclosure falls under the general regime and is supplemented by XRB guidance, such as the Financial Reporting Standard No. 42 1996. Both forecasts and climate information are based on assumptions about the future.62 The evidence used to support the assumptions is also future-oriented and speculative.63 The uncertainty regarding the future environment means that preparing forecast and climate disclosure requires judgement calls.64 Further, the uncertainty inherent in these disclosures makes them less amenable to objective verification.65 If financial forecast information can be regulated via the existing framework, it follows that information of a similar nature, such as climate information, could also fall within the general disclosure regime. This suggests that additional climate regulation, in the form of mandatory disclosure, could result in over regulation.
Despite arguably falling within the existing regulation, the form and type of environmental disclosure remained unregulated. International organizations responded to this gap in the regulatory scheme by creating non-binding frameworks that businesses could use when disclosing their climate-related impacts and risks. There was no clear consensus on reporting standards and businesses could apply any framework of their choosing.66 These frameworks used principles-based approaches. For example, the Global Reporting Initiative Standards (‘GRI Standards’) was one of the most popular reporting frameworks in Australasia.67 In regard to report content, the GRI Standards incorporate the principles of stakeholder inclusiveness, sustainability context, materiality and completeness.68 In relation to report quality, the GRI Standards are based on the principles of accuracy, balance, clarity, comparability, reliability and timeliness.69
61 International Federation of Accountants, above n 50, at 9.
62 Financial Reporting Standard No. 29 1996 at 1.1.
63 Financial Reporting Standard No. 29 at 1.1.
64 Financial Reporting Standard No. 29 at 1.2.
65 Financial Reporting Standard No. 29 at 1.3.
66 New Zealand Stock Exchange Environmental, Social and Governance Guidance Note (December 2017) at 9.
67 New Zealand Stock Exchange, above n 66, at 9.
68 GRI 101: Foundation 2016 at 7.
69 GRI 101: Foundation at 7.
Alongside principles-based frameworks, regulatory bodies provided environmental disclosure guidance. These guidance notes aimed to help entities better understand the benefits of environmental reporting and provide clarity on the different frameworks.70 In New Zealand, both the NZX and FMA have released publications on environmental disclosure, such as the NZX ESG Guidance Note, NZX Corporate Governance Code and the FMA Disclosure Framework for Integrated Financial Products.
The influx of international non-binding frameworks, regulatory guidance and legislative provisions created a ‘regulatory jungle’ for environmental disclosure. This was an overwhelming mix of hard and soft law that provided no clear route through the regulatory scheme. The resulting confusion amongst firms who wanted to provide environmental information to the market meant that disclosed climate information lacked comparability, consistency, and carried a high risk of unintentional greenwashing. The implementation of a mandatory disclosure scheme in New Zealand was seen as an opportunity to make clear that environmental disclosure was required by certain reporting entities, and to enhance the comparability and consistency of climate information.
In 2021, mandatory climate-related disclosure was introduced via amendments to the FMCA, the FRA and the Public Audit Act 2001. Part 7A of the FMCA requires climate reporting entities (‘CREs’) to keep proper records relating to their obligations to issue climate-related disclosure records.71 These entities must also prepare and lodge climate statements.72 The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 came into force in October 2022, and requires climate reporting for financial years beginning on or after the 1st of January 2023. New Zealand was the first country in the world to introduce mandatory climate-related disclosure regulation.73
70 New Zealand Stock Exchange, above n 66, at 3.
71 Section 461N.
72 Section 461N.
73 Habib Khan, Muhammad Houque and Lelemia Lelemia “Organic versus cosmetic efforts of the quality of carbon reporting by top New Zealand firms. Does market reward or penalise?” (2023) 32 Bus Strategy Environ 686 at 691.
A CRE is a business that meets the definition of an FMC reporting entity with a higher level of public accountability74 and is either a large listed issuer, registered bank, licensed insurer, credit union, or building society.75 A manager of a registered scheme can also fall within the definition of a CRE.76 The key consideration when determining whether a FMC reporting entity with a higher level of public accountability is a CRE is whether it meets the ‘large’ requirement, as expressed in Part 7A. The CRE definition covers approximately 200 entities in New Zealand.77
A listed issuer will be considered ‘large’ if the business has quoted equity or debt securities during the accounting period, and as at the balance date of each of the two preceding accounting periods, the equity or debt securities’ value exceeds $60 million.78 A listed issuer will be excluded from the climate reporting entity definition if, at any time during the accounting period, any quoted debt or equity securities are only on a growth market, or the issuer has no quoted debt or equity securities.79
Registered banks, credit unions and building societies will be ‘large’ if, as at the balance date of each of the two preceding accounting periods, their total assets exceed $1 billion.80 The entity can also be considered large after amalgamation.81 A licensed insurer will be ‘large’ in respect of an accounting period if its total assets exceed $1 billion (as at the balance date of each of the two preceding accounting periods), the annual gross premium revenue exceeds
$250 million (in each of the two preceding accounting periods), or the entity is large after amalgamation.82 A manager that holds a market services licence will be a ‘large manager’ if the total assets of the schemes exceed $1 billion.83
74 Financial Markets Conduct Act, s 461K.
75 Section 461O.
76 Section 461O.
77 Ministry for the Environment “Mandatory climate-related disclosures” (18 January 2023)
<https://environment.govt.nz/what-government-is-doing/areas-of-work/climate-change/mandatory-climate- related-financial-disclosures/>.
78 Financial Markets Conduct Act, s 461P(1).
79 Section 461P(2).
80 Section 461Q(1)(a).
81 Section 461Q(1)(b).
82 Section 461Q(2).
83 Section 461S.
Every CRE must keep climate-related disclosure records at all times.84 These entities have to create and maintain an adequate control system.85 Climate records must be available at all reasonable times for inspection by the directors of the CRE, supervisors, the FMA, and any other persons authorised to inspect the records.86 Every CRE must ensure that, within four months after the entity’s balance date, climate statements that comply with the disclosure framework are completed and dated and signed by two directors of the entity.87 The legislation refers only to CREs, rather than directors, when setting out the obligation to maintain climate records and statements. This indicates that directors review the records and statements, rather than having an obligation to maintain them. The responsibility to maintain the records appears to fall to the CRE, therefore supporting the view that mandatory disclosure is focused on entities rather than directors.
CREs have three defining features that justify the imposition of a mandated climate disclosure regime. These are their higher level of public accountability, macroeconomic influence, and unique agency problems.
First, CREs have a higher level of public accountability. Therefore, they need to establish and maintain a social license to operate (‘SLO’). A SLO refers to the ongoing approval or acceptance of a business by local community stakeholders.88 The term developed in response to increasing pressure and scrutiny in the mining industry regarding the social and environmental impact of companies.89 Publicized chemical spills, community conflict, and dam failures in the 1990’s adversely impacted the reputation of mining companies.90 Simultaneously, society began to prioritize social and environmental considerations. The approval of the local stakeholder community was important to mining companies as the community could, if desired, create reputational damage and thus negatively impact on profit. For example, a company’s activities can be hindered by product boycotts, legal challenges, protests and negative publicity.91 The SLO is distinct from consumer demand for a product as
84 Section 461V(1).
85 Section 461V(3).
86 Section 461Y(1).
87 Section 461Z(1).
88 Kieren Moffat, Justine Lacey, Airong Zhang and Sina Leipold “The Social Licence to Operate: a Critical Review” (2015) 89 J. For. Res. 477 at 480.
89 Moffat, Lacey, Zhang and Leipold, above n 88, at 477. 90 Moffat, Lacey, Zhang and Leipold, above n 88, at 477. 91 Moffat, Lacey, Zhang and Leipold, above n 88, at 479.
it focuses on the ethics of production methods and the impact of business operations on stakeholders. The license relates to what the business does, rather than what it is.92 Unlike a legal licence to operate, which is provided by a governing body, a SLO is earned from stakeholders that are affected by the company’s operations.93 The license is informal, and can be implied through firm reputation and stakeholder feedback.
While the SLO is a concept traditionally used in energy sectors, the growing importance of ESG considerations and increasing focus on social legitimacy has broadened the application of the SLO. The focus has shifted from single operations and the direct impact on local communities, to analysing whether companies are accepted by the broader public of stakeholders and citizens.94 The SLO is important to CREs as their public accountability characteristic means that their operations will impact on a range of stakeholders and communities. If stakeholders are adversely affected by the entity’s operations, such as through environmental degradation, they will lose their public approval. This could result in a reduction in share price and an overall negative impact on the CREs financial position. Subjecting CREs to additional disclosure obligations increases stakeholder engagement and transparency, and gives the public the ability to assess whether the business deserves a social licence.95 CREs can listen to stakeholder feedback, prior to the occurrence of reputational damage, and work towards maintaining their SLO. It should be noted, however, that the usefulness of the SLO is limited. The SLO suggests that CREs will change their business practices to conform with the herd mentality of society. This indicates a flaw in the concept as the most popular societal view may not always be the most desirable.
CREs also meet the ‘large’ requirement set out in Part 7A of the FMCA and therefore have a significant macroeconomic influence. Unlike small firms, for which mandatory climate disclosure can pose a disproportionately large financial reporting burden, large entities have considerable market value, presence, and the resources to measure and disclose climate related information.96 If mandatory climate disclosure has the desired effect of making firms reassess
92 Geert Demuijnck and Björn Fasterling “The Social License to Operate” (2016) 136 J. Bus. Ethics. 675 at 679.
93 Moffat, Lacey, Zhang and Leipold, above n 88, at 480.
94 Moffat, Lacey, Zhang and Leipold, above n 88, at 481.
95 Frank Vanclay and Philippe Hanna “Conceptualizing Company Response to Community Protest: Principles to Achieve a Social License to Operate” (2019) 8 Land 101 at 25.
96 Theodore Rose “Time is running out: The urgency of mandatory environmental disclosure in New Zealand Securities Market Law” (LLB(Hons) Dissertation, University of Otago, 2019) at 22.
their strategy and adjust their behaviour, changes to large business operations will have the most impact.
CREs also encounter unique agency problems. For example, a feature of a listed issuer is that its shares can be transferred between strangers.97 In the primary market, transactions can occur with limited involvement from the company.98 In the secondary market, the two investors operate at arm’s length.99 Further, listed companies have significant dispersion in ownership.100 The combination of these characteristics presents an opportunity for market failure via information asymmetry, thus requiring additional disclosure obligations to mitigate this risk. In contrast, private companies operate in an environment that provides a much smaller opportunity for information asymmetry. This is because companies do not transfer securities via a liquid secondary market.101 Rather, the investor pool for private firm transactions is generally smaller, exhibits relative long-term stability, and interests are transferred after face to face negotiation (rather than a faceless exchange in a market where the price is set).102 Private companies are also often managed by a majority owner, which results in less separation of control and ownership.103
The disclosure framework referred to in Part 7A of the FMCA has been created by the XRB, and contains three climate standards (‘NZ CS’). NZ CS 1 provides the framework through which entities must consider climate risks and opportunities.104 The standard requires reporting entities to disclose their current climate-related impacts, scenario analysis, risks and opportunities and impacts of these.105 A reporting entity must also set out how it will position itself as the domestic and global economy transitions towards a climate-resilient, low- emissions future.106 NZ CS 2 sets out the adoption provisions.107 The standard recognizes that
97 Michael Minnis and Nemit Schroff “Why regulate private firm disclosure and auditing?” (2017) 47 Account. Bus. Res. 473 at 475.
98 Minnis and Schroff, above n 97, at 475.
99 Minnis and Schroff, above n 97, at 475.
100 Minnis and Schroff, above n 97, at 490.
101 Minnis and Schroff, above n 97, at 483.
102 Minnis and Schroff, above n 97, at 483.
103 Minnis and Schroff, above n 97, at 483.
104 External Reporting Board “Aotearoa New Zealand Climate Standards” (15 December 2022) < https://www.xrb.govt.nz/standards/climate-related-disclosures/aotearoa-new-zealand-climate- standards/#:~:text=The%20ultimate%20aim%20of%20Aotearoa,emissions%2C%20climate%2Dresilient%20fut ure.>
105 Aotearoa New Zealand Climate Standards 1 Climate-related Disclosures 2022 (NZ CS 1) at paragraph 10.
106 NZ CS 1 at paragraph 10.
107 External Reporting Board, above n 104.
it may take time for businesses to develop the ability to produce high-quality climate-related information.108 NZ CS 2 provides firms with an exemption, for the first reporting period, from disclosing their current and anticipated financial impacts, transition planning, scope 3 GHG emissions and comparatives, metrics comparison, and analysis of trends.109 NZ CS 3 supports the first two standards by detailing the general requirements and principles underlying the framework.110
A CRE and every director commits an offence if they knowingly fail to comply with climate standards.111 A director is liable to imprisonment for a term not exceeding 5 years, a fine not exceeding $500,000, or both.112 A CRE will be liable for a fine not exceeding $2.5 million.113 This applies in relation to the entity’s climate statements, group statements, or climate standards prepared for any separate fund.114
Before evaluating the effectiveness of the environmental disclosure regime, the aims of the mandatory climate-related disclosure provisions must be assessed. A key purpose of mandatory disclosure is to address information asymmetry. This purpose translates to climate disclosure, which aims to close the environmental information gap between businesses and investors. The FMA views this as the primary purpose of the regime.115 Prior to the enactment of Part 7A, it had been found that the majority of large companies did not provide adequate environmental information to investors.116 Companies either provided no information, reported in an ad hoc manner, or only released small amounts of information.117 Investors were therefore taking on risk without informed consent. This information gap resulted in asset mispricing and an inefficient allocation of resources.118 Even if entities were voluntarily disclosing environmental
108 Aotearoa New Zealand Climate Standards 2 Climate-related Disclosures 2022 (NZ CS 2) at 4.
109 NZ CS 2 at 4.
110 External Reporting Board, above n 104.
111 Financial Markets Conduct Act, s 461ZG.
112 Financial Markets Conduct Act, s 461ZG(2)(a). 113 Financial Markets Conduct Act, s 461ZG(2)(b). 114 Financial Markets Conduct Act, s 461ZG.
115 Interview with Jacco Moison, Head of Audit and Financial Reporting at Financial Markets Authority – New Zealand (Clementine Rose, Zoom call, 11 August 2023).
116 Ministry for the Environment & Ministry of Business, Innovation and Employment Climate-related financial
disclosures – Understanding your business risks and opportunities related to climate change: Discussion document (ME 1473, October 2019) at 10.
117 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 23.
118 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 22.
information to the market, these disclosures often lacked the link to climate change’s financial implications.119 For example, only disclosing the quantity of greenhouse gases being emitted by an entity was insufficient for investors to understand the company’s exposure to climate risk and opportunities, and their corresponding management strategies.120 Mandatory disclosure and the climate framework increase the decision-usefulness of the information being released to the market.
The mandatory disclosure scheme also aims to change behavior. This is interesting as, according to the Ministry of Business, Innovation and Employment’s (MBIE) discussion document on reforming securities law generally, the main purpose of disclosure is to rectify the information gap between investors and issuers.121 The secondary goal of disclosure was considered to be allocative efficiency.122 In the climate context, however, MBIE appears to view behavior change as the key purpose of the mandatory regime.123 This suggests a deviation from the theoretical purposes of disclosure theory and broadens what disclosure is trying to achieve. The New Zealand government has set a target for net zero greenhouse gas emissions, excluding biogenic methane, by 2050.124 To achieve this goal, fundamental changes needed to be made to company behavior as many firms incorrectly perceived the consequences of climate change to be long term and not relevant to current decisions.125 This is exemplified by UK research which found that 80% of CFO’s would sacrifice long-term economic value in order to satisfy investor expectations for short-term returns.126 Because climate change risks and opportunities were not being satisfactorily considered in business and investment decisions, there was a lack of large-scale investment aimed towards mitigating and adapting to the impacts of climate change.127 Having access to environmental information can also influence investors, who may not have fully considered environmental impact on their investments before the implementation of mandatory disclosure, to invest in green companies. Compiling climate data in the necessary reporting format forces CREs to increase internal coordination and create new
119 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 13. 120 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 5. 121 Ministry of Economic Development Review of Securities Law Discussion Paper (June 2010) at 75.
122 Ministry of Economic Development, above n 121, at 76. .
123 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116.
124 Climate Change Response (Zero Carbon) Amendment Act 2019, s 5Q.
125 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 10. 126 John R. Graham, Campbell R. Harvey and Shiva Rajgopal “Value Destruction and Financial Reporting Decisions” (2006) 62 Financ. Anal. J 27 at 33.
127 Ministry for the Environment & Ministry of Business, Innovation and Employment, above n 116, at 10.
reporting lines.128 Mandatory disclosure thus elevates the profile of climate impact generally within reporting entities, ultimately making climate risks and opportunities more significant in the managers’ agendas.129
The XRB sets out an additional purpose statement. The aim of the climate standards is to support the allocation of capital towards activities that promote a low-emissions, climate- resilient future.130 This purpose is aligned with MBIE’s focus on behavior change as the standards create a strategy exercise through which businesses modify their practices and integrate environmental considerations into their overall strategy.
Therefore, alongside disclosure’s traditional goal of reducing information asymmetry, disclosure is being used in a novel manner to address the 2050 net zero policy goal. Traditional disclosure theory does not necessarily support the proposition that disclosure can achieve the aim of quickly and drastically changing company behavior. The use of disclosure without a theoretical foundation for its application, alongside the risk of over-regulation, suggests that the legislation may have been enacted as a ‘quick fix’ to growing environmental concern. In particular, the implementation of a mandatory disclosure regime makes the government appear active in addressing their goal of net zero by 2050. This indicates that the mandatory disclosure regime has been implemented for a political reason, rather than being primarily introduced for its legal effectiveness. It can be further posited that the mandatory disclosure regime is reactive as it was implemented in response to growing climate concern and as a means of addressing policy goals that had already been implemented. The increased demand for environmental information, the implementation of a mandatory disclosure regime, and the increase in climate related information available to the market, provides an opportunity for greenwashing. The greenwashing trend has become well-known in recent years, and will now be examined.
128 Samuel Tang and David Demeritt “Climate Change and Mandatory Carbon Reporting: Impacts on Business Process and Performance” (2018) 27 Bus. Strategy. Environ. 437 at 445.
129 Tang and Demeritt, above n 128, at 447.
130 External Reporting Board, above n 104.
III. Greenwashing
Greenwashing occurs when a firm misrepresents the extent to which a financial product, service or investment strategy is environmentally friendly or sustainable.131 In particular, it refers to the selective disclosure of positive environmental sustainability information and the use of unsubstantiated environmental claims.132 There are two types of greenwashing. First, where deliberate sustainability claims are made that the entity knows or ought to know are false. 133 This form of greenwashing is rare. Second, and more commonly, greenwashing occurs through well-meaning aspirations of a business to address investor or customer concerns, which are not subsequently incorporated into daily business operations.134 This distinction can be described as intentional and unintentional greenwashing.
Greenwashing is difficult to prevent. Profit maximizing entities are incentivized to greenwash as, if successful, they reap the benefits of selling a green financial product, without the associated cost. This allows firms to gain an unfair competitive advantage. Moreover, even if firms do not intend to greenwash, inevitably, mistakes will be made. The sole use of preventative measures is thus insufficient to deal with greenwashing. It follows that regulation is required to further mitigate the greenwashing risk.
Greenwashing regulation is supported by the public interest theory, which argues that governments should respond to market failure via regulation.135 Greenwashing creates a market failure as investors receive false or misleading information, which leads to a price mechanism breakdown and an inefficient allocation of resources.136 When it becomes known to the market that firms are greenwashing, investor’s trust in the market deteriorates.137 This threatens the stability of a fair and efficient financial system.138
131 Australian Securities & Investment Commission Information Sheet 271 (June 2022).
132 Alessio Pacces “Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance?” (2021) 13 Sustainability 12316 at 12317.
133 MinterEllisonRuddWatts “Greenwashing: The new due diligence environment” (14 December 2022) < https://www.minterellison.co.nz/insights/greenwashing-the-new-due-diligence-environment>.
134 MinterEllisonRuddWatts, above n 133.
135 Imad A. Moosa Good Regulation, Bad Regulation: The Anatomy of Financial Regulation (Palgrave Macmillan, New York, 2015) at 7.
136 Moosa, above n 138, at 7.
137 Xingqiang Du “How the Market Values Greenwashing? Evidence from China” (2015) 128 J. Bus. Ethics. 547 at 548.
138 Australian Securities & Investment Commission Information Sheet 271 (June 2022).
Regulation is also necessary as greenwashing undermines the government’s aim of changing private sector behavior. The net zero by 2050 goal is ambitious, and disclosure regulation must be implemented quickly and used efficiently to achieve it. If reporting entities are able to successfully greenwash, stakeholders will be under the impression that businesses have adequately changed their sustainability behavior. As a result, the need to improve current initiatives or implement additional sustainability projects will not be addressed. Ultimately, this will result in a worsening climate crisis, which may not be realized until it is too late to make changes.
Investors are also placing a market premium on environmental sustainability. This is because environmental information is increasingly being used by investors for financial decision making.139 The market premium is illustrated by the willingness of many investors to pay a higher price for shares in companies that are investing in environmental sustainability. In exchange for paying a higher price, investors will expect a greater long-term return on their investment. A driving force of this trend is the participation of millennials in the financial markets.140 Millennials are twice as likely than other investors to base their financial decisions on personal values and to invest in entities that provide an environmental benefit.141 This reflects a general societal shift towards engaging with climate issues and the need to place importance on non-financial externalities.
There remain a group of investors who have a short-term time horizon.142 For example, a retail investor may be sixty-five years old, and wanting to make a short-term investment to increase their savings prior to retirement. In this scenario, the retail investor will be less interested in the long-term sustainability of the company, and more concerned about the short-term returns. It follows that, to satisfy both sets of investors, companies will endeavor to maximize short term returns whilst also ensuring long-term sustainability. These two purposes of the firm are difficult to achieve simultaneously.
This short-term horizon argument, however, fails to recognize that environmental considerations are already being factored into share prices. The enormous appetite for green
139 International Federation of Accountants, above n 50, at 3.
140 Ronnie Cohen & Gabriele Lingenfelter “Money Isn't Everything: Why Public Benefit Corporations Should Be Required to Disclose Non-Financial Information” (2017) 42 DEL. J. Corp. L 115 at 119.
141 Cohen & Lingenfelter, above n 140, at 119.
142 International Federation of Accountants, above n 50, at 3.
investments from a large group of institutional and retail investors is funneling capital into environmentally sustainable firms. For example, Blackrock has created a Sustainable Energy Fund, which invests 70% of its assets in sustainable energy firms.143 Moreover, they have recently entered into an agreement with the New Zealand government to launch a $2 billion fund that aims to make New Zealand reach 100% renewable electricity.144 Blackrock is the world’s largest asset manager and its actions indicate that institutional investors are prioritizing green investment. The stance of institutional investors is of primary importance, as opposed to retail investors, as institutional investors constitute the majority and are therefore likely to be mediating the short and long-term differences in horizon. If investors are not confident about an entity’s credentials, they will redirect their investment. The growing number of investors pursuing this ‘environmental premium’ means that firms that fail to adequately invest in long term environmental sustainability will experience a significant capital outflow. The shrinking capital supply for firms that are not engaging with environmental sustainability raises the cost of capital (assuming demand for capital stays the same). There are therefore pricing impacts for all investors already, whether they care about climate change or not.
To ensure that the market premium for environmental sustainability is directed towards appropriate firms, it must be made known to investors when firms are making false, misleading or unsubstantiated claims. By doing so, investors who will pay an environmental premium are investing in products with the greatest environmental yield.
A. Greenwashing Regulatory Framework
Greenwashing is regulated by the fair dealing provisions in Part 2 of the FMCA. These provisions apply to both the primary and secondary markets and prohibit misleading or deceptive conduct, and conduct which is likely to mislead or deceive.145 In relation to representations, a person must not make a false or misleading representation in connection with any financial product or financial service.146 Moreover, a person cannot generally make an
143 BlackRock “BlackRock Sustainable Energy Fund” (22 September 2023)
<https://www.blackrock.com/hk/en/products/229299/blackrock-new-energy-fund-a2-usd>.
144 Simpson Grierson “New BlackRock Climate Infrastructure Fund targets 100% renewable electricity in New Zealand” (8 August 2023) < https://www.simpsongrierson.com/insights-news/legal-updates/new-blackrock- climate-infrastructure-fund-targets-100-renewable-electricity-in-new-zealand>.
145 Section 19.
146 Section 22.
unsubstantiated representation.147 Practitioners have warned entities that unsubstantiated or embellished statements regarding ESG information of a financial product or service could breach the fair dealing regime.148
New Zealand’s response to greenwashing has been slow in comparison to international developments.149 Countries have begun to implement additional regulatory measures that are focused solely on mitigating greenwashing. For example, the European Commission has recently introduced the Green Claims Directive. The Directive introduces new requirements regarding the substantiation of green claims, sets out minimum requirements that must be satisfied before companies can communicate green claims to consumers, and provides measures to ensure the reliability of ecolabels.150 The regulation will apply to EU-operating companies that have more than 10 employees and have an annual turnover of more than 2 million Euros.151 The regulation also applies to non-EU companies who sell to EU consumers.152
To date, the FMA has not displayed a large degree of regulatory activism regarding greenwashing.153 However, the FMA has signalled that its tolerance for selective disclosure and unsubstantiated claims is diminishing.154 This is illustrated by the FMA’s release of three publications.155 First, the Disclosure Framework for Integrated Financial Products in December 2020 provides guidance on advertising and disclosure for financial products that have a non- financial element (an ‘integrated financial product’).156 The FMA also conducted a review of managed fund documentation in July 2022 which analyses the disclosure practices for a sample
147 Section 23.
148 Toby Sharpe, Richard Massey, Tim Shiels and Olivia Woolford “International action highlights regulatory risk over ESG ‘greenwashing’” (7 June 2022) Bell Gully <https://www.bellgully.com/insights/international- action-highlights-regulatory-risk-over-esg-greenwashing/>.
149 Elise Plunket “FMA red-flags greenwashing” (13 June 2023) MinterEllisonRuddWatts
<https://www.minterellison.co.nz/insights/fma-red-flags-greenwashing>.
150 Proposed Directive 2023/0085 on substantiation and communication of explicit environmental claims (Green Claims Directive, COM(2023) 166 final, 22 March 2023).
151 Proposed Directive 2023/0085 on substantiation and communication of explicit environmental claims (Green Claims Directive, COM(2023) 166 final, 22 March 2023).
152 Els Van Poucke “The Green Claims Directive proposal in a nutshell” (26 May 2023) Deloitte Legal <
https://www.deloittelegal.be/lg/en/blog/Deloitte-Legal-Newsflashes/2023/the-green-claims-directive-proposal- in-a-nutshell.html>.
153 Plunket, above n 149.
154 Plunket, above n 149.
155 Plunket, above n 149.
156 Plunket, above n 149.
of managed funds that used an ESG label.157 An ethical investing report was also conducted in July 2022 which sets out the findings from a qualitative study where New Zealanders were interviewed about their experience buying ethical investments.158 This indicates an increased focus on ESG claims regarding financial products.
It appears that the disclosure obligations are giving rise to a greenwashing trend in New Zealand. While regulation exists to deal with these claims, the FMA has yet to begin enforcing against contravening entities. It has, however, indicated a willingness to do so in the near future. What follows is a theoretical analysis of how the structure of New Zealand’s regulatory scheme creates an opportunity for reporting entities to greenwash in the financial markets.
157 Plunket, above n 149.
158 Plunket, above n 149.
Chapter Two: Theoretical Incoherence
The theoretical coherence within environmental disclosure and greenwashing regulation is important to reporting entities as it impacts on the regulation’s clarity and focus. While on the face of it, the regime appears to increase the quantity of climate related disclosure, a regulatory incoherence would reduce the disclosure quality. This is because a lack of clarity in the law could lead to confusion amongst well intentioned reporting entities as to their disclosure obligations. In particular, the target audience for disclosure may be unclear. Reporting entities may therefore unintentionally greenwash in the financial markets. An incoherent scheme could create a false sense of security, as the regime may be believed to be more effective than it actually is. If this incoherence, and resulting lack of effectiveness, remains undetected, further policy initiatives or legislative change to achieve the net zero goal may not be actioned. It will be argued that an incoherence exists within the regulatory scheme’s theoretical underpinnings, thus providing an opportunity for both intentional and unintentional greenwashing. This theoretical incoherence can be illustrated via reference to the narratives of financial law.
I. The Narratives of Financial Law
Joanna Benjamin argues that there are three prominent narratives that inform the rules of financial law: the arm's length, fiduciary and consumerist narratives.159 The concept of ‘financial law,’ according to Benjamin, extends beyond financial regulation to include the law of derivatives, insurance, fund management sectors, capital markets and commercial banking.160 Laws and narratives are intrinsically related.161 These narratives give meaning and context to legal rules, whilst also providing a framework through which changes in securities law can be better understood.162 The identification of the dominant narratives within an area of the law allows assumptions to be evaluated and, if necessary, reformed.163 Moreover, the narratives do not co-exist seamlessly and thus the existence of multiple narratives can create incongruity within a regulatory scheme.164 The emergence of greenwashing regulation and environmental disclosure can be situated within these narratives.
159 Joanna Benjamin “The Narratives of Financial Law” (2010) 30 Oxford J Leg Stud 787.
160 Joanna Benjamin Financial Law (OUP, Oxford, 2007) at 4.
161 Robert Cover “Nomos and Narrative” (1983) 97 Harv L Rev 4 at 4.
162 Griffiths, above n 13, at 291.
163 Benjamin, above n 159, at 788.
164 Benjamin, above n 159, at 809.
The arm’s length narrative refers to the concept that parties to a transaction are strangers and deal at ‘arm’s length.’165 Each party acts in their own self-interest and therefore produces positive market outcomes in accordance with the laws of supply and demand.166 This narrative emphasizes freedom of contract and certainty of outcome in the law.167 As a result, unsuccessful risk-takers are generally held to be responsible for their losses.168 However, this narrative assumes that risk is taken on and retained with informed consent.169 In order for a valid transaction to occur, issuers must disclose all information needed to enable investors to make an informed assessment regarding the financial offering.170
The fiduciary narrative focuses on the idea that a client’s assets and liabilities are often controlled by intermediaries.171 This narrative applies to the agent (asset manager) and principal (client) relationship as the agent has the power to bind the principal and deal with her assets.172 Benjamin argues that this narrative requires an intermediary, who puts the client at risk with the aim to profit, to do so loyally and in good faith.173 Benjamin further posits that the ethical ambition of the fiduciary narrative is that trust between the parties should not be misplaced.174 Investment managers and advisers are considered to be fact-based fiduciaries as the duty arises through reliance on professional expertise.175 Good faith duties are imposed in order to address the exposure of the client to the intermediary’s bad faith.176 Four rules regulate the fiduciary relationship: the no-profit, no-conflict, undivided loyalty and confidentiality rules.177 The conflict rules derive from the fiduciary’s obligation to prioritize its principal’s interests.178 Financial law has begun to deprioritize the fiduciary project, and place further emphasis on the arm’s length narrative.179 This aligns with the observed shift in the law whereby progressive societies have moved from a status to contract based approach.180 Maine, the British jurist, argues that early society began with the status approach, in which all family
165 Benjamin, above n 159, at 792.
166 Benjamin, above n 159, at 793.
167 Benjamin, above n 159, at 793.
168 Benjamin, above n 159, at 793.
169 Benjamin, above n 159, at 794.
170 Benjamin, above n 159, at 794.
171 Benjamin, above n 159, at 797.
172 Benjamin, above n 159, at 789.
173 Benjamin, above n 159, at 789.
174 Benjamin, above n 159, at 789.
175 Benjamin, above n 159, at 797.
176 Benjamin, above n 159, at 798.
177 Benjamin, above n 159, at 797.
178 Benjamin, above n 159, at 797.
179 Benjamin, above n 159, at 798.
180 Benjamin, above n 159, at 802.
members, except the father, could not acquire or bequeath property, or enter into property contracts.181 Gradually, the emphasis on familial status was substituted by the individual, in particular, via the development of contracts.182 The law thus began to focus on the individual’s ability to enter into legally binding independent agreements with strangers.183
The fiduciary project is limited in its scope.184 This is because it only covers intermediary risk, and does not deal with position risk. As a result, it offers no solution if the retail investor is placed in a detrimental position by an intermediary acting in good faith.185
The most recent narrative in financial law is the consumerist narrative.186 This narrative reframes ‘investors’ as ‘consumers’ and addresses the unequal bargaining powers of the two transacting parties.187 Consumers are treated as weaker parties and in need of protection from abuse by the stronger transacting party.188 The state implements regulation in order to ensure fairness to consumers.189 The use of this narrative in financial law originated in Europe, where the consumer of financial products and services appears to be the modern target of intervention.190 This change in emphasis occurred after the Global Financial Crisis and the subsequent financial law reform.
Evidence of the consumerist narrative is present in both the FMCA and its antecedents.191 In Verano Properties Ltd v Severs, Hugh Williams J considered the underlying purpose of the Securities Act 1978 to be consumer protection.192 The way to achieve this was by ensuring that those involved in commerce were fully informed of their obligations prior to committing to them. The 2005-2008 securities review, which focused on the development of a consistent and effective framework for the regulation of non-bank financial institutions, financial
181 Sir Henry Sumner Maine Ancient Law: Its Connection to the History of Early Society (eBook ed, J.M. Dent & Sons Limited, 2007).
182 Maine, above n 181.
183 Maine, above n 181.
184 Benjamin, above n 159, at 798.
185 Benjamin, above n 159, at 798.
186 Benjamin, above n 159, at 800.
187 Griffiths, above n 13, at 291.
188 Benjamin, above n 159, at 799.
189 Griffiths, above n 13, at 291
190 Niamh Moloney “The Investor Model Underlying the EU’s Investor Protection Regime: Consumers or Investors?” (2012) 13 European Business Organization Law Review 169 at 172 – 178.
191 Griffiths, above n 13, at 290.
192 Verano Properties Ltd v Severs HC Auckland CIV-209-404-8487, 21 April 2010; see also Orr v Martin (1991) 5 NZCLC 67,383 at 67,390 – ‘such extended meaning [of offer] is entirely consistent with the consumer protection nature of the Act.’
intermediaries and financial products, also made reference to the aim of “promoting well- informed investors/consumers.”193 In the current securities markets framework, a main purpose of the FMCA is to promote confident and informed participation of consumers.194 It has been posited that the FMCA arguably moves beyond securities law and towards ‘financial law.’195 It follows that securities law, which is largely based on the arm's length and fiduciary narratives, has been inserted into legislation that is financial in ambit and emphasizes the consumer.
The arm’s length narrative is the predominant narrative in the FMCA. This is because the Securities Commission chose disclosure as the primary regulatory tool in securities markets.196 The emphasis on accessible information and investment freedom is illustrated via the main purposes of the FMCA. In particular, this focus is seen in the aims of promoting the informed participation of businesses and investors and promoting and facilitating transparent financial markets.197
The arm’s length narrative is apparent in Part 3 of the FMCA, which requires disclosure via the PDS. The periodic financial reporting requirements also exhibit the arm’s length narrative. More recently, the arm’s length narrative has been further incorporated into New Zealand financial law via mandatory environmental disclosure. This recent use of the arm’s length project follows a general observed trend that this narrative is taking precedence over the consumerist project.198
The fiduciary narrative arises via the relationship between retail investors and asset managers. The majority of modern retail investors indirectly own shares via institutional investors such as Blackrock.199 These funds have become the largest shareholders of publicly held corporations.200 Most retail investors are therefore in fiduciary relationships with asset managers. Asset managers are generally profit maximisers, whereas a large proportion of their
193 Ministry of Economic Development Review of Financial Products and Providers – Stage One: Framework, Problem Identification and General Directions for Reform – Report to Minister of Commerce (2005).
194 Section 3(a).
195 Griffiths, above n 13.
196 New Zealand Securities Commission, above n 4, at 13.
197 Sections 3(a) and (b).
198 Benjamin, above n 159, at 805.
199 Pacces, above n 132, at 12317.
200 Pacces, above n 132, at 12317.
investor base is sustainability focused.201 A conflict of interest, and a resulting agency cost, arises here. While asset managers could pursue sustainability and meet the demands of many of their investors, successful greenwashing allows firms to attract environmentally minded investors without disappointing more profit-oriented investors.202 Greenwashing therefore violates the fiduciary relationship.
The FMCA imposes good faith obligations on managers and supervisors of registered schemes. In particular, a manager of a registered scheme must act honestly, in good faith, and in the best interests of the scheme participants.203 The same obligations apply to supervisors.204 The FMCA has adopted the fiduciary project’s limitation by choosing not to deal with position risk. This is exemplified by the fact that the supervisor of a registered scheme is not liable for anything done, or omitted to be done, in good faith.205
The consumerist narrative, while not the key narrative, is present in the FMCA. The first reference in the Act to the consumerist narrative is in the main purposes, where it is stated that the FMCA aims to promote and facilitate fair financial markets.206
Part 2 of the FMCA can be viewed as implicitly adopting the consumerist narrative. The general dealing misconduct provision is analogous to section 9 of the Fair Trading Act 1986 (‘FTA’), which states that no person shall, in trade, engage in conduct that is misleading or deceptive, or likely to do so.207 Section 19 of the FMCA differs from section 9 of the FTA in that it only applies to dealings in financial products (quoted or otherwise), the supply or possible supply of a financial service, and the promotion by any means of the supply or use of financial services.208 A purpose of the FTA is to contribute to a trading environment in which consumer interests are protected.209 This purpose underpins section 9 of the FTA, which has been effectively transplanted into section 19 of the FMCA. It follows that the aim of consumer protection forms part of the basis of the FMCA’s fair dealing provisions.
201 Pacces, above n 132, at 12318.
202 Pacces, above n 132, at 12318.
203 Section 143.
204 Section 153.
205 Section 153(3).
206 Section 3(b).
207 Fair Trading Act 1986, s 9.
208 Financial Markets Conduct Act, s 19.
209 Section 1A.
Moreover, Part 2 prohibits misleading and deceptive conduct in relation to ‘financial products’ and ‘financial services.’ These ‘financial services’ are defined in section 5 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008, and include consumer credit, banking, insurance and financial advice services. In recent years, the number of retail investors has increased significantly.210 Everyday citizens are using financial markets as a means to save money, primarily via Kiwisaver managed funds as opposed to purchasing individual shares.211 This trend means that financial investment has become a mass market activity, instead of being confined to rich investors.212 A range of financial services are now commonly used by households.213 It is therefore arguable that Part 2 of the FMCA reaches beyond securities to consumer products.214
A similar illustration of the consumerist narrative can be seen in the regulation concerning the false or misleading statements or omissions in the PDS.215 While the wording of section 82 is not analogous to section 9 of the FTA, as occurs in Part 2 of the FMCA, the section still focuses on statements or omissions that may or are likely to mislead. Therefore, to some extent, the consumer protection purpose of the FTA is imported into the PDS regulation. Retail investors engage with initial public offerings (‘IPOs’), and therefore Part 3 of the FMCA also appears to be covering consumer financial products. This injection of consumerization into securities market regulation has been applauded in some literature as it provides implicit recognition that modern consumers are purchasing financial products in order to protect their long-term welfare.216
210 Matt Weaver “Who Has Time to Read It Anyway? Financial Markets Disclosure, Mum and Dad Investors and the Theory of an Efficient Market” (LLB(Hons) Dissertation, University of Otago, 2017) at 5.
211 JBWere Foreign Ownership Survey New Zealand 2016 (5 December 2016) at 2.
212 Niamh Moloney “Regulating the Retail Market” in Niamh Moloney and Eilìs Ferran and Jennifer Payne (eds) The Oxford Handbook of Financial Regulation (Oxford University Press, Oxford, 2015) 736 at 742-743. 213 Griffiths, above n 13, at 293.
214 Griffiths, above n 13, at 299.
215 Financial Markets Conduct Act, s 82.
216 Niamh Moloney “The Investor Model Underlying the EU’s Investor Protection Regime: Consumers or Investors?” (2012) 13 European Business Organization Law Review 169.
Disclosure, as the only requirement, is inadequate to deal with greenwashing. This is because it allows for firms to comply, yet mislead, investors. For example, under the climate reporting framework referenced in Part 7A, a firm must disclose its scope 1 and 2 emissions.217 Scope 3 emissions do not have to be disclosed in a firm’s first reporting period.218 A firm may not emit a large quantity of carbon emissions, directly or indirectly, via its own activities (scope 1 and 2 emissions). However, the company may know that its value chain emits a very significant amount of carbon (scope 3). In fact, this is often the case.219 The firm can selectively disclose its scope 1 and 2 emissions, without presenting its scope 3 emissions, and therefore give the market the misleading impression that it is a low emitter. The company is complying with Part 7A as the climate statements abide by the XRB’s standards.
The sole use of the arm’s length narrative via disclosure can also lead to unsubstantiated claims. For example, NZ CS 1 states that an entity must provide a transition plan when describing how it will position itself as the economy transitions towards a low-emissions, climate-resilient future.220 This plan must include how the reporting entity’s business model and strategy might change to address climate-related opportunities and risks.221 NZ CS 1 therefore provides an opportunity for firms to make a claim regarding their climate-related goals, and how they will achieve it, without genuinely planning to follow it through. While the firm must disclose the extent to which the plan aligns with its capital deployment and funding decision-making processes, it does not have to show evidence of tangible efforts taking place to bring about the plan’s success.222 Investors may therefore be under the impression that a company is actioning a new sustainability strategy, when in reality, the disclosure was only hypothetical.
It follows that protectionary mechanisms are needed to work in tandem with the disclosure requirements to combat the risk of greenwashing. This protection is provided in the FMCA via the provisions relating to misleading or deceptive conduct, false or misleading representations, and unsubstantiated representations. The need for both the consumerist and arm’s length
217 NZ CS 1 at paragraph 22.
218 NZ CS 2 at paragraph 17.
219 Deloitte “Scope 1, 2 and 3 emissions” (2023) Deloitte < https://www2.deloitte.com/uk/en/focus/climate- change/zero-in-on-scope-1-2-and-3-emissions.html>.
220 NZ CS 1 at paragraph 16.
221 NZ CS 1 at paragraph 16 – emphasis added.
222 NZ CS 1 at paragraph 16.
narratives in the environmental disclosure and greenwashing regulation scheme creates an inevitable conflict.
All three narratives underpin environmental disclosure and greenwashing regulation in financial law. The multitude of relationships conceptualized in the narratives are incorporated into the FMCA via the main purposes of the Act. In particular, the relationship between investors and businesses indicates the incorporation of the arm’s length narrative, and the relationship between consumers and businesses indicates the existence of the consumerist narrative.223 Environmental disclosure and greenwashing regulation thus deals with a range of stakeholders that extends beyond the typical ‘investor and business’ transaction.
A fundamental tension exists between the narratives, as they developed independently and reflect different social values. 224 In particular, the arm’s length narrative reflects possessive individualism and the consumerist narrative focuses on welfare statism.225 Moreover, the content of the arm’s length and consumerist narratives do not harmonize.226 The disclosure obligations are underpinned by the arm’s length narrative whereas the majority of the greenwashing regulation is supported by the consumerist narrative. The arm’s length narrative, in the form of disclosure, promotes freedom and sanctity of contract. In contrast, the consumerist narrative quashes unfair transactions per the fair dealing requirements.227 While historically the narratives did not overlap, institutional and transactional convergence in the financial markets during the 20th century has brought them together.228 This creates an incoherence in the scheme as the narratives, and therefore the different parts of the regulation, do not talk to each other.
This incoherence manifests itself in the multiple perceptions of an ‘investor’ across the environmental disclosure and greenwashing regulation. When abiding by disclosure requirements, the investor is viewed as autonomous, empowered,229 and a joint venturer in the
223 Financial Markets Conduct Act, s 3(a).
224 Benjamin, above n 159, at 806.
225 Benjamin, above n 159, at 806.
226 Benjamin, above n 159, at 803.
227 Benjamin, above n 159, at 803.
228 Benjamin, above n 159, at 806.
229 Moloney, above n 190, at 172 – 178.
security they have purchased.230 Therefore, when a company provides climate-related information in line with the climate standards, the investor can make an informed financial decision. The investor enters into a bargain with the company whereby they share risk and potentially receive a return.231 If an investor subsequently experiences an unfair market outcome, then they are generally held responsible for their loss as they ‘should have known better.’232
In contrast, if a reporting entity makes a misleading or unsubstantiated claim, the ‘investor’ is reconceptualized as a ‘consumer.’ The typical consumer is viewed as a vulnerable person who requires protection from, rather than the acquisition of, risk.233 As a result, the fair dealing provisions can step in to protect consumers of financial products and services from being misled by an entity’s representation. The legal response of greenwashing thus depends on whether you are perceived to be an autonomous investor or a weak consumer. As a result, legal uncertainty is introduced into the law. While the arm’s length narrative promotes certainty, the consumerist and fiduciary projects purposefully incorporate a lack of certainty via the concept of fairness.234
The multiple perceptions of the ‘investor’ creates a further incoherence within the purposes of mandatory climate-related disclosure. It can be argued that investor protection is implicitly embedded within the purpose statement of Part 7A as the mandatory regime creates an environment in which investors can factor climate risks into their decisions, or knowingly take on the risk. The narrative confusion in the FMCA, however, makes it unclear whether this protection relates to an autonomous investor or a vulnerable consumer. The purpose statement of mandatory climate-related disclosure does not aid the interpretation, as it includes both “investors” and “other stakeholders” in its purpose, which may cover consumers. This distinction is important as the information needs of investors and consumers are different, and the target of the information will determine the level of disclosure required for the assessment of risks and opportunities. If an investor is an autonomous risk taker, then businesses may only need to disclose information in line with Part 7A and the climate reporting framework.
230 Griffiths, above n 13, at 307.
231 Griffiths, above n 13, at 307.
232 Benjamin, above n 159, at 793.
233 Griffiths, above n 13, at 307.
234 Griffiths, above n 13, at 807.
Conversely, if the investor is conceptualized as a vulnerable consumer, then the entity may need to disclose information in a more simply worded and extensive manner.
Further, the degree of greenwashing required for a fair dealing provision to be activated depends on the conceptualization of the investor. For example, an unsubstantiated claim may be substantiated per the concept of an autonomous investor, but not of a vulnerable consumer. This can be illustrated via reference to a recent infringement notice issued by the Australian Securities and Investments Commission (‘ASIC’).235 Vanguard Investments Australia Ltd (‘Vanguard’) issued a PDS that ASIC considered misled the public because it overstated an investment screen.236 Vanguard’s PDS claimed to prevent investment in companies involved in tobacco.237 While the investment screen did prevent certain tobacco investments, it only applied to manufacturers and not to companies who sold tobacco products.238 If the investor is viewed as a vulnerable consumer, it follows that Vanguard may need to provide more precise details of the companies that were prevented by the investment screen in order to protect the consumer. Under this perception of the investor, the PDS likely included an unsubstantiated claim. Conversely, if the investor is perceived to be autonomous, the investor may be expected to recognize that not all connections with tobacco will be prevented. Thus, an autonomous investor could make additional queries and arrive at an informed decision. Vanguard’s PDS tobacco statement may therefore not be considered to be unsubstantiated from this perspective. This creates uncertainty for reporting entities regarding the target audience of their disclosure and whether the release of their climate information will be captured by the fair dealing provisions. This lack of clarity may mean that firms engage in unintentional greenwashing. It also provides a platform for intentional ‘greenwashers’ to take advantage of the multiple narratives prevalent in the FMCA.
The narrative confusion illustrates that the theoretical underpinnings of the environmental disclosure and greenwashing regulation are not cohesive. Successfully navigating through what has become a ‘regulatory jungle’ will prove difficult when different parts of the scheme expect
235 Australian Securities & Investments Commission “ASIC issues infringement notices against investment manager for greenwashing” (2 December 2022) < https://asic.gov.au/about-asic/news-centre/find-a-media- release/2022-releases/22-336mr-asic-issues-infringement-notices-against-investment-manager-for- greenwashing/>.
236 Australian Securities & Investments Commission, above n 235. 237 Australian Securities & Investments Commission, above n 235. 238 Australian Securities & Investments Commission, above n 235.
a different stakeholder to be the recipient of disclosure. Alongside the theoretical foundations of environmental regulation, a further layer of incoherence may be seen in the legal content of the regulation.
Chapter Three: Incoherence within the Legal Content
If the law fails to set out clear disclosure obligations, reporting entities will not know what information they must disclose. Intentional and unintentional greenwashing will likely result. Intentional greenwashing can occur as entities may utilize the ambiguity in the law to argue that their statements fit within the regulations. Moreover, if the law is ambiguous, entities may believe they are reporting per the regulation, yet they are actually unintentionally greenwashing.
The level of coherence within the legal content of environmental disclosure and greenwashing regulation can be explored through reference to the degree of precision debate. The two main schools of thought are the principles-based and rules-based approaches.239 The principles- based approach is made up of a set of brief principles, which is supplemented by guidelines.240 The rules-based approach uses more concrete measures which set out actions or behaviors to be undertaken, or specifies the means through which the actions or behaviors are achieved.241 The approach taken in New Zealand’s environmental disclosure regulation will indicate the degree to which entities have clarity about what must be included in their climate related disclosure.
In securities market regulation generally, New Zealand takes a mixed approach.242 For example, there is prescribed content for the PDS.243 This is accompanied by general principles such as including any other material information and ensuring that no false or misleading statements are made. In environmental regulation, America, the UK and the EU have adopted predominantly principles-based regimes.244 New Zealand also follows a mainly principles- based approach.
239 Ministry of Economic Development, above n 121, at 97. 240 Ministry of Economic Development, above n 121, at 97. 241 Ministry of Economic Development, above n 121, at 97. 242 Ministry of Economic Development, above n 121, at 97. 243 Financial Market Conduct Regulations, s 4.
244 Ministry of Economic Development, above n 121, at 97.
I. The Principles-based Approach and Mandatory Disclosure
The New Zealand government endorsed the Task Force on Climate-related Financial Disclosures (‘TCFD’) framework in 2019.245 The TCFD report focuses on four areas: governance, strategy, risk management and metrics and targets.246 The recommendations are underpinned by seven principles for effective disclosure.247 The principles are that disclosures should represent relevant information, they should be specific and complete, clear, balanced and understandable.248 The disclosures should also be comparable, reliable, verifiable, objective and provided on a timely basis.249 These principles are consistent with internationally accepted frameworks for financial reporting and the TCFD recommends that organizations engage with them when developing climate-related financial disclosures.250 The climate standards are based on the TCFD recommendations.251
The climate standards are concise and focus on high-level areas for disclosure.252 The standards will soon be supported by supplementary non-binding guidance from the XRB.253 The XRB Board, in creating the climate reporting framework, aims to provide flexibility for firm-specific disclosures whilst also including some prescriptive disclosures for comparability. For example, an entity must disclose a description of its anticipated climate-related impacts.254 As part of this, firms must disclose their anticipated financial impact.255 In relation to anticipated financial impact, the International Sustainability Standards Board (‘ISSB’) proposed a more prescriptive standard, whereby an entity would disclose how it expects its financial position and performance to change over time given its strategy to address climate risks and opportunities.256 The XRB decided to take a principles-based approach by only requiring a firm to disclose the anticipated financial impacts of climate-related risks and opportunities reasonably expected by
245 External Reporting Board Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures – Governance and Risk Management Consultation Document (October 2021) at 5.
246 Task Force on Climate-related Financial Disclosures Task Force on Climate-related Financial Disclosures Overview (December 2022) at 16.
247 External Reporting Board, above n 245, at 23.
248 Task Force on Climate-related Financial Disclosures Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017) at 18.
249 Task Force on Climate-related Financial Disclosures, above n 248, at 18. 250 Task Force on Climate-related Financial Disclosures, above n 248, at 18. 251 External Reporting Board, above n 245, at 5.
252 External Reporting Board, above n 245, at 9.
253 NZ CS 1 at paragraph BC8. 254 NZ CS 1 at paragraph 11(d). 255 NZ CS 1 at paragraph 15(b). 256 NZ CS 1 at paragraph BC33.
an entity.257 In doing so, the XRB recognized that this was a new area of disclosure and a more general disclosure rule would better facilitate the emergence of new practices.258
The principles underlying the New Zealand framework are related to information, presentation and materiality. The XRB Board sets out a list of principles that makes climate-related disclosure information useful to primary users.259 These are relevance, accuracy, verifiability, comparability, consistency and timeliness.260 The Board also provides principles to ensure that the presentation of climate-related disclosures is useful. These are balance, understandability and coherence.261
The key principle underlying the climate framework is materiality.262 Information required by the climate standards must be disclosed if it is material.263 The XRB defines ‘material information’ as information that, when omitted, misstated or obscured, could reasonably be expected to influence decisions that primary users make on the basis of an entity’s climate- related disclosures.264 This definition is similar to recent articulations of the general materiality definition used in financial markets.265 Primary users are existing and potential investors, lenders and other creditors.266 Materiality is entity-specific and based on the nature and magnitude of the items to which the information relates.267 The climate standards do not state a uniform quantitative threshold for materiality or predetermine what would be material information in a given situation.268 The application of the disclosure requirements in the climate standards are presumed to result in material information, though ultimately the responsibility for making this judgment rests with the reporting entity.269 An entity does not need to disclose information set out in the climate standards if it does not consider it to be material.270 Moreover, the firm does not need to disclose how conclusions on materiality judgments were made.271
257 NZ CS 1 at paragraph 15(b).
258 NZ CS 1 at paragraph BC33.
259 Aotearoa New Zealand Climate Standards 3 Climate-related Disclosures 2022 (NZ CS 3) at page 7.
260 NZ CS 3 at page 7.
261 NZ CS 3 at page 8.
262 NZ CS 3 at paragraph 27.
263 NZ CS 3 at paragraph 28.
264 NZ CS 3 at paragraph 28.
265 Moses, above n 54.
266 NZ CS 3 at page 15.
267 NZ CS 3 at paragraph 30.
268 NZ CS 3 at paragraph 30.
269 NZ CS 3 at paragraph 31.
270 NZ CS 3 at paragraph 32.
271 NZ CS 3 at paragraph BC40.
The materiality concept is useful for climate disclosure as it provides a workable standard for evaluating precision and accuracy.272 An analogy can be drawn to financial forecasting regulation. Like climate information, financial projections can quickly change and information can become redundant. To place some boundaries on the disclosure of this forward-looking information, New Zealand financial forecasting regulation has incorporated a principles-based approach, and places emphasis on materiality.273 For climate disclosure to follow the same approach indicates that New Zealand is regulating similar types of information via the same means.
A principles-based approach provides a degree of flexibility that is desirable within environmental disclosure law. Reporting entities are able to provide more or less information depending on the extent to which their business activities impact on the climate.274 This is important as some issuers will find some areas of climate impact more relevant to their operations than others. Good practice in environmental disclosure is rapidly evolving, and supporting guidance can be more regularly updated than the climate standard itself. This is because guidance is not subject to a formal consultation process.275 Data can be disseminated quickly, via guidance, to CREs. The principles-based approach thus provides a regulatory framework that can adapt to technological, institutional and structural change.
The use of principles also gives issuers scope to develop their own disclosure initiatives. This is important in a new area in which strong disclosure practices are still being established. Firms are thus encouraged to create innovative ways of complying with the climate standards.
Some prescription is still necessary. Rules have a high degree of certainty and work well when there is a clear policy objective and a low tolerance for policy failure.276 The climate emergency illustrates that there is a low tolerance for policy failure in this area. While rules are useful in environmental disclosure, they are not a foolproof approach. This is because rules can lack
272 Avi Rushinek, Sara F. Rushinek, Lucia S. Chang and Kenneth S. Most “The Construction of an International Investors’ Perception Model for Corporate Published Forecasted Financial Reports for the USA, the UK and New Zealand” (1983) 4 Manag. Decis. Econ. 258.
273 Financial Reporting Standard No. 42 at paragraph 12.
274 External Reporting Board, above n 245, at 9.
275 External Reporting Board, above n 245, at 9.
276 Ministry of Economic Development, above n 121, at 97.
detail, be inconsistently applied, and encourage ‘tick-box’ compliance.277 Moreover, prescriptive regulation may reduce innovation by promoting ‘static’ provisions.278
It has also been argued that fixed rules do not always generate the desired outcome. For example, Professor Colin Mayer argues that implementing a legal obligation on companies to adopt a mandatory social purpose would result in entities operating to find profitable solutions for people and the planet.279 Professor Paul Davies critiques this proposition by stating that merely requiring a purpose statement, and leaving its formulation to the board, is unlikely to produce better quality purpose statements than those produced under a voluntary regime.280 Moreover, Davies states that the legal obligation could be discharged, in a particular manner, without generating the desired result.281 He draws on the UK Companies Act history to demonstrate that companies will use lawyers to navigate around the required statements if they are perceived to be inconvenient. 282 This is especially pertinent if significant consequences are attached to non-compliance.283 It follows that a predominantly principles-based approach, supported by some prescription, is the most appropriate way to govern the environmental disclosure regime.
While a predominantly principles-based approach is necessary, it is not without flaws. It should be noted that there is a lack of clarity surrounding the interpretation of climate risk materiality.284 Disagreement has occurred in most jurisdictions regarding what constitutes a material climate risk that will trigger mandatory disclosure. The question of what constitutes material information arises often in general securities disclosure and the answer requires a judgment call. This judgement call is more difficult in the context of environmental disclosure due to the largely qualitative, forward looking, and unknowable nature of climate risk. It follows that the forms and types of statements and data that should be material, and conversely what should be considered to be puffery, remains muddled. The fine distinction between puffery and material information, which can result in greenwashing, is exemplified in the class
277 Ministry of Economic Development, above n 121, at 97. 278 Ministry of Economic Development, above n 121, at 97. 279 Colin Mayer Prosperity (OUP, Oxford, 2018).
280 Paul Davies Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements (European Corporate Governance Institute, Law Working Paper No. 666/2022, 1 November 2022) at 15.
281 Davies, above n 280, at 15.
282 Davies, above n 280, at 16.
283 Davies, above n 280, at 16.
284 Interview with Jacco Moison, above n 115.
action brought against Oatly, a Swedish oat milk company.285 The disclosure in question was made in the Registration Statement in Oatly’s U.S. IPO, where it was stated that the conversion from cow’s milk to Oatly resulted in 79% less land usage, 80% less carbon emission emissions, and a 60% reduction in energy usage.286 It was alleged that these statements were materially misleading as they used data collected prior to Oatly’s expansion into the United States and Asia and thus overstated the company’s environmental impact and practices.287 The Court considered the statements to be mere puffery and dismissed the complaint.288 This outcome illustrates that the threshold for materiality is scenario-specific, therefore making it difficult in advance to know whether a particular statement will be deemed material.
The judgment calls inherent in a principles-based approach are influenced by who the reporting entity perceives to be their disclosure audience. As argued in Chapter Two, the three narratives in this area of the law means that there are multiple conceptions of who the audience could be. The flexibility in a principles-based approach, and the concept of materiality, allows for the content of disclosure to vary depending on whether the entity perceives its audience to be investors or consumers. This may reduce comparability between CRE disclosures.
Part 7A provides some clarity to the regulatory scheme by ensuring that all CREs follow the same climate framework. This creates a degree of standardization across climate statements for CREs. However, businesses who do not meet the definition of a CRE are still subject to the original regulatory jungle. Moreover, the reliance on materiality means that supplementary guidance from the XRB and other regulatory bodies, such as the FMA and the NZX, remain a key part of the regulatory scheme. It follows that while mandatory disclosure may appear to provide clarity to the regime, in reality, the principles-based approach incorporated into the climate standards reintroduces uncertainty into the law.
The mix of potentially overlapping FMCA provisions, alongside multiple guidance notes and non-binding recommendations, indicates that environmental disclosure may be over-regulated. This can create inefficiency, hinder growth and development, increase operational costs and
285 Jochims v Oatly Group AB 1:21-CV-06360-AKH (District Court SD New York, 26 July 2021).
286 Oatly Group AB, above n 285, at 8.
287 Oatly Group AB, above n 285, at 11.
288 Jochims v Oatly Group AB 1:21-CV-06360-AKH (District Court SD New York, 1 June 2023) at 1.
reduce innovation.289 Therefore, while the mandatory regime may have been implemented to reduce the environmental disclosure regulatory jungle, the resulting ‘clutter’ in environmental disclosure and greenwashing regulation shows that this jungle has re-emerged under the mandatory regime.
The below diagram illustrates the regulatory jungle:
The jungle creates a breeding ground for both intentional and unintentional greenwashing. Providing disclosures that satisfy both the hard and soft law components requires an in-depth understanding of all resources, and relies on the market’s materiality judgement aligning with the firm’s understanding. This raises a rule of law issue as the intricacies of the regulatory jungle make it near impossible for reporting entities to know what the applicable law is. This difficulty is exacerbated by the entity-specific nature of this area of the law, for example, what is material under NZ CS 1 for one company may not be material for another company in the same industry. For firms with well-meaning intentions, they may fail to successfully navigate through the disclosure law jungle and thus unintentionally greenwash. Given the opaque nature of the disclosure regime, those who intentionally want to ‘work the system’ can do so and avoid detection.
289 Zeleke Worku “The Impact of Over-regulation on small enterprises” (2016) 6 Risk governance & control: financial markets & institutions 12 at 12.
The concept of a regulatory jungle is not unique to climate information. A comparable incoherence within legal content can be seen in the initial development of the financial reporting framework. The harmonization of financial reporting as a means to dispel this jungle, and its relevance to climate reporting, should thus be explored.
II. International Harmonization
Over time, financial reporting has harmonized. This is primarily due to the adoption of the International Financial Reporting Standards (‘IFRS’), which were created by the International Accounting Standards Committee.290 Since the initial adoption of the IFRS in the EU, it has become mandatory for listed companies in 168 jurisdictions.291 The adoption of one standard provides clarity to businesses regarding their disclosure obligations. Improvements have been observed in financial forecasts, where the introduction of IFRS has increased the comparability and accuracy of information.292
Climate information has been described as at the level of alignment that financial standards were at approximately 60 years ago.293 Countries are applying different frameworks to their climate-related disclosure regimes. For example, the EU is focused on achieving climate neutrality by 2050.294 A key part of this is directing investment towards environmentally friendly activities and products. This is done through mechanisms such as the EU Taxonomy, which provides a classification system for sustainable activities.295 In contrast, the ISSB framework, which was considered in the development of the Aotearoa Climate Standards, focuses on reducing information asymmetry for investors.296 While the ISSB aims to provide
290 Helena Vieira “Harmonising accounting standards across the globe” (5 April 2017) London School of Economics < https://blogs.lse.ac.uk/businessreview/2017/04/05/harmonising-accounting-standards-across-the- globe/>.
291 IFRS “Who uses IFRS Accounting Standards?” (2023) < https://www.ifrs.org/use-around-the-world/use-of- ifrs-standards-by-jurisdiction/>.
292 Chee Seng Cheong, Sujin Kim and Ralf Zurbruegg “The impact of IFRS on financial analysts’ forecast accuracy in the Asia-Pacific region: The case of Australia, Hong Kong and New Zealand” (2010) 22 Pacific Accounting Review 124 at 141.
293 Sharman, above n 3.
294 European Commission “EU taxonomy for sustainable activities” (2023)
295 European Commission, above n 294.
296 IFRS “International Sustainability Standards Board” (2023) < https://www.ifrs.org/groups/international- sustainability-standards-board/>.
a framework that is used internationally, this is yet to result in global alignment. Therefore, there is currently two distinct means of regulating environmental disclosure information.297
International harmonization of climate frameworks, for all entities who disclose environmental information, would reduce the regulatory jungle. Despite still being principles-based and therefore inherently uncertain, abiding by one standard decreases the need for multiple non- binding recommendations and guidance notes. It also streamlines the climate disclosure process for multinational companies who are subject to several standards. Harmonization mitigates the difficulties that the FMA currently faces when working with overseas regulators as there would be a smaller number of differences between disclosure regimes.
This analysis shows that the content of environmental disclosure and greenwashing regulation must be governed by a predominantly principles-based approach due to the nature of the information. The incoherence in both the theoretical foundations and the legal content has manifested in a regulatory jungle, ultimately creating an opportunity for unintentional and intentional greenwashing. While international harmonization could reduce some of the incoherence and decrease the greenwashing risk, this is a long-term solution that depends on the actions of multiple stakeholders. As greenwashing in the market must be dealt with, the effectiveness of the FMA’s enforcement powers will now be assessed.
297 Sharman, above n 3.
Chapter Four: Greenwashing and Enforcement
An enforcement regime is necessary to prevent and punish greenwashing in financial markets. Without effective enforcement, some market participants will contravene the law.298 These transgressors benefit from an unfair competitive advantage over complying market participants.299 The enforcement regime is disciplinary, and consists of monitoring, prosecution and penalties.300 As greenwashing is a relatively recent phenomenon, the available enforcement tools and the extent to which the FMA will utilize these is unclear. The likely strategy and associated implications will be assessed via game theory.
The passing of the FMCA, which shifted enforcement in New Zealand from a predominantly private to public scheme, completed a transition which had started about a decade before.301 In contrast to the Securities Commission, which was described as an observer rather than a protector, the FMA has significant enforcement powers.302 When the SA and the SMA were repealed, both used the declaration of contravention, pecuniary penalties, compensatory orders and other civil remedy orders.303 This structure was incorporated into the FMCA, and is supported by the FMA’s ability to make prohibition and disclosure orders, the court’s power to make similar orders, make management banning orders, and grant injunctions.304 A notable change is the reduced importance of criminal offences and the increased reliance on civil liability provisions.305
Greenwashing can be prevented through criminal and civil liability avenues in the FMCA. These include options such as infringement notices, bans and stop orders. An analysis of the provisions indicates that enforcement mechanisms will differ based on whether the entities or directors engaged in intentional or unintentional greenwashing.
298 Philipp Maume and Gordon Walker “Enforcing Financial Markets Law in New Zealand” (2013) NZ L Rev 263 at 265.
299 Maume and Walker, above n 298, at 265.
300 Ana Carvajal and Jennifer Elliott The Challenge of Enforcement in Securities Markets: Mission Impossible?
(International Monetary Fund, WP/09/168, August 2009).
301 Maume and Walker, above n 298, at 263.
302 Bryan Gaynor “Securities Regulation in New Zealand: Crisis and Reform” in Gordon Walker and Brent Fisse (eds) Securities Regulation in Australia and New Zealand (OUP, Auckland, 1994) 10 at 17.
303 Shelley Griffiths “Two Markets Share Two Structures: Fair Dealing and Enforcement” in Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomas Reuters New Zealand Ltd, Wellington, 2018) 1111 at 1114.
304 Griffiths, above n 303, at 1114.
305 Griffiths, above n 303, at 1114.
Greenwashing can be a criminal offence as it relates to defective disclosure and false statements.306 These offences can be committed by offerors and directors. In particular, it is an offence to knowingly or recklessly contravene a prohibition on offers where there is defective disclosure in the PDS or register entry.307 It is also an offence if this occurs in regard to any other defective disclosure provision.308 Contraventions occur when there is a false or misleading statement, a statement that is likely to mislead, or an omission.309 In relation to disclosure in the PDS or register entry, a contravention can also occur if a circumstance has arisen since the PDS was lodged that would have been required by the FMCA or the regulations to be disclosed in the PDS or the register entry, had it occurred before the PDS’ lodgment.310
To engage in intentional greenwashing, the offeror or director must be aware that the information they are providing or omitting creates an unrealistic depiction for investors. Intentional greenwashing will therefore meet the ‘knowledge’ requirement in sections 510 and
511. Unintentional greenwashing may be a criminal offence if it is found that the offeror or director was reckless when disclosing the information. Honest misjudgments from offerors and directors may be captured by the provision, as there is a very fine distinction between honest mistakes and dishonest risk-taking.311 It follows that honest directors or offerors, who unintentionally engaged in greenwashing, could have acted recklessly and therefore become liable for imprisonment or a fine.312 This result seems misaligned with one of the criminal law’s key goals – deterrence. In situations where unintentional greenwashing was an honest mistake, the deterrence aim of criminal provisions has no relevance as the party did not mean to commit the act. The significant repercussions for offerors and directors who disclose environmental information with good intentions may discourage them from providing any additional disclosure or innovation in this field. This is an adverse outcome in environmental information, as tackling the climate emergency via disclosure requires quick innovation and support for entities. The ‘recklessness’ standard in the criminal provisions may point towards an overinclusive greenwashing enforcement scheme.
306 Financial Markets Conduct Act, Subpart 4 Part 8.
307 Section 510.
308 Section 511.
309 Section 511.
310 Section 82(1)(a)(iii).
311 Griffiths, above n 303, at 1117.
312 Financial Markets Conduct Act, ss 510 and 511.
Section 512 provides a general offence for false or misleading statements. The mental element required is knowledge, and thus only applies to intentional greenwashing.
The FMA can issue infringement notices if it believes on reasonable grounds that the person is committing or has committed an infringement offence.313 A number of offences in the FMCA are infringement offences.314 For example, an infringement offence is committed when a CRE fails to keep its CRD records in the prescribed manner.315 This is a strict liability offence and results in a fine not exceeding $50,000.316 In the past year, ASIC has taken a very active enforcement role against greenwashing, and has issued multiple infringement notices.317 In its regulatory response guidelines, the FMA envisages issuing infringement notices when a warning is required and it is the entity’s first contravention.318 The contravention will usually be low level.319 If New Zealand follows Australia’s lead, the FMA will use infringement notices as a key part of their enforcement strategy. It should be noted, however, that ASIC is known for taking a more active and strict enforcement policy than the FMA. Therefore, while the FMA may increase its use of infringement notices in this area, it is unlikely to match the quantity and severity of Australia’s infringement notices.
A range of orders are available if a civil liability provision is contravened.320 The contravention must relate to provisions of fair dealing, disclosure of offers of financial products, governance of financial products and dealing in products in markets.321 These provisions are strict liability and do not distinguish between intentional and unintentional greenwashing. The orders available include a declaration of contravention, a pecuniary penalty order, a compensatory order and other civil penalty orders per s 498.
313 Financial Markets Conduct Act, Subpart 5 Part 8.
314 Griffiths, above n 303, at 1117.
315 Section 461W(3).
316 Section 461W(3).
317 Australian Securities & Investments Commission “ASIC issues infringement notice to superannuation fund promoter for greenwashing” (2 May 2023) < https://asic.gov.au/about-asic/news-centre/find-a-media- release/2023-releases/23-110mr-asic-issues-infringement-notice-to-superannuation-fund-promoter-for- greenwashing/>.
318 Financial Markets Authority Regulatory response guidelines (August 2016) at 12.
319 Financial Markets Authority, above n 318, at 12.
320 Griffiths, above n 303, at 1118.
321 Griffiths, above n 303, at 1118.
Unintentional greenwashers can avoid liability via a defence. The ‘reasonableness’ standard is pervasive in the defences.322 Two general defences are available for people who contravene a civil liability provision.323 First, there will be no liability if the contravening party can show that the contravention was due to reasonable reliance on information supplied by another person.324 This applies to all civil liability provisions. Second, the person can avoid liability if the contravention was due to the act or default of another person, or to an accident or some other cause beyond the party’s control, and they took reasonable precautions and exercised due diligence.325 This defence does not apply to defective and ongoing disclosure obligations.
Section 500 sets out disclosure defences for contravening persons. If a person provides a statement that is false or misleading, or likely to mislead, it is a defence if the person can prove that they made all reasonable inquiries and, after doing so, believed on reasonable grounds that the statement was not false or misleading.326 The same defence is available if a person contravenes a disclosure provision via omission from a disclosure document or register entry.327 If a person contravenes section 82 due to the lack of disclosure of a new circumstance that has arisen since the PDS’ lodgment, there will be no liability if the person proves that they did not know about the matter.328
Section 501 provides a defence for directors who contravened a climate-related disclosure provision. This defence applies when a director took all reasonable steps to ensure that the climate reporting entity complied with the provision. The availability of this defence likely incentivizes directors to engage with the disclosure regulation, without fear of harsh enforcement. This may increase environmental disclosure innovation, which would be welcomed due to the urgency of the climate crisis.
The availability of defences demonstrates that not all greenwashing results in disciplinary action. If greenwashing is due to someone else’s actions or required a beyond reasonable effort to prevent its occurrence, there will be no liability. This means that, when viewed generally, reporting entities and directors will not be liable for honest efforts that resulted in
322 Griffiths, above n 303, at 1123.
323 Financial Markets Conduct Act, s 499.
324 Financial Markets Conduct Act, s 499(1)(a). 325 Financial Markets Conduct Act, s 499(1)(b). 326 Section 500(1).
327 Section 500(2).
328 Section 500(3).
greenwashing. Further, even if a defence is available, the conduct is still treated as contravening a civil liability provision, despite no liability being given.329 This suggests that Parliament still views all types of greenwashing to be undesirable. While the FMA has a framework through which it can prevent and punish greenwashing, the effectiveness of enforcement is dependent on the extent to which the FMA uses these tools.
I. The Optimal Enforcement Strategy
Game theory can be used to determine the optimal enforcement strategy for reporting entities and the FMA. In particular, the FMA’s choice of a cooperative or uncooperative approach to greenwashing enforcement will be examined. If the FMA uses an inappropriate enforcement strategy, this will add further incoherence to the environmental scheme. Reporting entities will not only face a lack of clarity regarding their disclosure obligations, but will also have to deal with enforcement that does not properly rectify greenwashing.
An analogy can be drawn between the U.S. Securities and Exchange Commission (‘SEC’) and its enforcement of crypto-assets and the FMA and its enforcement of climate-related disclosure. Like crypto-assets, climate disclosure is a new area in securities regulation. Further, the FMA has released policy documents on environmental disclosure, which is similar to the SEC’s release of crypto-related policy statements.330 While the enforcement regime is set out in the FMCA, and the FMA has publicly stated that “greenwashing is illegal,”331 it is unclear how the FMA will enforce against greenwashing. The FMA’s general regulatory response is to use a principled approach when choosing the applicable tool.332 If there is a breach of financial markets legislation, the FMA will intervene on a low-level or informal basis if this is proportionate to the misconduct and achieves the desired market outcome.333 Stronger action will be taken when individuals and entities fail to meet the standards expected of them.334 This regulatory response is supported by Braithwaite’s responsive regulation theory, which posits that a regulator should have an escalating set of enforcement tools that it can apply flexibly.335
329 Section 502.
330 Yuliya Guseva “The SEC, Digital Assets, and Game Theory” (2021) 46 J. Corp. L 629 at 631.
331 Sharpe, Massey, Shiels and Woolford, above n 148.
332 Financial Markets Authority, above n 318, at 8.
333 Financial Markets Authority, above n 318, at 8.
334 Financial Markets Authority, above n 318, at 8.
335 Ayres and Braithwaite Responsive Regulation (OUP, Oxford, 1992).
The chosen tool will depend on the severity of the wrongdoers actions.336 The FMA’s regulatory response thus takes the form of a regulatory pyramid, and indicates that the FMA will choose an enforcement strategy in response to the degree of severity for each instance of greenwashing. As this is a flexible approach, the FMA and market participants are playing a game of complete but imperfect information.337 This is because the FMA and reporting entities know the available strategies but do not yet know which one the other party will use.338 A game theory model, adapted from the context of the SEC and its crypto-asset enforcement, will be constructed to determine the best strategy available to each player.
Both players have a choice. The reporting entities can choose to cooperate with securities laws or not.339 In the context of greenwashing enforcement, the incoherence within the regulatory framework provides the reporting entities with a ‘third choice.’ This is the ‘apparent cooperative approach.’ The lack of clarity and regulatory jungle created by the narratives conflict and principles-based approach means that reporting entities can choose not to cooperate with the disclosure regulation, whilst still being able to maintain an appearance of cooperation and the existence of an honest mistake. This opportunity incentivizes firms to intentionally greenwash as they can reap the benefits of greenwashing without experiencing reputational harm or full compliance costs.
On the other hand, the FMA can decide to take a cooperative or non-cooperative approach.340 No ‘third choice’ arises in the greenwashing context for the regulator. A cooperative approach manifests in a decision not to enforce, or to be lenient in enforcing, against a firm who had made a bona fide attempt to comply.341 For example, the FMA could choose to give an informal warning to the entity,342 or to only impose a small fine for a criminal offence. The cooperative approach is supported by the ‘really responsive model’ posited by Robert Baldwin and Julia Black.343 This model expands Braithwaite’s responsive regulation theory by arguing that regulators need to be responsive not only to the compliance of the reporting entity, but to five
336 Ayres and Braithwaite, above n 335.
337 Guseva, above n 330, at 648.
338 Guseva, above n 330, at 648.
339 Guseva, above n 330, at 649.
340 Guseva, above n 330, at 649.
341 Guseva, above n 330, at 650.
342 Interview with Jacco Moison, above n 115.
343 Robert Baldwin and Julia Black “Really Responsive Regulation” (2008) 71 MLR 59 at 59.
further considerations.344 These are the firms’ attitudinal settings, the institutional environment, the regime’s performance, changes to the scheme, and the different logics in the regulatory tools and strategies.345 The incoherence in the regulatory foundations, illustrated by the conflicting narratives, shows the presence of multiple contrasting logics within the regulation. The incoherence created by the principles-based approach and manifestation in a regulatory jungle indicates the complexity of the institutional environment. These two layers of incoherence leads to confusion amongst entities, therefore detracting from effective regulation.346 A really responsive approach by the FMA would recognize this confusion and the resulting compliance difficulties. Thus, the FMA would likely respond via a cooperative approach. In contrast, a noncooperative approach would involve a strict enforcement policy.347 The FMA’s decision to take a cooperative or non-cooperative approach will likely be hindered by an inability to interpret whether the entity has engaged in intentional or unintentional greenwashing.
The payoffs for each party must be analyzed. From the reporting entity’s perspective, the expected payoff from cooperation includes a decreased risk of civil and criminal penalties, injunctive relief, and a greater chance that the firm’s disclosure and/or IPO will proceed.348 This payoff, however, is reduced by the compliance cost.349 A reporting entity who does not comply with the regulations will save this cost.350 In a situation where the reporting entity tries to comply but fails, and the FMA subsequently enforces against it, the entity can still receive a reduced benefit.351 This is because it attempted to take a cooperative approach.352 Moreover, the fact that the compliance was unsuccessful suggests that the entity did not spend a sufficient amount on compliance (thus, the compliance cost is reduced).353 In the ‘apparent cooperative approach,’ the entity receives the benefits of a cooperative approach, but does not pay the full cost of compliance.
344 At 59.
345 At 59.
346 Baldwin and Black, above n 343, at 70.
347 Guseva, above n 330, at 649.
348 Guseva, above n 330, at 649.
349 Guseva, above n 330, at 650.
350 Guseva, above n 330, at 650.
351 Guseva, above n 330, at 650.
352 Guseva, above n 330, at 650.
353 Guseva, above n 330, at 650.
The FMA faces two policy payoffs.354 These are supporting innovation and confident participation, and market integrity.355 If the FMA takes a strict enforcement policy, the benefit of innovation and confident participation may be diminished as firms are hesitant to innovate and participate in projects that are not clearly compliant with the regulation.356 The benefit of market integrity may be reduced if the FMA enforces against reporting entities who made a bona fide attempt to comply.357 The FMA’s payoff is also reduced by the enforcement cost.358
When both the FMA and the reporting entity cooperate, the decision not to enforce, or to show flexibility in enforcement, results in a better relationship between the FMA and reporting entities, the facilitation of capital formation, and innovation.359 The cooperative approach is present in the FMCA through the use of defences, which allows entities and directors to avoid liability if they made reasonable compliance attempts. This strategy is also demonstrated through the FMA’s adoption of the risk-based enforcement approach, whereby the FMA uses its finite resources to enforce against market participants that present the most significant risk to the financial markets.360
In situations where the entity cooperates and makes a bona fide attempt at compliance, but the FMA brings an enforcement action, there is a reduced benefit from the policy objectives of innovation, confident participation and market integrity.361 The FMA also suffers an enforcement cost. Alternatively, when the reporting entity does not cooperate and the FMA does not respond with an enforcement action, there is a decrease in the benefits of innovation, confident participation and market integrity.362 This is because the FMA is exposing investors to risk, failing to pursue its objectives, and suffers reputational damage.363 When both players do not cooperate, the FMA will strictly enforce while the reporting entity fails to comply with
354 Guseva, above n 330, at 650.
355 Guseva, above n 330, at 650.
356 Guseva, above n 330, at 650.
357 Guseva, above n 330, at 650.
358 Guseva, above n 330, at 650.
359 Guseva, above n 330, at 651.
360 Financial Markets Authority “Compliance Approach” (8 August 2022) <https://www.fma.govt.nz/about- us/regulatory-approach/compliance- approach/#:~:text=FMA%20takes%20a%20risk%2Dbased,efficient%20and%20transparent%20financial%20ma rkets.>.
361 Guseva, above n 330, at 651.
362 Guseva, above n 330, at 651.
363 Guseva, above n 330, at 651.
the regulation. The sole benefit associated with this strategy is the preservation of market integrity.364
The addition of ‘apparent cooperation,’ arising via the regulatory incoherence, extends the game to two further scenarios. In the situation where the entity ostensibly cooperates and the FMA identifies this and takes a noncooperative approach, the reporting entity is adversely affected. This is because the entity has paid a reduced compliance cost and likely experiences reputational damage for their intentional greenwashing. In the situation where the entity takes an ‘apparent cooperative’ approach and the FMA takes a cooperative approach due to a failure to detect the greenwashing, the entity benefits from all the advantages of compliance, and only pays a reduced compliance cost. In contrast, the FMA suffers from a loss of market integrity as it has failed to identify an intentional greenwashing situation. The entity therefore has the highest payoff when it apparently cooperates and the FMA responds with a cooperative approach.
Without the incoherence and resulting third strategy for entities of ‘apparent cooperation,’ the best strategy for both players is to cooperate. Per this strategy, the FMA will not enforce against unintentional greenwashing occurring through bona fide compliance attempts, or alternatively, lenient enforcement action will be applied. Intentional greenwashing, when identified by the FMA, will be strictly enforced against. The issue of ‘apparent cooperation’ arises in the greenwashing context as the regulatory framework has provided a degree of incoherence which allows firms to ‘cheat the system’ and ostensibly comply when they have no intention of cooperating. With the option of ‘apparent cooperation,’ the reporting entity’s best strategy is no longer to genuinely cooperate. Rather, the entity receives a higher benefit from apparently cooperating as there is a reduced compliance cost (in comparison to a cooperative approach). While a move up the enforcement pyramid in these situations would be an appropriate response to the entity’s contravention, the FMA is likely to take a cooperative approach as intentional greenwashing is difficult to detect. This undermines market integrity. The ineffective use of the cooperative approach here is difficult to rectify, due to the inherent lack of clarity in the regulatory scheme. The incoherence creates a risk that the FMA will inappropriately apply the cooperative approach in response to undetected intentional greenwashing.
364 Guseva, above n 330, at 651.
Conclusion
I began this paper with a skeptical view of environmental disclosure and greenwashing regulation. To my untrained eye, the framework appeared to be made up of reactive legislation that lacked clarity, ultimately resulting in ‘all talk and no action.’ On the face of it, this paper supports my initial impression of the scheme as it has shown that the environmental disclosure framework is theoretically incoherent and creates a regulatory jungle that is near impossible for entities to navigate through. The regulatory jungle limits the usability of the regulatory scheme for reporting entities and provides an opportunity for both intentional and unintentional greenwashing. Moreover, the FMA’s greenwashing enforcement strategy may display inefficiency as it likely overuses the cooperative approach.
After conducting my analysis, however, I have come to the view that the regulatory scheme must be configured in this way due to the nature of the information being regulated. While the legislation and guidance were reactive, their form are necessary in the climate context. Multiple narratives of financial law are needed in environmental disclosure regulation to mitigate the risk of greenwashing. This leads to an inevitable theoretical conflict within the regulatory foundations. The principles-based approach to regulating legal content is also necessary, as the rapid development in climate information means that a rules-based approach would quickly become outdated. In contrast, the flexibility of the principles-based approach allows new innovations to fall within the bounds of existing principles. A principles-based approach also forces reporting entities to incorporate environmental impacts into their overall strategy, thus furthering the policy goal of net zero by 2050. While the FMA may be overusing the cooperative enforcement approach, the significant difficulty associated with detecting ‘apparent cooperation’ means that this will likely continue. Ultimately, the current level of intentional and unintentional greenwashing in the financial markets is inevitable due to the nature of climate information.
While it has been concluded that the environmental disclosure and greenwashing regulatory scheme does work, two warnings should be given. First, the regulatory scheme is currently appropriate for environmental disclosure due to the unknowable nature of climate information. It is possible, however, that over the next decade, the amount of available information may increase, and predictions may become more accurate. If this occurs, the current regulatory
scheme may no longer be appropriate due to a change in the nature of climate information. Second, the inevitable incoherence within the scheme is not necessary in all areas of the law. If this regulatory scheme was transplanted to an area of the law which deals with more ‘knowable’ risks, this may create further issues. Legislators and regulators should be hesitant to transplant this framework to information of a different nature as it could result in needless uncertainty.
It should be noted that part of the incoherence within the regulation may dissipate over time. Climate disclosure and greenwashing is a live issue, and the current scheme is in its infancy. As businesses begin to provide climate information to the market, the consequences of the incoherence may be identified and organically fixed. The XRB Board have committed to starting a post-implementation review of the climate-related disclosure framework by December 2025, the results of which should provide valuable insight into whether the regime has been effective in changing company climate-related behavior.365 In the meantime, regulators should focus on enhancing the usability of the scheme.
365 External Reporting Board Climate-related Disclosures: Climate-related Disclosure Framework Consultation Document (July 2022).
Bibliography
A Cases
Coleman v Myers [1976] NZHC 5; [1977] 2 NZLR 225 (CA).
Orr v Martin [1991] 5 NZCLC 67,383.
R v Moses HC Auckland CRI-2009-004-1388 8 July 2011.
Saunders v Houghton [2016] NZCA 493.
Verano Properties Ltd v Severs HC Auckland CIV-209-404-8487 21 April 2010.
Abrahams v Commonwealth Bank of Australia (2017) FCA VID879.
Mark McVeigh v Retail Employees Superannuation (2019) FCA 14.
Jochims v Oatly Group AB 1:21-CV-06360-AKH (District Court SD New York, 26 July 2021).
Jochims v Oatly Group AB 1:21-CV-06360-AKH (District Court SD New York, 1 June 2023).
B Legislative Instruments
Climate Change Response (Zero Carbon) Amendment Act 2019. Companies Act 1993.
Fair Trading Act 1986.
Financial Markets Conduct Act 2013. Financial Markets Conduct Regulations 2014. Financial Reporting Act 2013.
Securities Act 1978. Securities Markets Act 1988.
Corporations Act 2001 (Cth).
Proposed Directive 2023/0085 on substantiation and communication of explicit environmental claims (Green Claims Directive, COM(2023) 166 final, 22 March 2023).
C XRB Standards
Financial Reporting Standard No. 29 1996.
Financial Reporting Standard No. 42 2012.
Aotearoa New Zealand Climate Standards 1 Climate-related Disclosures 2022. Aotearoa New Zealand Climate Standards 2 Climate-related Disclosures 2022. Aotearoa New Zealand Climate Standards 3 Climate-related Disclosures 2022. D Books and Chapters in Books
Ian Ayres and John Braithwaite Responsive Regulation (OUP, Oxford, 1992). Joanna Benjamin Financial Law (OUP, Oxford, 2007).
Bryan Gaynor “Securities Regulation in New Zealand: Crisis and Reform” in Gordon Walker and Brent Fisse (eds) Securities Regulation in Australia and New Zealand (OUP, Auckland, 1994) 10.
Shelley Griffiths “The Secondary Market” in John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Thomson Reuters, Wellington, 2013) 1185.
Shelley Griffiths “Securities Regulation, Securities Law and Financial Markets Law: From Investor Protection to Consumer Protection in New Zealand, 1985 – 2016” in Susan Watson (ed.) The changing landscape of corporate law (Centre for Commercial & Corporate Law Inc, Christchurch, 2017) 289.
Mark Harvey Climate Emergency: How Societies Create the Crisis (Emerald Publishing, United Kingdom, 2021).
Sir Henry Sumner Maine Ancient Law: Its Connection to the History of Early Society (eBook ed, J.M. Dent & Sons Limited, 2007).
Colin Mayer Prosperity (OUP, Oxford, 2018).
Niamh Moloney “Regulating the Retail Market” in Niamh Moloney and Eilìs Ferran and Jennifer Payne (eds) The Oxford Handbook of Financial Regulation (OUP, Oxford, 2015) 736.
Imad A. Moosa Good Regulation, Bad Regulation: The Anatomy of Financial Regulation
(Palgrave Macmillan, New York, 2015).
Susan Watson and Lynne Taylor (eds) Corporate Law in New Zealand (Thomas Reuters New Zealand Ltd, Wellington, 2018).
E Journal Articles
Robert Baldwin and Julia Black “Really Responsive Regulation” (2008) 71 MLR 59. Joanna Benjamin “The Narratives of Financial Law” (2010) 30 Oxford J Leg Stud 787.
Chee Seng Cheong, Sujin Kim and Ralf Zurbruegg “The impact of IFRS on financial analysts’ forecast accuracy in the Asia-Pacific region: The case of Australia, Hong Kong and New Zealand” (2010) 22 Pacific Accounting Review 124.
Charles Cho and Dennis Patten “The role of environmental disclosures as tools of legitimacy: A research note” (2007) 32 Account. Organ. Soc. 639
Ronnie Cohen & Gabriele Lingenfelter “Money Isn't Everything: Why Public Benefit Corporations Should Be Required to Disclose Non-Financial Information” (2017) 42 DEL. J. Corp. L 115.
Robert Cover “Nomos and Narrative” (1983) 97 Harv L Rev 4.
Geert Demuijnck and Björn Fasterling “The Social License to Operate” (2016) 136 J. Bus. Ethics. 675.
William Douglas “Protecting the Investor” (1934) 23 Yale L.J. 522.
Xingqiang Du “How the Market Values Greenwashing? Evidence from China” (2015) 128 J. Bus. Ethics. 547.
Peter Fitzsimons “The New Zealand Securities Commission: The Rise and Fall of a Law Reform Body” [1994] WkoLawRw 5; (1994) 2 Waikato Law Review 87.
Lloyd Freeburn & Ian Ramsay “An Analysis of ESG Shareholder Resolutions in Australia” [2021] UNSWLawJl 40; (2021) 44 UNSW Law Journal 1142.
John R. Graham, Campbell R. Harvey and Shiva Rajgopal “Value Destruction and Financial Reporting Decisions” (2006) 62 Financ. Anal. J 27.
Yuliya Guseva “The SEC, Digital Assets, and Game Theory” (2021) 46 J. Corp. L 629.
Habib Khan, Muhammad Houque and Lelemia Lelemia “Organic versus cosmetic efforts of the quality of carbon reporting by top New Zealand firms. Does market reward or penalise?” (2023) 32 Bus Strategy Environ 686
Philipp Maume and Gordon Walker “Enforcing Financial Markets Law in New Zealand” (2013) NZ L Rev 263.
Michael Minnis and Nemit Schroff “Why regulate private firm disclosure and auditing?” (2017) 47 Account. Bus. Res. 473.
Kieren Moffat, Justine Lacey, Airong Zhang and Sina Leipold “The Social Licence to Operate: a Critical Review” (2015) 89 J. For. Res. 477.
Niamh Moloney “The Investor Model Underlying the EU’s Investor Protection Regime: Consumers or Investors?” (2012) 13 European Business Organization Law Review 169.
Alessio Pacces “Will the EU Taxonomy Regulation Foster Sustainable Corporate Governance?” (2021) 13 Sustainability 12316.
Avi Rushinek, Sara F. Rushinek, Lucia S. Chang and Kenneth S. Most “The Construction of an International Investors’ Perception Model for Corporate Published Forecasted Financial Reports for the USA, the UK and New Zealand” (1983) 4 Manag. Decis. Econ. 258.
Samuel Tang and David Demeritt “Climate Change and Mandatory Carbon Reporting: Impacts on Business Process and Performance” (2018) 27 Bus. Strategy. Environ. 437.
Patrizia Tettamanzi, Giorgio Venturini and Michael Murgolo “Sustainability and Financial Accounting: a Critical Review on the ESG Dynamics” (2022) 29 Environ. Sci. Pollut. Res. 16758 at 16758.
Frank Vanclay and Philippe Hanna “Conceptualizing Company Response to Community Protest: Principles to Achieve a Social License to Operate” (2019) 8 Land 101.
Cynthia Williams and Donna Nagy “ESG and Climate Change Blind Spots: Turning the Corner on SEC Disclosure” (2021) 99 TEX. L. REV. 1453.
Zeleke Worku “The Impact of Over-regulation on small enterprises” (2016) 6 Risk governance & control: financial markets & institutions 12.
Ellen Pei-yi Yu, Bac Van Luu and Catherine Huirong Chen “Greenwashing in environmental, social and governance disclosures” (2020) 52 RIBAF 101192.
F Papers and Reports
Ana Carvajal and Jennifer Elliott The Challenge of Enforcement in Securities Markets: Mission Impossible? (International Monetary Fund, WP/09/168, August 2009).
Paul Davies Shareholder Voice and Corporate Purpose: The Purposeless of Mandatory Corporate Purpose Statements (European Corporate Governance Institute, Law Working Paper No. 666/2022, November 2022).
External Reporting Board Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures – Governance and Risk Management Consultation Document (October 2021).
External Reporting Board Climate-related Disclosures: Climate-related Disclosure Framework Consultation Document (July 2022).
Financial Markets Authority Regulatory Response Guidelines (August 2016).
International Federation of Accountants Investor Demand for Environmental, Social and Governance Disclosures: Implications for Professional Accountants in Business (February 2012).
JBWere Foreign Ownership Survey New Zealand 2016 (5 December 2016).
Ministry for the Environment & Ministry of Business, Innovation and Employment Climate- related financial disclosures – Understanding your business risks and opportunities related to climate change: Discussion document (ME 1473, October 2019).
Ministry of Economic Development Review of Financial Products and Providers – Stage One: Framework, Problem Identification and General Directions for Reform – Report to Minister of Commerce (2005).
Ministry of Economic Development Review of Securities Law Discussion Paper (June 2010). New Zealand Productivity Commission Low Emissions Economy (August 2018).
Pricewaterhouse Coopers ESG Reporting in Australia - the full story, or just the good story? An in-depth analysis of the maturity of ESG Reporting Across Australia’s top 200 companies (2021).
Task Force on Climate-related Financial Disclosures Final Report: Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017).
Task Force on Climate-related Financial Disclosures Task Force on Climate-related Financial Disclosures Overview (December 2022).
United Nations Framework Convention on Climate Change UN Climate Change Annual Report 2018 (2019).
The United Nations Global Compact Who Cares Wins: Connecting Financial Markets to a Changing World (United Nations Environment Programme Finance Initiative, 2004).
G Dissertations and Theses
Carla Natalia Gargiulo “Comparison of New Zealand and United States Securities Markets through the Looking Glass of the Efficient Market Hypothesis” (LLM Thesis, University of Georgia Law School, 2004).
Theodore Rose “Time is running out: The urgency of mandatory environmental disclosure in New Zealand Securities Market Law” (LLB(Hons) Dissertation, University of Otago, 2019).
Matt Weaver “Who Has Time to Read It Anyway?” Financial Markets Disclosure, Mum and Dad Investors and the Theory of an Efficient Market” (LLB(Hons) Dissertation, University of Otago, 2017).
H Interviews
Interview with Jacco Moison, Head of Audit and Financial Reporting at Financial Markets Authority – New Zealand (Clementine Rose, Zoom call, 11 August 2023).
I Seminars
Dr Amelia Sharman, Director Sustainability Reporting at the External Reporting Board “Transformation through Reporting: External Reporting Board” (Business for Good Seminar 2023, Otago Business School, Otago, 15 September 2023).
J Internet Materials
Australian Securities & Investments Commission “ASIC issues infringement notices against investment manager for greenwashing” (2 December 2022) < https://asic.gov.au/about- asic/news-centre/find-a-media-release/2022-releases/22-336mr-asic-issues-infringement- notices-against-investment-manager-for-greenwashing/>.
Australian Securities & Investments Commission “ASIC issues infringement notice to superannuation fund promoter for greenwashing” (2 May 2023) < https://asic.gov.au/about- asic/news-centre/find-a-media-release/2023-releases/23-110mr-asic-issues-infringement- notice-to-superannuation-fund-promoter-for-greenwashing/>.
BlackRock “BlackRock Sustainable Energy Fund” (22 September 2023)
<https://www.blackrock.com/hk/en/products/229299/blackrock-new-energy-fund-a2-usd>.
Deloitte “Scope 1, 2 and 3 emissions” (2023)
<https://www2.deloitte.com/uk/en/focus/climate-change/zero-in-on-scope-1-2-and-3- emissions.html>.
European Commission “EU taxonomy for sustainable activities” (2023)
<https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy- sustainable-activities_en>.
External Reporting Board “Aotearoa New Zealand Climate Standards” (15 December 2022)
< https://www.xrb.govt.nz/standards/climate-related-disclosures/aotearoa-new-zealand- climate- standards/#:~:text=The%20ultimate%20aim%20of%20Aotearoa,emissions%2C%20climate
Financial Markets Authority “Financial Reporting FAQs” (3 May 2019)
<https://www.fma.govt.nz/library/guidance-library/faqs/>.
Financial Markets Authority “Compliance Approach” (8 August 2022)
<https://www.fma.govt.nz/about-us/regulatory-approach/compliance-
approach/#:~:text=FMA%20takes%20a%20risk%2Dbased,efficient%20and%20transparent% 20financial%20markets.>.
IFRS “International Sustainability Standards Board” (2023)
<https://www.ifrs.org/groups/international-sustainability-standards-board/>.
IFRS “Who uses IFRS Accounting Standards?” (2023) < https://www.ifrs.org/use-around- the-world/use-of-ifrs-standards-by-jurisdiction/>.
Ministry for the Environment “Mandatory climate-related disclosures” (18 January 2023)
<https://environment.govt.nz/what-government-is-doing/areas-of-work/climate- change/mandatory-climate-related-financial-disclosures/>.
MinterEllisonRuddWatts “Greenwashing: The new due diligence environment” (14 December 2022) < https://www.minterellison.co.nz/insights/greenwashing-the-new-due- diligence-environment>.
Elise Plunket “FMA red-flags greenwashing” (13 June 2023) MinterEllisonRuddWatts
<https://www.minterellison.co.nz/insights/fma-red-flags-greenwashing>.
Els Van Poucke “The Green Claims Directive proposal in a nutshell” (26 May 2023) Deloitte Legal < https://www.deloittelegal.be/lg/en/blog/Deloitte-Legal-Newsflashes/2023/the-green- claims-directive-proposal-in-a-nutshell.html>.
Toby Sharpe, Richard Massey, Tim Shiels and Olivia Woolford “International action highlights regulatory risk over ESG ‘greenwashing’” (7 June 2022) Bell Gully
<https://www.bellgully.com/insights/international-action-highlights-regulatory-risk-over-esg- greenwashing/>.
Simmons & Simmons “Decision in Abrahams v Commonwealth Bank of Australia” (11 November 2021) < https://www.simmons- simmons.com/en/publications/ckvv7c8ao1hfn0b366u5ed5xr/decision-in-abrahams-v- commonwealth-bank-of-australia>.
Simpson Grierson “New BlackRock Climate Infrastructure Fund targets 100% renewable electricity in New Zealand” (8 August 2023) < https://www.simpsongrierson.com/insights- news/legal-updates/new-blackrock-climate-infrastructure-fund-targets-100-renewable- electricity-in-new-zealand>.
Helena Vieira “Harmonising accounting standards across the globe” (5 April 2017) London School of Economics < https://blogs.lse.ac.uk/businessreview/2017/04/05/harmonising- accounting-standards-across-the-globe/>.
K Other Resources
Australian Securities & Investment Commission Information Sheet 271 (June 2022). Financial Markets Authority Disclosure Framework for Integrated Financial Products
(December 2020).
GRI 101: Foundation 2016.
New Zealand Securities Commission Proposals for the Enactment of Regulations under the Securities Act 1978 (1980).
New Zealand Stock Exchange Environmental, Social and Governance Guidance Note
(December 2017).
New Zealand Stock Exchange Listing Rules (1 April 2023).
New Zealand Stock Exchange NZX Corporate Governance Code (1 April 2023).
Appendix I: Regulatory Jungle Prior to Mandatory Disclosure
Appendix II: Game Theory Bimatrix – Reporting Entity Payoffs
Appendix III: FMA’s Enforcement Pyramid366
366 Adapted from Maume and Walker, above n 298, at 299.
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/journals/UOtaLawTD/2023/25.html
