Climate Change

Climate risk reporting set to ramp up

The Government is considering widening its proposed climate change risk mandatory disclosure scheme to include government departments and large non-listed companies, reports Marc Daalder

A proposal that would require public companies and finance firms to evaluate and disclose the risks climate change has subjected them to could be expanded.

The suggestion, aired in a discussion document released in October, originally called for the mandatory disclosure scheme to apply to publicly-traded companies, banks, general insurers, asset owners and asset managers. However, that could change.

During a panel conducted by Zoom with Reserve Bank Governor Adrian Orr and Mark Carney, a former Governor of the Bank of England and currently a United Nations Special Envoy on Climate Action and Finance, Climate Change Minister James Shaw said the Government might expand the scheme to large, non-listed companies, as well as government departments.

"Some of our largest emitters are either public entities or are privately-held companies," he said.

"Some of the suggestions that we got back, in the feedback, was that actually the materiality line should really be the scale of the organisation, not whether or not it's a publicly-listed company. That will be one of the considerations as we move towards policy decisions, hopefully later this year."

What is climate-related financial disclosure?

In New Zealand and other jurisdictions, many companies are required by law to prepare general purpose financial reports (GPFRs), which note their past performance and evaluate any risks they may be exposed to. These allow shareholders, investors and lenders to make informed decisions when interacting with businesses.

However, these disclosures rarely accurately encompass the risk that climate change poses to a given business. While in 2015, about 15 of the G20 countries had some form of mandatory climate reporting scheme in place, these were often limited just to disclosing companies' direct greenhouse emissions, as opposed to risks from sea level rise or changing weather patterns.

To this end, the Task Force on Climate-related Financial Disclosures (TCFD) has over the past five years developed a standard for disclosing this risk. It is this standard that New Zealand would require businesses to use - something the United Kingdom is also planning to implement.

Such disclosures have three impacts. First, they help businesses better understand the risks they are exposed to. These companies can then take action to mitigate those risks.

"There is a real realisation out there that this is a clear and present danger, it is a very material risk. Investors and directors and managers definitely want to know what risks they are exposed to, their businesses are exposed to. Why wouldn't you want to know what those risks are, so that you can start to work out a plan for mitigating and managing those risks down?" Shaw said.

Second, they ensure would-be investors are making informed decisions.

"Disclosure from firms of what the climate change risks they have and how they are managing them is critical for changing the game. Sorry, it more changes the rules of the game, it doesn't change the game itself. It allows firms to better understand the risks they hold and then better able to manage them," the Reserve Bank's Orr said.

"And likewise investors to better be able to alter their portfolios and take opportunities around emissions reductions and climate adaptation."

Disclosures can spark action

Perhaps most importantly, however, if climate disclosures became common practice at all levels of the economy, the true economic threat of climate change would become more apparent. This could galvanise to action those people who were otherwise uninterested in or unaware of the risks climate change poses.

"Disclosure is critically important. Firm disclosure allows the risks to be identified. It may not be perfect but, as Mr Carney mentioned, what gets measured gets managed. And it's better to measure something imperfectly and manage it, rather than just to assume it away, to ignore it," Orr said.

"We know that there are significant implications for the New Zealand economy and New Zealand society through climate change. Whether it's through the physical challenge, sea level rising, adverse weather interrupting key economic activities and society as a whole. As well as the transition challenges that we have, as our Prime Minister outlined, heading towards the zero carbon world. You can get there very abruptly, we don't want to do that. We want a smooth transition."

Orr said the Reserve Bank was supportive of compulsory disclosure and would work to enforce it.

"No surprise, we're stepping up our supervision activities, particularly around the climate-related risks. And our financial institutions are aware of that. We've been working very hard - I would say that any of the firms that are not providing any of the disclosure on climate risk should just hurry up and do so," he said.

'Leadership is still needed'

New Zealand has a long way to go before we see fund managers in the streets protesting for climate action, however. The regulatory framework for disclosing climate risk in New Zealand is in its infancy.

While stakeholders are broadly supportive of the Government's proposed mandatory disclosure rules - Shaw said 84 percent of submissions on the October discussion document supported the TCFD standard and 77 percent wanted to see the scheme expanded to large, non-listed companies - relatively few businesses are disclosing climate risks voluntarily.

"What we've found here in New Zealand is that leadership is still needed," Orr said at the panel.

"Our own survey at the Reserve Bank, of insurers and banks, last year found that there was a broad agreement around the concerns and the risks that climate change could bring. But I have to say there was scant evidence of that concern changing business decisions. Part of that might be because the disclosure and the awareness of the climate change was pretty thin.

"Two-thirds of the banks we surveyed had some form of disclosure on climate change risks, but only one third of the insurers. Hence, partial information, ability to kink the playing field and poor information leading to misinformed decisions. This is why we take disclosure as being critical and we are very happy to support compulsory disclosure."

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