The proposed NZ financial sector climate risk reporting regime released by government last week could have market-skewing side-effects, according to a leading legal firm.
Under the ‘world-first’ policy announced by Climate Minister James Shaw, a defined group of mainly large NZ financial businesses would have to report annually on a “comply-or-explain basis, based on the Task Force on Climate-related Financial Disclosures (TCFD) framework”.
The mooted climate reporting rules, yet to be finalised in legislative form, would affect some 200 entities including banks, insurers, all NZX listed firms and fund managers with $1 billion in assets.
However, a Minter Ellison Rudds Watt analysis suggests the government proposal has some significant flaws.
“There is no doubt that the proposed regime is a step in the right direction. However, given the narrow focus on large financial institutions and listed companies, there is a serious question as to whether this step is hefty enough, or will create competitive distortions,” the law firm says.
“… There is a risk that the distinction between entities imposed by the proposed regime will lead to unintended consequences, such as disincentivising listing and creating distortions in the economy. For example, in many cases one of several competitors in a sector will be listed, and will be required to report, while its privately or overseas owned competitors will not.”
The Minter review says excluding private sector firms from the climate reporting obligations would exempt about 1,200 companies with revenues of $30 million plus “compared to 70 listed issuers” who would have to comply.
“But more importantly, entities sitting either side of the proposed threshold are equally likely to have a climate impact and face an equal climate risk,” the analysis says.
However, Minter says the scope could be extended later while many firms could choose to voluntarily comply with the climate reporting standards.
The law firm says the devil would, as always, be in the detail including “whether the reporting for fund managers will relate to the fund manager’s own business, or to the entities into which its funds invest”.
Simon Haines, chair of the recently formalised Boutique Investment Group (BIG), said fund managers were generally in favour of “providing some form of useful information to our customers about climate change risk”.
“However, we are reluctant to produce reporting that is neither meaningful nor read by anyone,” an earlier BIG submission says. “In the case of fund manager financial reporting (which is where Government is proposing to insert climate change reporting); no one reads the manager’s financial report because no one invests in the manager, no one reads the wholesale scheme financial reports because they are not lodged anywhere, and virtually no one reads the retail scheme financial reports because fund managers post daily valuations of their funds so they are entirely unnecessary… so this is not going to be an effective way to get customers to engage.”
The BIG opinion says it would be futile, too, for fund managers to report on climate risks in their portfolios before the availability of “any good data” from the underlying companies.
Haines, also Nikko NZ general counsel, said his “personal preference” would see managers provide more information about their investment approach – including environmental, social and governance (ESG) reporting – in upfront investor disclosure documents.
“There is a greater chance that [ESG reporting etc] will be read, and if they are read it will be in the context of making a decision about who to invest in,” he said.
The climate reporting standards – to be developed by the External Reporting Board (XRB) – won’t be ensconced in law until after the October election.
“If it is approved, financial entities will have until at least 2023 before they will be required to make disclosures, at which point the XRB will have established a clear and considered set of reporting standards,” the Minter report says.
The Financial Markets Authority (FMA) would be responsible for policing the climate-reporting regime once it is in place, adding to a growing list of duties for the regulator.