With climate-reporting duties looming large for most local fund managers, insurers and NZX-listed firms, two industry organisations have joined together to produce a compliance guide.
Compiled by consultancy firm EY, the 87-page document sets out a possible climate-reporting framework aimed at members of the Financial Services Council (FSC) and the Boutique Investment Group (BIG).
Collectively, BIG and the FSC represent the majority of insurers and fund managers (with more than $1 billion under management) captured by the legislation requiring mandatory disclosure of climate risks and opportunities – down to the portfolio level for funds.
Under the climate-reporting regulations developed last year by the government accounting standards body, the External Reporting Board (XRB), fund managers et al will have to map their respective risks and opportunities against three global temperature increase levels including two mandatory scenarios of 1.5°C and 3°C plus and a third unspecified outcome: the FSC/BIG framework fills in the gap with a 2°C plus scenario.
In the introduction, FSC chief, Richard Klipin, says the new industry guide “is the culmination of nine month’s work by FSC members and others and reflects the passion of the industry to do the right thing and accelerate action to address the climate crisis.”
“We commend these common set of scenario narratives and approach, co-created with the aim to improve comparability and consistency of climate-related risk disclosures in the financial sector,” Klipin says.
Scenario-planning was flagged as a major issue for the NZ funds management sector by BIG in its submission on the draft XRB standards last year.
“Undertaking scenario analysis across a large number of debt and equity instruments, many of which are multi-geography or multi-sector, is an undertaking beyond the resources and capability of most New Zealand MIS Managers,” the BIG submission says.
The Ministry for the Environment (MFE) also developed a climate-scenario framework with another consultancy firm, KPMG, in 2021.
Given the wide range of potential outcomes based on underlying assumptions of particular climate models, scenario plans could vary considerably.
According to the XRB, climate scenarios should be “plausible, challenging descriptions of how the future may unfold… based on coherent and internally consistent sets of assumptions”.
“Climate-related scenarios should not be probabilistic, predictive, or a perceived ‘most likely’ outcome of climate change. The compounding uncertainty of future socioeconomic, regulatory, and climatic change make likelihood problematic to determine,” the XRB says.
The FSC climate report carries the usual disclaimers.
“Nothing in this report constitutes legal or professional advice or legal due diligence from the FSC. Users should not act upon any such information without seeking independent advice.”
NZ was the first country to legislate mandatory climate-reporting but many others including the UK and Australia are following suit.
The XRB regulations are based on the Taskforce for Climate-related Financial Disclosures, created in 2015 by the Financial Stability Board, the international body overseeing risks in the global financial system.