Parliament has passed a law requiring insurers, banks and investment managers to report on the impacts of climate change on their businesses, becoming the first country in the world to have a climate-related disclosure law in place.
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill received royal assent last week, and will require financial institutions to disclose information about their climate risks. It will apply to around 200 organisations in New Zealand which the government considers to have “a higher level of public accountability”.
The Ministry of Business, Innovation and Employment (MBIE) said that up until now, most New Zealand companies have been offering “limited or no information on what climate change might mean for them, or are reporting in inconsistent ways.” Mandatory climate-related disclosures will ensure that the impacts of climate change are monitored on an ongoing basis, and are “routinely considered in business, investment, lending and insurance underwriting decisions.”
New Zealand’s insurance sector has welcomed the Bill since its announcement, with ICNZ chief executive Tim Grafton saying that it was important for investors and insurers to “send clear signals around climate change risks.”
“If we don’t have disclosure of climate-related risks in the financial sector, then we’re operating blind,” Grafton said.
“Insurers specialise in the area of risk and accepting risk, so it’s very important that they are able to identify and report their physical exposure to climate change.”
ICNZ’s submission on the Bill stated that while listed companies already have to disclose “material information” in their financial reports, it has become important to identify and manage climate-related risks specifically.
“Unless there is transparent disclosure of material climate-related information, it is likely the world will not transition, or may not transition, as quickly as it needs to a low carbon future,” ICNZ said.
“The results would be catastrophic. Unless this disclosure occurs, the economic transition to a low carbon world will be volatile and unpredictable. This is not a desirable state for finance markets, and so purpose of the Bill is therefore endorsed.”
Organisations will need to report against standards issued by the External Reporting Board (XRB). Commenting on the impact of the law, CE April Mackenzie said that as well as serving a purpose in managing the risks of climate change, climate-related reporting also makes “good business sense.”
“Climate-related disclosures will take Aotearoa New Zealand a step closer to a low carbon future, and it also makes good business sense,” Mackenzie said.
“Increasingly, those who have ventured into taking a closer look at the impact of climate change on their businesses and activities are getting a much better sense of how that is going to impact their strategic planning.”
“Companies need to think about how they’re going to survive in the medium and long term, and when I talk short, medium and long term, I don’t mean two, five and 10 years,” she explained. “I mean five, 15 and 30 years, so we need to be changing the way that we think. Insurance companies may be thinking ‘well, we already think like that,’ and the exciting thing is that their consideration of climate change impact on their strategy will make other organisations also think further out into the future.”
Mackenzie said that the reporting requirement would also help businesses make better informed decisions, and would send strong signals to investors around where they can place their money to support a low carbon economy.
However, she said the law should not be seen as purely a ‘compliance exercise,’ and should ultimately be driven by the senior executives of organisations.
“It will offer a better understanding of the long term, and will help businesses make better informed decisions,” Mackenzie said.
“There is a mandatory climate-related disclosure requirement coming in, but if you look at it as just a compliance exercise, it’s going to cost a lot of money and will waste a lot of time. This will need to be driven from the top down, and will absolutely need to be taken on board by the board of directors and senior management.
“It’s not about being a ‘greenie’ or needing to suddenly change your values, but it does mean that you will be able to make much better-informed decisions about resource allocation.”