New Zealand could set to be the first country to require major financial institutions and financial market participants to assess and report on their climate-related risks.
The country’s government has signalled plans to make climate risk disclosures compulsory for some companies, with the proposed rules based on the Task Force on Climate-related Financial Disclosures (TCFD) framework.
Companies covered by the requirements will have to make annual disclosures, covering governance arrangements, risk management and strategies for mitigating climate change impacts. If businesses are unable to disclose, they will have to explain why.
In total, around 200 organisations will be required to disclose their exposure to climate, including the Crown financial institutions, five local public entities responsible for managing and investing large financial assets, such as the NZ Super Fund and compulsory insurance provider ACC.
The climate requirements will apply to registered banks, credit unions and building societies with total assets of more than NZ$1 billion ($917.5 million), as well as all managers of registered investment schemes with more than NZ$1 billion in total assets under management (AUM).
All licensed insurers with more than NZ$1 billion in total AUM or annual premium income greater than $250 million, all equity and debt issuers listed on the NZX and Crown financial institutions with more than $1 billion in AUM, such as ACC and the NZ Super Fund will also be covered under the rules.
The government has stated the NZ$1 billion threshold will make sure around 90 per cent of assets under management in the country are included in the disclosure system.
Overseas incorporated organisations will also be required to disclose in their New Zealand annual reporting.
New Zealand Minister for Climate Change James Shaw stated the initiative is another step for the country towards a low carbon future.
“Many large businesses in New Zealand do not currently have a good understanding of how climate change will impact what they do,” Mr Shaw said.
“The changes I am announcing today will bring climate risks and resilience into the heart of financial and business decision-making. It will ensure the disclosure of climate risk is clear, comprehensive and mainstream.”
He added that “what gets measured, gets managed” and if businesses know how climate change will affect them, they can adapt and adopt low-carbon strategies.
“COVID-19 has highlighted how important it is that we plan for and manage systemic economic shocks – and there is no greater risk than climate change,” Mr Shaw said.
“Australia, Canada, UK, France, Japan and the European Union are all working towards some form of climate risk reporting for companies, but New Zealand is moving ahead of them by making disclosure about climate risk mandatory across the financial system.”
The regime would be introduced through an amendment to the Financial Markets Council Act (2013). If approved by Parliament, financial entities could be required to make disclosures in 2023 at the earliest.
New Zealand’s Financial Markets Authority will be responsible for independent monitoring, reporting and enforcement.
Emma Herd, chief executive of the Investor Group on Climate Change (IGCC) said mandatory climate disclosure is a “crucial step” by the Kiwi government.
“Mandatory disclosure of climate risks is vital to managing the systemic economic risks posed by climate change to the New Zealand economy and the long-term savings of all New Zealanders,” Ms Herd said.
“The details of the reporting standards to be developed by the External Reporting Board will be absolutely critical to ensuring that disclosure under this regime will fully allow investors to make well-informed portfolio management decisions about exposure to climate risk and their response.”
She added the investor group is working with its members to identify their needs from climate risk disclosure.
“Recent consultation with major trans-Tasman institutional investors found the market wants significantly bolstered climate risk disclosure from companies, including clear demonstration of how it is being used to inform business strategies and decisions,” Ms Herd said.
“Ultimately all countries, including Australia, must move towards implementing a robust and investable mandatory climate risk disclosure regime to manage the systemic risk that climate change presents.”
New Zealand has climate targets aligning with its commitment to the Paris Agreement – its target is to reduce greenhouse gas emissions by 30 per cent below gross emissions for the next 10 years.
The government has reported it is on track to meet its unconditional target for this year, to reach 5 per cent below its 1990 gross emissions levels for the 2013-2020 period.
In Australia, APRA has previously indicated it will require major financial institutions to answer for how well prepared they are for climate change, with plans to embed climate risk in its stress testing framework.
The RBA, along with other central banks, has warned limited climate action could lead to around a quarter or more of global GDP being shed by 2100.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
The COVID crisis has revealed how central banks have amplified wealth inequality in recent years, according to Schroders, with its head of A...