A new plan to require 200 New Zealand companies to disclose their climate-related financial risk has been touted as a potential game-changer for the climate – even more than the Zero Carbon Act, Marc Daalder reports

It may not seem like much, but experts say this morning’s announcement of a mandatory regime for disclosing climate-related financial risk could be the coalition Government’s “most significant” climate policy.

The new regulations, which could come into effect by 2023, would require banks, insurers and other finance firms to publicly release details about how their investments and assets are exposed to risk from climate change. That includes both physical risk from the impacts of climate change (like sea-level rise) and transition risk from the devaluation of assets as the economy decarbonises (like oil and gas).

While dozens of other countries are exploring similar regimes, the Tuesday morning announcement by Climate Change Minister James Shaw makes New Zealand the first country in the world to commit to implementing one. The framework to be used was devised by the Task Force on Climate-related Financial Disclosures (TCFD), led by former Bank of England governor Mark Carney.

Climate finance experts have hailed the Government’s decision as momentous and even the companies that are to be regulated have endorsed the approach. Shaw said about three-quarters of those consulted on the changes wanted them to be expanded to include finance companies listed on the New Zealand stock exchange, which the Government has done.

“Many large businesses in New Zealand do not currently have a good understanding of how climate change will impact on what they do,” he 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.”

Ivan Diaz-Rainey, an associate professor at the University of Otago and head of the Climate and Energy Finance Group, told Newsroom the move “could be the biggest win for the Greens in this political term”.

He said it “will lead to more concrete action and change and investment” than the Zero Carbon Act.

Mark Baker-Jones, a special counsel at Simpson Grierson and the head of the firm’s climate practice, was also effusive.

“For me, it’s probably the most significant piece of policy work that’s come out of this Government,” he told Newsroom.

“The Zero Carbon Act introduced a target and [emissions] budgets and the Climate Change Commission and [the Government] reformed the Emissions Trading Scheme, they’re all very, very significant and necessary, but this step towards mandating the financial disclosure of that climate-related risk is very significant because it sends such a clear message to our financial institutions and to the markets. I think it will probably have the biggest impact on Aotearoa New Zealand’s efforts to reduce emissions.

“With the disclosure, coupled with the Emissions Trading Scheme where we have a price on carbon and we have a target which provides us with a trajectory for reductions in our emissions, there’s a very clear financial incentive now for organisations to decarbonise, and this disclosure will demonstrate that.”

While the new rules will only apply to about 200 companies – all registered banks, credit unions, managers of registered investment schemes and licensed insurers with more than $1 billion in total assets – the expected flow-on effects will be felt by many small and medium-sized enterprises (SMEs) and individual property owners. The companies covered are in charge of about 90 percent of assets under management in New Zealand, according to Shaw’s office.

The devil may be in the details of the regulations that are drafted by the External Reporting Board, as well as how fiercely the Financial Markets Authority enforces them. Shaw said the rules would initially be on a “comply-or-explain” basis, in which entities must comply with them or otherwise explain why they are unable to.

The standards will have to be drafted to a specific enough degree to capture the most relevant climate risk while remaining broad enough to allow for some flexibility given the range of different entities covered by them, Shaw said. He had faith that the TCFD framework was the ideal starting point for such a system.

Assuming this was achieved, Baker-Jones said, the new system could help change the way we live our lives and push us towards a low-carbon society.

“If you have to report about it, it gets you thinking about it.”

“The aim of the mandatory disclosure regime is to do two things – one is to disclose that risk associated with climate change. But, importantly, the second is to change behaviour – the way we operate and the way we work with carbon in high-emitting industries,” he said.

“The reason it will have an effect much more broadly than the institutions themselves is that those institutions will now need to make an assessment of their customers’ compliance, for the market, of what that risk is, when they make their decisions to lend or to invest. So they’ll be requiring, in some form or some way, for those customers and the other people on their books to be assessing and identifying what their climate risk is, so that the financial institution can cost it or can assess it accurately.”

Diaz-Rainey said the new system would cover much of the economy.

“It’s an indirect way of capturing SMEs, which obviously are hugely important to the economy. So it now means that banks need to think about, is this SME exposed to transition risk, physical risk? They’ll have to start thinking about these things when they lend,” he said.

If you’re starting a business that relies on (or worse, emits) fossil fuels, it will be harder to get a loan than it might have been otherwise. If you want to buy or build a house in an area subject to sea-level rise, banks may decline to lend and insurers may decline to insure – or they may charge higher interest or premiums – because they’ll have to report those loans and coverage plans as exposed to climate-related risk.

“It’s that focus on the financial sector that’s going to start making people think about this,” Diaz-Rainey said.

“If you have to report about it, it gets you thinking about it.”

Marc Daalder is a senior political reporter based in Wellington who covers climate change, health, energy and violent extremism. Twitter/Bluesky: @marcdaalder

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