Greater transparency on climate-risk on the cards

By Richard Gordon

For some time, the Government has been considering whether to require listed companies and financial institutions to declare the impact of climate change on their business activities.

Rather than amend the Companies Act or create new legislation, the Government has smartly chosen to empower the External Reporting Board (XRB), an independent Crown Entity, to issue financial reporting standards on climate-related financial disclosures.

The nuts and bolts of the September announcement mean that sometime around 2023 all companies listed on the NZX and organisations with total assets of more than $1 billion, such as the New Zealand Super Fund, will need to disclose climate-related risks, how that risk informs strategy and planning, and what action is being implemented to manage risk and capture opportunities.

From an investor and stakeholder point of view, this is a good move and is in step with international best practice. There are also many benefits for the disclosing organisation, which we outline further below.

Effective and comparable climate-related risk disclosures have a dual purpose.

Firstly, they can influence internal decision making regarding how to identify, assess and manage climate-related risks and opportunities.

Secondly, they ensure that disclosed information is standardised and is useful for investors.

There is a growing demand from investors for consistent, comparable, and useful climate-related disclosures. Internationally, reporting on Environmental, Social and Governance (ESG) issues is growing; evidenced by 60,000 reports registered in the GRI Sustainability Disclosure Database.

The Reserve Bank of New Zealand has stated that climate change will have a significant effect on New Zealand’s economy and financial system. According to the RBNZ, the disclosure of institutions’ exposure to climate change risks is important for there to be a coordinated response to the risks.

However, overall disclosure on climate-related risk by companies globally remains low and is relatively unheard of in New Zealand. Only a handful of locally listed companies, including Genesis Energy, Meridian Energy, Fisher & Paykel Healthcare, and Z Energy, have reported on their climate risk, using the international framework, Taskforce on Climate-related Financial Disclosure (TCFD).

The move by the Government to fund the XRB to develop and issue standards will go a long way to ensuring transparency of the risks and opportunities arising from climate change and enable a transition to a low-emissions economy.

However, rather than spend the next three years reinventing the wheel, the XRB could do worse than adopt the guidelines and principles of TCFD, which was developed by a consortium of financial and corporate governance experts in Europe and North America.

TCFD recommends 11 disclosures across four core elements of governance, strategy, risk management and metrics and targets. Using the TCFD an organisation can map out its climate-related risks over the short, medium and long term. It would also describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2oC or lower scenario.

Using this framework, as Genesis Energy did so comprehensively in its 2020 Annual Report, helps a company, investors and customers understand climate-risk in financial terms.

Reporting on ESG matters, including climate-related risk, is not about how good you are as an organisation but how committed you are. Investors are increasingly seeking companies that make commitments, set targets, and then manage their impacts towards these goals.

According to the TCFD 2019 Status Report, “340 investors with nearly $34 trillion in assets under management are asking companies to report under the TCFD”.

Finally, following the introduction of climate-related risk disclosure, along comes another new framework – the Task Force on Nature-related Financial Disclosures. Yes, it is a thing. The scope, plan and team of the Task Force is due to be announced in the first quarter of 2021.

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