Climate change has moved from the wings to centre stage for the global financial services industry. Trustees Executors chief risk officer, Robert Sloan*, explains why the NZ finance sector must act with more urgency in 2020…
With the start of a new year it’s customary to unpack the crystal ball and examine some of the risks and issues facing New Zealand’s financial services sector.
In 2020 and beyond it is undeniable that responding to climate change will be a key issue for those in the financial markets across a range of factors, including investment and physical risk, asset values and portfolio management.
This theme of climate change and the need for financial institutions to respond quickly was taken up in asset manager BlackRock’s recently published annual open letters to CEOs and investor clients. BlackRock’s central thesis, expressed by its chairman and CEO Larry Fink is his letter to CEOs, is that climate risk is investment risk.
Globally, climate change is fundamentally reshaping finance, resulting in a major reallocation of capital. In New Zealand, The Aotearoa Circle’s Sustainable Finance Forum released its interim report last October which spoke of the uncertainty over stranded or compromised assets, threatened natural resources, regulatory changes, insurance concerns, interruptions to supply chains, coastal property devaluation and rapidly evolving consumer demands.
The Sustainable Finance Forum also commissioned and published a legal opinion from law firm Chapman Tripp to clarify the legal obligations regarding climate change on New Zealand company directors and on managers of retail investment schemes.
That opinion concluded because climate change presents a foreseeable risk of financial harm to many businesses, directors and scheme managers must assess, manage and disclose climate risk as they would any other financial risk.
In 2020, I believe the debate around the mandatory disclosure of these risks will gain even more momentum in New Zealand’s financial services sector. Globally, there is increasing recognition of the importance of disclosure of financial risk from climate change, and this trend looms large on the horizon in New Zealand.
For example, since 2017 the NZX has referenced disclosure recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), an international taskforce established by the G20.
In its ESG Guidance Note, the FMA’s Corporate Governance Handbook recommends non-financial disclosure, including environmental factors. The FMA also consulted on proposed guidance on green bonds and other responsible investment products – one objective of this guidance is to ensure investors have a clear understanding of what they are being offered and the risks involved and are then able to make informed and deliberate choices.
The Council of Financial Regulators (CoFR) also announced its work priorities for 2020 and climate change was one of these workstreams with the objective of facilitating a smooth transition to a low-carbon and climate-resilient economy, while supporting the soundness and efficiency of the financial system.
The Ministry for the Environment (MFE) and Ministry of Business, Innovation and Employment (MBIE) has consulted on climate-related financial disclosures asking four key questions:
- What are the arguments for retaining the status quo, versus introducing new mandatory disclosures?
- What should be disclosed?
- Which entities should be disclosing?
- When should they start disclosing?
Submissions closed in December 2019 and the feedback from this consultation will inform the Government’s final decisions about the proposed regime on climate-related financial disclosures.
This may require annual climate related financial disclosure (on a comply or explain basis) for listed issuers, banks, general insurers, institutional investors and investment managers.
Here in New Zealand there is increasing pressure on companies from highly-motivated investors to respond and disclose on climate change.
For example, the Investor Group on Climate Change, which represents New Zealand and Australian investors, recently released its 2019-2022 strategic plan promoting investment for a climate resilient net zero emissions economy by 2050.
Last March the New Zealand Super Fund (NZS) released its climate change investment strategy, which in part concluded that ignoring climate change would be an “undue risk”. As part of its climate response strategy the NZS is significantly reducing assets exposed to fossil fuel emissions and reserves.
It is clear that companies who do not address sustainability and climate risks will encounter growing scepticism from the markets and investors, and in turn, a higher cost of capital. In contrast, companies that champion transparency and demonstrate their responsiveness on climate change will attract investment more effectively, including higher-quality, more patient capital.
While there is progress on improving climate disclosure by New Zealand financial institutions, for many companies there is still considerable work to do. In 2020 this issue should be on the governance radar of all responsible organisations as part of their risk management and professional duty of care obligations.
*Robert Sloan is the chief risk officer of Trustees Executors, New Zealand’s oldest professional trustee company which serves the corporate trustee sector and individuals as a Licensed Financial Markets Supervisor.