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The New Zealand Parliament is expanding on a government order
made in September 2020 requiring large insurers and financial
institutions to identify their risks from climate change.
The bill, once enacted into law, would cover insurers with over
NZ$1 billion (US$750 million) in assets under management; all
banks, credit unions, and building societies with total assets
exceeding $1 billion; and all equity and debt issuers listed on the
national stock exchange NZX. The institutions affected by this bill
represent about 90% of assets under management in New Zealand,
according to the government's announcement.
"We simply cannot get to net-zero carbon emissions by 2050
unless the financial sector knows what impact their investments are
having on the climate," said Minister for Climate Change James Shaw
in introducing the bill. "This law will bring climate risks and
resilience into the heart of financial and business decision
making."
The bill would set into law guidance issued in September
2020. In all, about 200 institutions would be affected, including
state-owned investment funds.
One of those institutions, Australia and New Zealand Banking
Group (ANZ), told IHS Markit that it "supports the ambition and
sentiment of the bill to bring climate risk and resilience into the
heart of financial and business decision making. We recognize the
fundamental role we, as New Zealand's largest bank, can play in
shifting investment towards a low-emissions future that values
biodiversity and nature-based solutions here in New Zealand."
A first reading on the bill was held on 15 April, and it is open
for public comment through 28 May before a second reading in the
Economic Development, Science and Innovation Committee.
"As the governing Labour Party has a majority of seats, and the
Green Party's support can be expected, the bill is likely to pass
in a form similar to what was initially introduced," said Russell McVeagh, a New Zealand
law firm, in an analysis made available to IHS Markit.
TCFD standards
The bill states that the standards will be developed by the
External Reporting Board (XRB) based on the Task Force on Climate-related Financial Disclosures
(TCFD) framework. The XRB is a government body charged with
issuing accounting standards and coordinating with international
organizations that have similar standards-setting functions.
The TCFD was created in 2015, and its first recommendations were
issued in 2017. Since then, these have been expanded and refined to
identify voluntary disclosures in four core areas of business
operations: a company's governance, strategy, risk management, and
the metrics and targets used to monitor and assess climate-related
risks and opportunities, explained Russell McVeagh.
In the absence of mandatory disclosures, banks operating in New
Zealand have already been voluntarily reporting climate risk using
the TCFD framework. For example, ANZ told IHS Markit it has been
reporting on its climate risk profile for four years by using the
TCFD framework.
Under the bill, the Reserve Bank of New Zealand, the nation's
central bank, will be required to disclose its climate risk
alongside private institutions. It issued a report in March that
generally supported the TCFD framework for voluntary disclosure "as
a way to mainstream and integrate the consideration of
climate-related risks across organizations." But it noted that TCFD
was developed for the private sector, "and further study would be
required to identify any limits to the suitability of this approach
for the public sector."
The Reserve Bank also noted the benefits for New Zealand's green
industries if the government acts quickly and decisively to set a
new international standard. "There is a window of opportunity to
take advantage of low interest rates and global capital markets
that are awash with liquidity," it said.
The XRB already is moving ahead with its plans to
develop a standard, even as the law is still being debated in
parliament. In May, XRB said it is preparing a draft standard that
will be released by June 2022. During summer and fall 2022, that
standard will be subject to public comment and review, and it will
be finalized in December 2022, to enable the first reporting to
occur in 2023.
Under the proposed legislation, each covered institution in New
Zealand would have to submit an annual report that discloses its
climate risks and explains how it will manage them. Institutions
that opt out of disclosure would have to explain why. The Financial
Markets Authority will review those disclosures and enforce
compliance. Under this bill, violations would be subject to
corporate criminal penalties of up to NZ$2.5 million (US$1.8
million) and up to NZ$500,000 (US$361,000) for individual
directors; and civil fines could be up to NZ$50,000
(US$36,100).
Already, New Zealand's regulators have powers to oversee climate
risk disclosures, though without the new law the impact has been
limited primarily to guidance, not binding regulations. As an
example, the Financial Markets Authority issued guidance in May
that Russell McVeagh said "clarifies how existing prohibitions
against misleading or deceptive conduct or representations can be
applied to such products."
New Zealand's GHG emissions goals
New Zealand was one of the first nations to submit to the UN a
nationally determined contribution
(NDC) to reduce GHG emissions under the Paris Climate
Agreement. Its May 2016 NDC, which was affirmed in a filing on 25
April, set the following goals:
Reduce net GHG emissions by 30% from 2005 levels by 2030
Reduce net emissions of GHG other than biogenic methane to zero
by 2050
Reduce emissions of biogenic methane to 24-47% below 2017
levels by 2050 and 10% below 2017 levels by 2030
However, the government-appointed Climate Change Commission said
in a draft report in January that the nation is falling short of
its interim and ultimate goals. Also, the commission recommended
that the NDC itself be raised to a 35% reduction by 2030.
"In 2018, gross greenhouse gas emissions in Aotearoa [Maori term
for New Zealand] were about 45.5 Mt CO2-e of long-lived
gases, and 1.34 Mt CH4 (biogenic methane). Our analysis
shows if policy stayed as it is now, Aotearoa would fall short of
achieving the 2050 net zero long-lived gas target by 6.3 Mt
CO2-e. Biogenic methane would reduce 12% below 2017
levels and fall short of the current target of 24-47%," it
said.
Source: New Zealand Climate Change Commission
In its NDC, New Zealand referenced a "forestry-based approach"
to reduce carbon emissions. The strategy "will create incentives
for the establishment of new forests, recognize permanent,
long-term enhancements of carbon sinks ... and take responsibility
for deforestation." The country has enacted an emissions trading
program based on those forest carbon sinks.
But the commission's new report says this is inadequate.
"Aotearoa must focus on decarbonizing and reducing emissions at the
source. As a country we can no longer rely on forests to meet our
climate change targets," it said.
The report, which will be submitted to the government on 31 May,
recommends enacting policies to require or incentivize a range of
carbon-reduction strategies in key sectors of the economy. This
includes having "the majority" of vehicles in use be electric by
2035, and the use of biofuels and hydrogen for transport in
heavy-duty trucking, shipping, and flights. For heating
(residential and industrial), the commission recommends a
transition by 2035 to electrification, and this would be supported
by expansion of renewable power and the elimination of all
coal-fired power sources.
In the forestry sector, it recommends a continuation of current
policies, such as planting of pine forests to absorb carbon, but
improved biodiversity and wetlands management. It also said that
the farming sector's contribution to GHG emissions can be reduced
through innovations in management of animal waste.
The report backs the mandatory disclosures and recommends
consideration of an extension to public nonfinancial entities in
the future.
Limitations
Although New Zealand could be first out of the gate in mandating
corporate climate risk disclosure, Christine Chow, IHS Markit
global head of strategic governance advisory and ESG integration,
said other countries are not far behind. She said the UK will
likely finalize mandatory reporting by the end of 2022, and Hong
Kong has said its goal is to require it by 2025.
The standards themselves continue to evolve too, Chow said.
While the TCFD's four pillars include extensive guidance for how a
company identifies short-, medium-, and long-term risks and its
processes for identifying and managing those risks, Chow said they
have limitations. "TCFD does not contain metrics" by which
different institutions' risk management can be compared, she
said.
Rather than identifying the metrics by which progress is
measured, TCFD only requires disclosure of the metrics that each
entity has chosen. As a result, comparisons are difficult, Chow
explained. Over time, Chow said that the standards-setting groups
and countries will likely move towards "standardization of the
underlying definition of the data," which will enable better
comparisons of progress. Standardization will also facilitate
growth of emissions-trading programs, she said.
