Dean Schmidt: Taking the united path toward change

Dean Schmidt says TCFD will require us to disclose climate risk across all sectors and industries we bank. Photo / Supplied

Opinion

OPINION:

The world is constantly evolving, and everyone is learning to adjust at pace as we aim for a more sustainable future. There is no going back.

Banks are not immune from the challenge of change. The way we assess risk and allocate capital is no longer just confined to a narrow range of economic factors. Longer-term issues such as environmental protection, social cohesion, social values and equality, transparency and governance are all now part of the complex jigsaw.

We live in an age where consumers and markets are looking to invest in companies and purchase products and services from those with a shared set of principles and values. What was once the rhetoric of a few is now a reality with brands and service providers investing in showcasing sustainable credentials to increasingly well-informed consumers.

At BNZ, our approach to sustainability is driven by two key principles: Kaitiakitanga — to accelerate the just transition to a low-emissions economy that supports the regeneration of the natural environment and Manaakitanga — to grow the long-term social and financial wellbeing of all New Zealanders. These principles commit us to lead the development of a fairer, more sustainable Aotearoa through the decisions we make and the way we act. We are re-establishing what it means to be corporate stewards, hardwiring sustainability into the way we work, helping those customers who are working to transition their own businesses, and sending a clear signal about who we want to do business with.

Our Government has clearly outlined its expectations on improving the lives of New Zealanders while signalling its intention to build back better. It expects to decouple carbon emissions from economic growth and introduce higher standards on businesses to support our country's commitment to limit global warming to 1.5 degrees.

Agribusinesses know well the increasing compliance requirements and the associated financial consequences of this focus. But there are implications across all industries as carbon reduction targets, environmental, and social policies all alter government priorities and investment.

For the banking sector, there are additional initiatives, such as the UN Principles for Responsible Banking and its Sustainable Development Goals, the Task Force for Climate-Related Financial Disclosure (TCFD), and closer to home, the work of the Aotearoa Circle and the Climate Leaders Coalition that are driving changes that will have significant ramifications for business.

Significantly, TCFD will require us to disclose climate risk across all sectors and industries we bank, and, in time, our customers will need to do the same.

As we lift our game, increasing transparency and changing the way we make decisions and manage risks, so must our customers. They will need to mitigate and manage their own environmental and social footprint and understand what that means for the ongoing viability of their business. It is essential to recognise this reporting and change is not just about managing climate risk, with social issues such as gender and racial equality, poverty, labour practices and the drive to act in ways that can increase fairness in society all sharing equal focus.

Those demands not only require a business to ensure its own house is in order, but it also must account for the actions of its myriad partners in its supply chain. There are impacts from inaction that extend beyond the bottom line into the viability of products and services, staff retention and recruitment, reputation, and partnership opportunities.

Ultimately it means more work for all businesses, no matter how big or small. Both banks and our customers will need to be smart about it as the burden we share is just part of our collective new reality. More information is needed to assess the environmental, social health, impacts of a business and its resilience to change.

Many Kiwi businesses already collect a lot of the data banks are looking for, but many will have to start as we seek to assess customers' long-term sustainability in the broadest sense of the word. Can this customer and its assets withstand temperature changes and sea level rise? Does the business consider the wellbeing of its employees? Is it confident in its supply? What is the societal consensus about the future viability of its products or services? Has the business considered issues relating to the local community? Is it transparent about what it is doing?

In aligning capital to sustainability and fairness, we are able to deliver stronger risk management, improve stewardship of equity capital, increase productivity and capital accuracy.

These benefits are not ours alone. Businesses taking a more sustainable approach, embracing improvements in mobility, digital technology, automation, electrification and carbon reduction, can increase employee retention, efficiency, productivity, brand value and the bottom line.

In doing so they have the opportunity to take advantage of cost-effective capital structures that might previously have been out of reach, such as sustainability-linked loans, that align reduced loan costs to ESG achievements. These "green bonds" can be a path to finance when linked to investment that creates positive outcomes for the business, the environment and people.

Supporting one another to make the changes is critical for the overall sustainability of our small and medium businesses, including New Zealand's strong agricultural base. The innovation, initiative, struggle, and perseverance that got New Zealand to where it is today is a strong foundation and we all must tackle this change together.

Have we reached an ESG utopia? Do we have all the answers? Clearly not. We do know embracing this change is required, but it is a partnership, and nobody should be left behind. We can win by working together and creating resilient, sustainable businesses that can thrive for decades to come.

● Dean Schmidt, is BNZ Executive — Commercial Services and Responsible Business.