Climate change is posing an ever larger legal risk to boards and most listed companies are "grossly underestimating" the time and cost involved in New Zealand's new climate reporting regime, a legal expert is warning.
The issue is one of those being raised by major law firm Chapman Tripp as part of its two-yearly review of trends in New Zealand's corporate governance.
Roger Wallis, a partner at Chapman Tripp, pointed to litigation both in New Zealand at the United Kingdom over climate change.
Here Mike Smith, the climate change spokesman for the Iwi Chairs Forum was taking action against seven New Zealand companies in a case currently before the Supreme Court.
While in the UK, the directors of Royal Dutch Shell are being taken to court by ClientEarth in a shareholder action alleging the company is in breach of their duties under the UK Companies Act for failing to take adequate action to support a global shift to a low carbon economy.
"That is being watched as a trend. If you want to worry about sleeping as a director the risk of climate change litigation is such a polarising topic, it has to be pretty high on the topic on the list of unavoidable risk. Whatever you do, you are not going to please everybody."
New Zealand's new climate reporting regime - the Financial Sector (Climate-related
Disclosures and Other Matters) Amendment Act comes into force next year requiring all NZX-listed companies with a market capitalisation over $60m to report their climate-related risks
Wallis said he believed most boards had grossly underestimated the time, effort and cost that the new regime would require of them.
"There are few that are at the front end of it, that have been doing voluntary financial disclosures for a couple of years but it is a pretty small proportion."
Wallis said initial cost-benefit analysis indicated it would be a multi-$100k cost for the first report for companies.
"I think people have underestimated that regime and we are going in at the bleeding edge at the moment, so the XRB standards will require more extensive disclosure of green house gas emissions than the [US] SEC will. I wonder about the wisdom of that when we are competing for capital, competing for listings."
Wallis said those New Zealand companies who were listed only on the ASX fell outside the New Zealand regime and the legislation could drive more Kiwi companies to list solely in Australia.
"When you add that on to other things, it's another reason that will draw some issuers to the ASX only. If you are a mid-cap and you have to spend $300,000 -$400,000 in your first climate change report, maybe $150k per annum after that.
"My personal view is the regime has been overbaked but you can't ignore it."
He said a lot of boards were waking up to the issue but like a lot of new regimes people tended to leave it closer to the commencement date to take action.
The reporting regime kicks in for those with December 31, 2023 balance dates with the first reports due to start coming out in February 2024.
Initially around 12 companies would be required to report with a second batch due to come through in August 2024.
"So there is a bit of time. But you wouldn't want to start in July, reporting in August."
He said for a company like Fonterra it would be a complex exercise.
"It's consolidated, so that means looking at all of your businesses around the world. It's not just about New Zealand. I'm not sure that is widely appreciated, but the reporting regime is not limited to activity in New Zealand. That's an issue that to date hasn't had the prominence that it warrants."
He said other countries like the UK and US were only bringing in the reporting for much larger companies.
Wallis estimated around 90 of the 130 listed companies on the NZX would be required to produce the reports.
"The biggest banks and insurers will be captured but not the government sector nor the largest private emitters."
That meant there would be some big emitters outside the mandatory reporting regime.
Wallis said the hardest part would be the scope three requirement to report emissions caused by others that the company interfaced with.
"If they are not reporting it, it is going to be quite challenging. If a managed fund has got to make an assessment of what your portfolio looks like. It is hard to do that if you can't get good information about what the underlying investees are doing."
He predicted the new regime would have two or three years of teething issues.
"You can't fault it directionally."
Wallis said the likes of the big banks could afford it but a smaller company that had the choice of listing on the NZX or ASX and had to spend $300,000 on compliance costs to be on NZX could be faced with a tough decision.
"It is not good for the capital markets. That is where I think there are some unintended consequences of what I think in general terms is a good thing."