Collaboration Calling: New Zealand and Climate-Related Financial Disclosures

Greta Thunberg’s recent comments in the media have cast doubt on the notion that New Zealand is striding ahead of its OECD counterparts when it comes to walking the talk on climate change action. New Zealand has chalked up several world firsts by enshrining in law its ambition to drive GHG emissions (with the exception of biogenic methane) to net zero by 2050; establishing an independent Climate Change Commission, standing up a dedicated Green Investment Fund to mobilise capital into decarbonisation projects; and mandating listed entities above a specified market cap to disclose their climate related financial exposure (TCFD). With a tailwind of policy and shareholder pressure, coupled with societal expectations around business’ role, transition activity should be accelerating. But as Thunberg notes, words and policy have yet to translate into tangible, material emissions reductions.

There is hope yet

The Financial Sector (Climate-related Disclosures and other Matters) Amendment Bill and External Reporting Board’s (XRB) reporting standards on climate-related financial disclosures are soon to be announced. This will provide much needed clarity to businesses on the standards, indicators, and metrics to track to yield material outcomes. The Bill is of particular interest as it mandates large entities to disclose their governance, strategy and management of climate change mitigation (i.e. emissions reduction), climate change risk management and climate change adaptation. Helping businesses to comprehensively understand and manage climate-related scenarios, opportunities, and risks improves their long-term strategic resilience.

Organisations are at varying levels of preparedness for TCFD reporting. Adopting the recommendations will therefore be an iterative process. Preparation of climate-related financial disclosures will require internal collaboration across the Board and Executive and across finance, strategy, sustainability, and risk teams. Involving the right people at the outset and identifying and resolving any gaps is a sensible place to start.

It appears right now that organisations are looking to develop and use their own existing internal models. Consequently, the level of sophistication and detail that will be set out in their respective TCFD reports will vary widely.

A call for industry collaboration and a common framework to enable comparable benchmarks

TCFD will require industry collaboration for the establishment of comparable benchmarks. Today there is asymmetry in availability of expertise, data and the level of understanding of TCFD requirements. This is amplified when considering cross-sector organisations.

Further challenges faced by reporting organisations include access to consistent climate hazard datasets and agreement on which global warming scenarios to apply when assessing both transition and physical risk exposure. At the macro level, consistent datasets and agreed scenarios will accommodate industry benchmarking. At the micro level, consistent datasets and agreed scenarios provide greater confidence from a decision-making perspective.

For example, when determining the design specifications for assets with a 50+ year design life, the Shared Socioeconomic Pathway (SSP) scenario applied will dictate specifications such as asset location (proximity to the coast, or to overland flow-paths and flood sensitive areas); height; wind and wave loading tolerance; or heat stress tolerance.

Physical conditions under a given SSP will also dictate timing on capital investment decisions.  The timing of such decisions will determine the potential for growth opportunities and carbon price shielding. In this regard, agreement on which scenarios to model can prove critical for medium and long-term planning and investment.

The Ministry for the Environment has indicated that it will work closely with regulated parties on how to undertake the ‘scenario analysis’ component of the disclosures and XRB also recently asked the question of whether reference scenarios be provided freely to all entities.

But more collaboration is required. There is a role for industry collaboration to provide a common framework, including sector-specific scenarios, a common set of assumptions and standards, which would aid understanding and benchmarking the risk profile of different organisations over time.

A collaborative approach and common standards are pivotal to organisations undertaking climate-related financial disclosures in a meaningful way that contributes to New Zealand’s transition to net zero emissions. This approach may yet elicit an outcome worthy of Thunberg’s approval.

This is the first of a blog series by Liza Van der Merwe, Director Deloitte Access Economics and Rikki Stancich, Director of Climate & Sustainability. Over the coming months, Rikki will walk readers through the key steps to establishing a robust understanding of your organisation’s financial exposure to climate change risk; to facilitate climate resilient planning and investment decision; and to support TCFD compliance.