Why New Zealand could become global leader on corporate climate risk disclosures

New Zealand has an opportunity to establish itself as a global leader in mandating company reporting of climate change risks, a step a leading investor group says will become essential for countries hoping to attract international investment.

A new report published by the Investor Group on Climate Change (IGCC) has called on New Zealand regulators to establish a world’s best-practice regime for companies and investors to assess and report climate change risk.

In 2021, New Zealand became one of the first countries to formally legislate the mandatory assessment and reporting of climate change risks by publicly listed companies, banks, investors, and insurers.

The Ardern government tasked New Zealand’s External Reporting Board (XRB) to develop the reporting regime to be consistent with the international Task Force for Climate-related Disclosure, which published a landmark set of recommendations in 2017 to provide greater visibility of the financial risks of climate change.

CEO of the IGCC, Rebecca Mikula-Wright, welcomed the moves being made by New Zealand’s the XRB to align the proposed climate risk reporting regime with the standards being adopted in overseas markets.

“Investors welcome that the XRB has tracked the rapid international developments on climate disclosure standards emerging from Europe, Asia, and the International Financial Reporting Standards Foundation,” Mikula-Wright said.

“Although New Zealand has its own unique economic characteristics, in a global market, any country looking to attract private capital investment should aim to stay ahead of international developments.”

The IGCC represents a membership that includes Australian and New Zealand institutional investors, including superannuation funds, and has advocated for stronger climate change risk disclosures by both investors and the companies they invest in.

Climate change has been increasingly viewed by investors as a growing financial risk to companies both exposed to the impacts of global warming as well as to companies that are involved in industries contributing to increased global warming.

The IGCC said investors were looking for more information about these potential climate risks, and such considerations were becoming a standard part of their assessments of potential investments.

“Climate accounting standards can link financial statements with climate-related disclosures to emphasise the implications of climate-related issues on the financial position and performance of the organisation. But investors are beginning to look for more,” the report says.

“They want to see the linkage between an organisation’s sustainability risks and opportunities and its business, strategy, and financials.”

The IGCC called on New Zealand regulators to adopt best practice measures for company reporting, including requiring companies to measure and report their scope-3 emissions, the inclusion of climate risk assessments in financial reporting and requiring companies to both assess the contributions to global emissions and their exposure to climate impacts.

Mikula-Wright said such climate risk reporting would become standard across global markets and was becoming an essential feature of financial reporting regimes to mandate such reporting to attract international investment.

“Climate risk reporting by companies has accelerated since the Task Force on Climate-related Disclosures’ recommendations emerged in 2017, but the quality and comparability of this reporting has too often fallen well short of providing investors with the information they need to manage the climate risk in their portfolios,” Mikula-Wright said.

“In response, many jurisdictions have begun mandating reporting rules like New Zealand is doing.”

“New Zealand now has an opportunity to join the global leaders in climate reporting, setting a great example in the region, and helping its companies attract international capital investment.”

There has been growing momentum for a similar climate change related financial risk reporting regime to be introduced in Australia, with some ASX listed companies already voluntarily adopting the recommendations of the international Task Force on Climate-related Financial Disclosures.

While the reporting of climate change risks has not yet been made mandatory in Australia, many financial and legal experts consider the practice an essential duty of company directors, with those ignoring the potential climate risk to business potentially facing legal liability.