The country’s small step may lead to a giant leap for climate legislation.
To see the future of rules-based climate reporting, take a visit to New Zealand. In September, a place known more for sheep than finance became the world’s first nation to propose climate legislation that would require its major financial institutions to report on its risks posed by the climate crisis.
The measure is based on the financial disclosure model developed by the Taskforce on Climate-related Financial Disclosure (TCFD). Introduced by New Zealand’s Climate Change Minister James Shaw it would impact up to 90% of New Zealand’s assets under management and 200 institutions by as early as 2023. “These changes,” said Shaw, will bring climate risks and resilience into the heart of financial and business decision making by ensuring the disclosure of climate risk is clear, comprehensive and mainstream.”
But this small step in New Zealand, along with Europe and Canada’s accelerating efforts to harmonize financial and environmental objectives, will have a profound effect on the global effort to combat climate change. It is also a small, but significant answer to a question recently raised by former U.S. vice president Al Gore: Can humanity organize bold rules-based responses to stave off the catastrophic threat of the climate crisis?
A market-friendly plan
Under the proposal, any registered bank, insurer, investment managers with total assets of more than $1 billion, would be required to report their climate risks, governance and strategies for mitigating climate change impacts. Importantly, overseas incorporated organizations operating in the country would also be required to disclose in their New Zealand annual reporting.
“COVID-19 has highlighted how important it is that we plan for and manage systemic economic shocks and there is no greater risk than climate change,” Shaw said. “What gets measured, gets managed — and if businesses know how climate change will impact them in the future they can change and adopt low carbon strategies.”
“COVID-19 has highlighted how important it is that we plan for and manage systemic economic shocks and there is no greater risk than climate change.”
The TCFD framework New Zealand is using is fast becoming the climate risk tool of choice for investors and national and international climate change regulatory bodies.
The TCFD framework is intended to help investors assess whether climate risk is appropriately priced into the value of companies. It is voluntary but makes reporting consistent across a wide range of potential impacts with metrics and targets. The European Commission is going one step further by developing a “taxonomy” with mandatory “rules for the road” that will guide the economic transition in Europe to ensure the European Union’s environmental objectives are met.
The New Zealand legislation also comes on the back of the Canadian government’s linking COVID economic recovery funding for large financial institutions and businesses to mandatory TCFD reporting.
At the start of the global COVID-19 pandemic, Mark Carney, UN special envoy for climate action and finance, and former governor of the Bank of England said that a globally coordinated, rules-based international response required mandatory TCFD-like reporting. A number of large financial institutions, including Australia’s Prudential Regulation Authority, have since endorsed the idea and the need to speed up risk reporting.
Breaking new ground down under
New Zealand’s climate push is the latest of a series of groundbreaking initiatives Jacinda Ardern has introduced since becoming prime minister. She orchestrated passage of a Zero Carbon Bill to provide a legal framework to speed up achieving the country’s net-zero carbon emissions goal by or before 2050.
As with other urgent social issues, such as gun control, Ardern’s mandatory TCFD climate risk reporting efforts puts the country well out in front of its neighbor Australia and the United States, two countries that have balked at developing specific climate change policies.
New Zealand’s legislation is bound to be copied by other nations.
New Zealand’s legislation is bound to be copied by other nations, said Emma Herd, CEO of the Investor Group on Climate Change. “Ultimately all countries…must move towards implementing a robust and investable mandatory climate risk disclosure regime to manage the systemic risk that climate change presents,” she said.
New Zealand’s new effort was also applauded by other green investment groups including the Responsible Investment Association of Australasia, both of whom have encouraged TCFD reporting for measuring climate risk.
“Australia, Canada, UK, France, Japan and the European Union are all working towards some form of climate risk reporting for companies, Minister Shaw said. “But New Zealand is moving ahead of them by making disclosures about climate risk mandatory across the financial system.”