A bill proposing to expressly include ESG factors in the context of a director’s exercise of corporate power has recently failed to obtain Select Committee support. Hesketh Henry’s Business Advice team takes a look at the controversial bill and its recent legislative history.
As environmental, social and governance (ESG) considerations continue to receive increased attention from organisations around the world, these considerations came into sharper focus from a NZ legislative perspective in 2021 when MP Duncan Webb introduced a bill which proposed to amend well established legislation regarding directors duties in New Zealand.
The bill focussed on section 131 of the Companies Act 1993. Section 131 provides that when exercising powers or performing their duties, the director of a company must act in good faith and in what they believe are the best interests of the company. The bill proposed to add the following subsection 5:
(5) To avoid doubt, a director of a company may, when determining the best interests of the company, take into account recognised environmental, social and governance factors, such as:
(a) recognising the principles of the Treaty of Waitangi (Te Tiriti o Waitangi):
(b) reducing adverse environmental impacts:
(c) upholding high standards of ethical behaviour:
(d) following fair and equitable employment practices:
(e) recognising the interests of the wider community.
The policy statement to the bill outlined that its aim was to make clear that a director, in acting as the mind and will of the company, can take actions which take into account wider matters than the financial bottom-line.
In early May 2023, the Economic Development, Science and Innovation Committee released its report on the bill. The report noted that the Committee was unable to agree that the bill should pass, but recommended amendments to the bill, if it were to proceed any further. The Committee also noted that the new subsection 5 could be shortened and still achieve its intended effect, per the following wording:
(5) To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit.
Key concerns raised by the Committee about the bill were:
- The bill as introduced could have unintended consequences insofar that it may confuse directors and give the impression that these ESG factors should be given more weight than others.
- Reference to Te Tiriti o Waitangi could be an additional source of confusion because the relationship between the Crown and Māori is governed by Te Tiriti and this relationship does not typically include other individuals or private entities.
- Its introduction could create inconsistencies within the Companies Act and with other legislation insofar that if this subsection was included in section 131 and not in other areas of the Companies Act, or in other laws (such as the Incorporated Societies Act 2022), there could be confusion as to how they are to be interpreted or why they are not framed in a similar way.
The bill has also been criticised by other commentators for its reference to ‘recognised’ in the phrase ‘recognised environmental, social and governance factors’ – without giving any clarification on what those recognised factors are. Other commentators have also pointed out that a prudent director would already be considering ESG related matters (for example, the extent to which adverse environmental impacts may result from a corporate decision) and therefore the bill does not add meaningfully to the legislation.
Our team will be following further developments in this area.
If you would like further information about any of the matters discussed in this article, or how it may affect your business, please get in touch with our Business Advice team or your usual contact at Hesketh Henry.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.