The way businesses report and respond to climate change is about to change, David Williams writes in this content partnership article
Pressure for climate action by businesses is about to hit a tipping point, a leading law firm predicts in a just-released report.
New financial disclosure requirements going through Parliament mean climate reporting will be mandatory at the big end of town – and that could trickle down to smaller businesses and some home-owners. Law firm Bell Gully says this change, combined with five-year emissions budgets to be decided by the Government later this year, will drive a business response to climate that will spur the transition to a low-emissions economy.
In what’s being billed as a world-first, legislation introduced to Parliament last month will make climate-related disclosures mandatory for some of our biggest businesses: banks, fund managers (including KiwiSaver schemes), insurers, and equity and debt issuers on the NZX. It affects about 200 entities, in all, with assets over $1 billion each. (Standards will be set by an external reporting board and monitored by the Financial Markets Authority. Accident Compensation Corporation and NZ Superannuation Fund will also be caught by the law change, which takes effect in 2023.)
The move takes an existential issue – leading to increased temperatures and heightened risk of natural disasters, as well as sea-level rise – and forces big companies to include it in their financial reporting. In other words, climate risks will become a routine consideration for business investment decisions. At the same time, those risks will be spelled out for existing and would-be investors.
Bell Gully partner Simon Watt, an internationally recognised climate law expert, says the firms forced to make climate disclosures are the financial enablers of business.
“When banks and insurers start looking at the risk that they have from their portfolio that they insure or that they lend to, that will encompass not just listed companies but a much wider spectrum of business.”
Lending could tighten, he says, while insurance costs could increase, and the availability of insurance could be restricted in some areas.
Assuming the mandatory reporting requirements – being made via a so-called omnibus Bill that amends the Financial Markets Conduct Act, Financial Reporting Act, and Public Audit Act – pass as outlined, directors face a fine of up to $500,000 or up to five years in prison if statements fail to meet climate standards. (Fines for companies could reach $2.5 million.)
That makes climate issues much more personal for directors, Watt says. “We really see it being like health and safety was five years ago, when it really came onto the board agenda and has stayed on the agenda. These things are going to make a difference.”
There’s a real sense of urgency building.
The Government might announce more ambitious emissions-reduction targets under its Paris Agreement commitments and enshrine them in emissions budgets which will take the country through to 2035. Watt says there’s a sense the Government is keen to take on board the Climate Change Commission’s recommendations, which issued its draft advice earlier this year.
“Because we need to get on track very much in the next decade to have any chance of making the ultimate net-zero target in 2050, a lot needs to be put in place to tighten the position in the coming years.”
International pressure will also be brought to bear. COP26, the 26th “conference of the parties” under the United Nations’ climate arm, UNFCCC, will be held in Scotland in November, Covid-19 permitting. (The Paris meeting in 2015 was COP21.)
‘Screws are tightening’
Today, Bell Gully releases its report The Big Picture: Climate Change, What Lies Ahead In 2021?. It’s timely, given the Climate Change Commission is working its way through 15,500 submissions on its draft advice, with final advice going to ministers by the end of the month.
The commission’s initial take was the country’s on the wrong path, and strong, decisive action’s needed to meet its emissions reduction targets.
Prime Minister Jacinda Ardern has already signalled the Government will revise its Paris Agreement promise, made in 2015, of a 30 percent reduction on 2005 levels – deemed insufficient by Climate Action Tracker.
A big question mark hanging over more ambitious emissions targets has been what it will mean for businesses.
The Bell Gully report covers proposed amendments to the Emissions Trading Scheme – with consultation being carried out as the Commission finalises its advice. Changes to the price and volume of New Zealand units are planned – with fewer units to be offered at ETS auctions, and annual increases to the price floor and ceiling. The commission’s draft advice was for unit prices to start at $30 instead of $20, and the cost containment reserve to increase from $50 to $70, with higher annual rises.
Watt, the Bell Gully partner, says the higher ceiling doesn’t mean the unit price goes immediately to $70 next year – “though there is the potential for prices to go that high”. In March, at the first carbon credit auction, 4.75 million units were bought for $36 each.
“The screws are tightening,” Watt says. “There’s a ratcheting up and it’s happening from next year, if you think the Climate Change Commission will make its final recommendations at the end of this month, at the end of this year the Government announces what it will do in terms of the policy response.
“The rubber really needs to hit the road on policy in the period to 2030 and some of those announced actions, companies will be reacting to. They’re already strategising around it from next year, they’ll be preparing their records and reporting, to be ready for that from 2023. “And they’ll be seeing the price steadily increasing, the carbon price, and they’ll see a path of that ratcheting up to the end of this decade, because that direction of travel will become so clear. That’s what will drive the change.”
Watt says while there’s been pressure for a political consensus, it’s hard to predict how much of the climate legislation being pushed through by the Labour Government, ruling alone, would be agreed by the Opposition.
National says it can’t support the Commission’s draft plan without changes. The party supported the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill at its first reading, but said it would oppose the August report-back date.
(National’s Michael Woodhouse said at the Bill’s first reading the Government “might be a little over its skis” on the degree to which the bill will influence investment. The party also raised concerns about penalties.)
With its majority, and the wind behind, Watt picks the current Government will press on in the absence of a consensus. If there was a change of government, they would be stuck with the same architecture and framework from the Zero Carbon legislation but would be able to soften the settings – just as the National-led Government did in 2010, in response to the global financial crisis.
“When insurers and local government take, as they are, a really hard look at the risks of insuring and having properties in those very low-lying, coastal locations, there’ll be a lot of home-owners that will start to feel the effect.” – Simon Watt
The current cascade of climate legislation continues an evolution since 2015, when almost 200 countries adopted the Paris Agreement, with a goal of limiting global warming to well below 2°C, but preferably 1.5°C, compared to pre-industrial levels.
A report that year from The Economist Intelligence Unit estimated the cost of inaction, in a future world with 6°C of warming, at $US43 trillion. “Disclosure of carbon emissions and acknowledgement of climate-related risks by publicly-listed companies should be mandatory,” the report said.
Back in New Zealand, a 2018 Productivity Commission report said mandatory climate-related financial disclosures could help stop investors valuing assets or investment opportunities “incorrectly”, “resulting in misdirected finance or stranded assets”. The theory goes, money will flow from emissions-intensive sectors to low-emissions activities – being funneled into electric vehicle charging stations, for example.
The scale of the challenge is huge. In 2016, the International Energy Agency estimated to have a 50-50 chance of limiting warming to 2°C would require investments of $US40 trillion for energy, and $US35 trillion in energy efficiency by 2040.
New Zealand’s move to climate disclosure reporting is a well-worn path. The United Kingdom has had it for eight years.
In terms of the public appetite for rapid changes and steep cuts to emissions, Bell Gully partner Watt notes Climate Change Minister James Shaw is still talking about “bending” the emissions curve.
“We’re probably in that phase for the rest of this decade of really bending that curve and then it turns downwards, and has to go down from 2030 onwards.”
Fossil fuel prices will inevitably have to increase, he says, to create sufficient incentives for change. And farming has to be brought into the Emissions Trading Scheme, he says, lest disproportionate pressure be put on other parts of the economy, like the industrial sector, to make deeper cuts to make up for farming’s exclusion.
“It makes sense to spread that burden. It might mean that we’re at the peak, at the moment, in terms of animal numbers, based on the Climate Change Commission’s report.”
Society-wide, a widespread move to electric vehicles seems inevitable, Watt says, along with construction of the associated infrastructure – new renewable power stations and EV charging stations up and down the country.
He also mentions climate change adaptation legislation, which will emerge from the Resource Management Act reforms. “When insurers and local government take, as they are, a really hard look at the risks of insuring and having properties in those very low-lying, coastal locations, there’ll be a lot of home-owners that will start to feel the effect.”
The Government will be keen to encourage more forestry, especially more natives and permanent forests, but he says there’s little public appetite to see hillsides all over the country suddenly covered in pine forest as climate offset. That means, of course, real action is needed to lower greenhouse gas emissions.
It’ll be a balancing act for the Government. On one hand, the carbon price will force changes on businesses relying on fossil fuels and, as the price steepens, generators should get the signal to build more renewable power stations.
But then, with an election in 2023, the Government will have to be attuned to the price of electricity and petrol.
In terms of Government policies affecting businesses, Watt believes the debate will continue over the free allocation of carbon credits to emissions-intensive, trade-exposed businesses.
(The policy recognises if domestic businesses close and re-open offshore, they might have higher emissions intensity. This is known as carbon leakage.)
Already there seems more interest from senior managers and board directors in climate matters, Watt says – although they will already be keeping a close eye on new regulations and Government policy signals.
“Many boards will be forward thinking – it won’t be about just compliance with what’s to come. It’s about strategically placing themselves for the opportunities.”
The task might seem insurmountable but experts suggest it’s doable.
In his recent book The New Climate War, American climate scientist Michael Mann, a distinguished professor from Penn State University, writes: “The solution is already here. We just need to deploy it rapidly and at a massive scale. It all comes down to political will and economic incentives.”
* Bell Gully is a Newsroom foundation supporter
