Capital Markets report: Climate risk on the agenda

Infinz executive director Jim McElwain kicks off the Infinz Awards earlier this month.

New Zealand has a target to be carbon neutral by 2050 — a vision that will take many, large strides to realise.

One major step on the finance sector's journey to meet the challenges posed by climate change was signalled late last year, when Climate Change Minister James Shaw announced an intention to introduce a mandatory climate-related financial disclosure regime.

If approved, through an amendment to the Financial Markets Conduct Act, New Zealand will become the first country in the world to introduce such a regime — and our businesses will find themselves at the forefront of the brave new world of climate reporting.

Climate change poses real and escalating risks to business. We're already seeing the impact of an increasing frequency of severe weather events on many industries, for example, but there are many other risks — from stranded assets and increased regulation, to reputational damage and increased liabilities.

Currently, however, most New Zealand businesses have limited understanding of the risks posed to them by climate change. And those few that do report on these factors, do so in a range of ways, making it difficult to gain a cohesive national picture of progress.

The mandatory climate-related financial disclosure regime is designed to not only put climate change squarely on the agenda of businesses, but also provide a framework in which they can assess and understand the risks and declare how they will respond.

Aimed at publicly listed companies, as well as major banks, insurers, non-bank deposit takers and investment managers, around 200 entities will likely be subject to the regime. This collective reporting effort is expected to help de-carbonise investments, and transition us to the low-carbon economy we must create if we're to meet our international obligations to address climate change.

Current timeframes indicate that entities would need to start making climate-related financial disclosures for financial years beginning in 2022, meaning that for many, there is less than fifteen months before the first reporting period commences.

So what will climate change reporting look like?

XRB (the External Reporting Board) is currently developing the Financial Reporting Standard for climate-related financial disclosures, which will outline reporting requirements.

It's expected that the standard will be based on the Taskforce on Climate-related Financial Disclosures (TCFD) framework, which is considered global best practice for climate risk reporting, as well as international developments in this area.

The TCFD framework is based on four key themes for climate reporting — governance, strategy, risk management, and metrics and targets — with 11 disclosures recommended under each.

While publication of the standard is expected at the end of next year, many entities are getting ahead of the game.

Greater scrutiny of climate risks will also shine a light on new opportunities

At a recent Infinz event, Orion New Zealand shared lessons it's learned so far on its climate change reporting journey.

Last August, the Canterbury-based electricity distribution network published Climate Change Opportunities and Risks for Orion — a report prepared in line with the TCFD's recommendations.

The report provided the first qualitative snapshot of Orion's climate change risks, but also highlighted the greatest opportunities to make a positive impact in its community.

A key message from the Orion representatives speaking at the event was that climate change reporting must be seen as an opportunity to identify and develop strategic options and manage risk, rather than a compliance-based exercise.

The introduction of a mandatory climate-related financial disclosure regime means that the time for businesses to put climate change on their agenda is now.

- Jim McElwain is Executive Director of Infinz, the member-based body for professionals in finance-roles and working in the financial services eco-system, with over 1800 members nationally www.infinz.com.