By Simon Watt & Kate Redgewell*
Through Climate Change Minister James Shaw, the government has announced a policy to introduce mandatory climate-risk reporting for the financial sector in New Zealand from 2023.
Implementation would rely on support of the new government and would be enacted through amendments to the Financial Markets Conduct Act 2013.
In conjunction with New Zealand’s net zero carbon target and first tranche of emissions budgets arising from the recent amendments to the Climate Change Response Act 2002, which focus on the mitigation and adaptation journey for New Zealand as a whole, this policy (if implemented by a new government) would drive real change.
Climate-risk reporting and disclosure aims to promote more informed business, investment, credit and insurance underwriting decisions. The financial sector is broadly defined in the proposed policy to capture all registered banks, credit unions, building societies, managers of investment schemes, all equity and debt issuers listed on NZX as well as licensed insurers and Crown financial institutions, each with total assets of more than $1 billion.
This covers 90% of assets under management in New Zealand within the disclosure system.
Requiring this group of entities to consider and report on climate-related risks promotes better long-term, sustainable, strategic business and investment decisions to mitigate against climate risks and, importantly, take up climate opportunities. It also enables stakeholders to better understand carbon-related assets, where such assets are concentrated and the exposure of those assets to climate-related risks.
Expected to follow the TCFD Taskforce Climate Related Financial Disclosures Framework, the financial sector entities would be required to disclose on climate-related risks and opportunities associated with their organisation’s governance, strategy and risk management, and on the metrics and targets they are using to monitor and assess climate-related risks and opportunities.
While the framework is set up as a disclosure regime, as the TCFD Taskforce identified it is driving companies to understand the potential financial impact of climate-related risks and opportunities, and to consider longer-term strategies and the most efficient allocation of capital in light of the potential impacts of climate change.
In practice, this means these entities would be ensuring their governance, strategies and operations are structured so they not only know but can respond to climate-related risks and opportunities.
This will be a relatively big shift for a number of organisations and it will take several years and a fundamental, conscious shift to embed.
Many organisations have already started this journey, appreciating the longer-term value for the organisation (both financially and reputationally), their stakeholders and the communities in which they operate.
While New Zealand would be the first country to introduce mandatory climate-related risk reporting for the financial sector, a number of other countries and jurisdictions are also working towards some form of climate-risk reporting for companies. This includes Australia, Canada, the United Kingdom, France, Japan and the European Union.
*This article originally appeared in LawNews (ADLS) and is here with permission.. Simon Watt is a partner and Kate Redgewell a consultant at Bell Gully.