The International Organisation of Securities Commissions (IOSCO) has recently released an official statement calling for securities issuers worldwide to add ESG information disclosure into their investor communications.  ESG is a diverse cluster of complicated but broadly interrelated topics, namely environmental, social and governance.   IOSCO notes that ESG matters are “sometimes characterised as non-financial”.  The organisation is concerned that such matters can in fact have material impacts, both short-term and long-term, on issuers’ business operations and on investors’ risks, returns, and investment and voting decisions.

Market disclosure of ESG information has been increasing over recent years, in some cases on a voluntary basis and in others due to regulatory requirements.  Examples cited by IOSCO include sustainability and climate change (environmental), diversity and labour practices (social), and general governance-related factors.  The key thing these factors all have in common, IOSCO points out, is that they “have a material impact on the issuer’s business”.  ESG has graduated from being a niche interest of corporate activists to becoming a routine consideration for mainstream investors. 

In respect of this change, IOSCO has opted to hardwire ESG information disclosure into issuer best practice.  To do this, it has interpreted IOSCO Principle 16, which is aimed explicitly at securities issuers, as necessarily entailing ESG material information disclosure.  The Principle states: “There should be full, accurate and timely disclosure of financial results, risk and other information which is material to investors’ decisions.”  In practice, according to IOSCO, “When ESG matters are considered to be material, issuers should disclose the impact or potential impact on their financial performance and value creation.”  In making this interpretation, IOSCO has put securities issuers everywhere on notice of its intention that they will all be held to account for their ESG-related policies, procedures and actions by investors and regulators. 

Making resounding declarations is one thing; enforcing them is something else.  IOSCO concedes in its statement that ESG is intrinsically difficult to standardise information disclosure for.  It describes how there is substantial diversity of rules in different jurisdictions as to whether and how ESG information should be disclosed.  In a footnote to IOSCO’s own statement, it is recorded that the US Securities & Exchange Commission has not voted on the statement’s publication and that the Commission should not be regarded as sharing or endorsing IOSCO’s position on ESG information disclosure, which implies dissent.  There are also abroad widespread differences of opinion and practice concerning actual ESG information disclosures.  Moreover, ESG matters of material relevance to one company, industry, or economy may have little or no relevance to another.

Attempts are underway to develop standardised ESG information disclosure frameworks that provide consistency of disclosure practices and align with investors’ needs.  Voluntary ESG frameworks have been created by the likes of the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).   Other entities working in the same area are identified by IOSCO as the Carbon Disclosure Project (CDP), the Global Reporting Initiative (GRI), and Integrated Reporting (IR).  IOSCO itself has recently launched the Sustainable Finance Network, through which securities regulators will “share their experiences and engage in focused discussions about developments in the market and across jurisdictions.”  One topic for joint examination will be disclosure of ESG information.

New Zealand securities issuers can expect to feel the gathering winds of change fanned by IOSCO’s statement on ESG disclosure.  The Financial Markets Authority will have taken note of the statement.  Some local issuers are voluntarily moving down the route of explicitly adding ESG matters into their disclosure practices.  Much the same issues and problems arising elsewhere for establishing best practice in ESG information disclosure will occur in New Zealand, but as IOSCO has observed, there are already frameworks available to start from, such as TCFD’s.

As a licensed supervisor, Trustees Executors does not currently maintain any specifically ESG-related reporting requirements for its issuer clients, but is aware of the potential significance that material ESG matters could have for investors. 

“ESG has been on the radar screen for us as a licensed supervisor for quite some time now,” said Matthew Band, General Manager of Trustees Executors’ Corporate Trustee Services.  “We recognise that ESG-specific information disclosure is not yet required from issuers at the regulatory level in New Zealand, but of course the test of materiality still applies to all information that issuers need to disclose, and that captures ESG matters where they are material.  It’s probably just a matter of time before ESG disclosures are regulated in New Zealand and we’ll be ready to deal with that when it happens.  In the interim we urge our issuer clients to be constantly alert to the possibility that ESG matters could be or become material to their investors and therefore subject to disclosure,” said Matthew.

Matthew Band
General Manager, Corporate Trustees Services
+64 21 645 014