The Financial Markets Authority (‘FMA’) recently published a consultation paper regarding its proposed exemptions from climate reporting duties for certain foreign listed issuers. Feedback is being sought on the need for, and the content of, the proposed exemptions by 17 April 2023.

Who do the exemptions apply to?

The FMA proposes exemption relief for foreign exempt issuers (or ‘FEIs’), who:

• are listed on a recognised foreign exchange, currently these are the Australian Securities Exchange, Hong Kong Exchanges and Clearing Limited, London Stock Exchange Group, NASDAQ, Singapore Exchange and Toronto Stock Exchange; and 
• have a secondary listing (and therefore, foreign exempt issuer status) on the NZX Main Board.

Foreign exempt listings are designed to help overseas issuers gain access the New Zealand capital market without adding further compliance requirements (because compliance with the obligations of their home exchange are considered sufficient). It is a method by which international companies are offered a new source of capital from the New Zealand market, which in turn could deliver an alternative liquidity platform and help them build greater brand credibility in New Zealand.  

What is the default position, without the exemptions?

Under Part 7A of the Financial Markets Conduct Act 2013 (‘FMCA’), FEIs may be ‘climate reporting entities’ and become subject to certain compliance obligations if they are ‘large’ – meaning they are listed issuers of quoted equity or debt securities with over NZ$60 million in market capitalisation or quoted debt. That’s not a high bar.  

Under the FMCA, for financial years commencing after 31 December 2022, large FEIs must:

• keep proper records relating to their responsibility to make climate-related disclosures;
• prepare climate statements; and
• lodge those statements with the Companies Office, which are publicly accessible.

From October 2024, these large FEIs are expected to be subject to assurance obligations in respect of their greenhouse gas emissions disclosures also.

The FMA considers that there are 16 large FEIs currently operating in New Zealand. Six of them have their primary listing on the London Stock Exchange Group, while 10 of them have theirs on the Australian Securities Exchange. The FMA’s observation is that the number of New Zealand-based investors in these FEIs, as well as the amount traded on the NZX in respect of these FEIs, remain relatively small.

What exemptions have been proposed?

Two class exemptions are proposed by the FMA. These are designed to provide a solution that strikes the right balance between meeting the purposes of the climate-related disclosure regime, and avoiding unnecessary compliance burdens for FEIs. 

Under the first exemption, the FMA has proposed a five-year relief from the climate reporting duties if the FEI and its subsidiaries (if any) do not have significant business operations or investments in New Zealand during an accounting period. If the exemption is granted, climate reporting duties will not apply where, as at the balance date of each of the two preceding accounting periods: 

• the total assets of the FEI’s New Zealand business or New Zealand-based investment assets are NZ$1 billion or below; and
• the annual gross revenue of either the New Zealand business or New Zealand-based investment assets are NZ$250 million below.

This exemption will likely be coupled with conditions, which will require the FEI to:

• file an annual declaration to the FMA (together with supporting evidence) that it qualifies for the exemption;
• comply with the climate-related disclosure requirements in its home jurisdiction;
• include a statement in its annual report that it is exempt from the New Zealand climate-related disclosures regime; and
• publish statements regarding its exemption status, and providing access to any climate statements published by the FEI in its home jurisdiction.

Under the second exemption, the FMA is proposing a separate five-year relief for large FEIs from climate-related reporting duties in relation to their overseas business, provided that: 

• they report on their New Zealand business; or
• if their New Zealand business is operated via a locally incorporated company which is a climate reporting entity, that company reports on its New Zealand business under Part 7A of the FMCA.

It is the first exemption that is the focus of our commentary below.

The challenge

The challenge here is that imposing New Zealand law-compliant climate reporting duties on overseas issuers seems to cut across the fundamental rationale for a foreign exempt listing. Foreign exempt listings are an effective tool for facilitating FEIs’ access to our capital markets, and have an important role to play in growing our capital markets for investors’ benefit. That is best achieved by allowing FEIs to focus on complying with their home exchange requirements, plus very few compliance requirements for New Zealand. Imposing the same rules that apply to locally listed companies to FEIs makes little sense. The size of FEIs’ New Zealand business should not carry much relevance in the exemption discussions.

As the FMA recognises in its consultation paper, the additional compliance burden may discourage foreign issuers from participating in New Zealand’s capital markets, and limit the growth of those markets and opportunities for New Zealand investors. Those potential outcomes are concerning.

If the proposed exemptions are implemented, we would also be concerned with how the bar has been set for the first exemption (at $1 billion asset value and $250 million gross revenue). The approach seems entirely arbitrary.

Alternative approach?

An alternative approach, which may strike a better balance, is for a shorter initial exemption for all FEIs, regardless of the size of their New Zealand business – for, say, two or three years – from all climate reporting duties, while equivalent requirements in the jurisdictions of the recognised foreign exchanges are implemented. This could be conditioned with a requirement to publish the FEIs’ exemption from the New Zealand climate-related disclosures. Investors can then be clearly informed that they are not getting the same extent of climate-related disclosures that they would obtain from issuers whose primary listing is on the NZX Main Board.

This approach does not appear to conflict with the stated purposes of the FMCA, and would not create an additional compliance burden for the FEIs. As it would just involve delaying the implementation of the regime for FEIs, it is within the exemption-granting powers of the FMA to grant such an exemption.

New Zealand is an early adopter when it comes to mandatory climate-related disclosures – although overseas jurisdictions are quickly developing their own regimes, and the International Sustainability Standards Board (ISSB) is developing its own international standard for climate reporting in the background. A shorter initial exemption for all FEIs would allow the FMA to monitor the developments of other jurisdictions over time, and revisit the exemption in the near future – for example, if the anticipated equivalent requirements of the relevant overseas jurisdictions fall short of the FMA’s expectations. That consideration could also lead to an assessment of whether the current list of recognised foreign exchanges is appropriate.

Conclusion

Encouragingly, the FMA has expressly stated that it remains open to all views on the appropriate setting for relief for the FEIs – including the potential for an exemption to all FEIs. Our view is that that is the best approach to adopt for now, with the option to introduce fine-tuned exemptions in the future. We should not be actively creating impediments for international organisations from establishing a secondary beachhead in New Zealand – and neither should we be going against the purposes of the FMCA, which include avoiding unnecessary compliance costs, and promoting innovation and flexibility in the financial markets.

If you would like to discuss the above, or if you would like any assistance with preparing a submission to the FMA, please feel free to get in touch.