New Zealand took a bold and pioneering step in taking legislative steps to make climate-related disclosure compulsory. By doing so, it has become the first country to introduce a law that will require banks, insurers and investment managers to report the impacts of climate change on their businesses
The New Zealand government is specifically targeting financial firms in this move. All banks with total assets of more than NZ$1 billion (R10,3 billion), all insurers with more than NZ$1 billion in total assets under management, and all equity and debt issuers listed on the country’s stock exchange will have to make these disclosures.
The reason is quite simple. The sustainability of these businesses and their views on sustainability are crucial to their stakeholders. To quote the New Zealand Prime Minister: ‘This law will bring climate risks and resilience into the heart of financial and business decision-making. ’
In essence, financial institutions charged with the social and economic responsibility of holding, securing, protecting and investing funds on behalf of their customers will have to explain how they would, and do, manage climate-related risks and opportunities. Indirectly, then, their disclosure of risk management will have to include this vital component, or else they will no longer be able to be considered a public trust entity capable of securing its own future as well as that of its investors.
Per the NZ Prime Minister, there is no other way that New Zealand can achieve its goal of achieving net-zero carbon emissions by 2050, unless the financial sector knows what impact their investments are having on the climate.
It is proposed that, commencing in 2023, such disclosures by the affected companies would be mandatory.
This move resonates with the direction in which the IFRS Foundation is proposing to move with its intended creation of a Sustainability Standards Board (SSB). The foundation has earmarked climate-related disclosure as one of the key and initial focus points. This move validates the IFRS Foundation’s thought pattern.
What is admirable about what New Zealand is about to legislate is that it appears they did not get caught up by semantics or details such as how the information would be assured, would the discourse be consistent and what framework would be used for the disclosure. They asserted the principle, being that it will be compulsory for climate-related risks and strategy to be disclosed by qualifying financial entities.
They did not get bogged down by the how, the unintended consequences and various other scenarios. This, in the author’s view, has allowed for a bold and timely decision which can be implemented sooner rather than later.
We advocate that the rest of the word follows suite sooner rather than later, focus on the ultimate goal, and not get caught up in politics and semantics. In the end, the investor community as well as earth will emerge as the real winners from this bold move.
Milton Segal CA(SA), Senior Executive: Corporate Reporting – Standards at SAICA