New Zealand introduces climate risk disclosure regime

New Zealand has become one of the first nations in the world to introduce a regime which requires financial services companies to disclose climate risks. The rules, introduced by the country’s coalition government and led by Green Party minister James Shaw, will force financial companies to disclose or explain their climate-related challenges.

The plan will make more than 200 NZ companies disclose their climate-related financial risks. The regulations, which will kick-in in 2023, will require banks, insurers, and financial services operators to publicly release information on how investments, assets, and operations are exposed to environmental issues.

The regulations have been described as some of the boldest climate change legislation to come out of the South Pacific nation in recent years. Businesses will have to detail the physical risks from the impact of climate change, such as sea-level rise and coastal erosion, and the transition risk from the devaluation of assets, as New Zealand attempts to transition to a low-carbon economy.

The new laws have been designed in line with the Task Force on Climate-related Financial Disclosures Framework, (TCFD). New Zealand’s government has described the framework as global best practice and is keen to implement the laws if it gets back into power. The Labour-Green-New Zealand First coalition could change following next month’s general election, though Labour and the Green party will press ahead with the laws if they win.

The plans are the boldest yet in the Asia-Pacific region. Across the globe, governments are moving forward with the TCFD’s suggestions.

Earlier this year, UK regulator the Financial Conduct Authority announced plans to force British financial firms to disclose how climate change will affect their business. In March, the regulator said British companies should start reporting on climate risks immediately.

Comply or explain

The rules will be drafted when the next NZ government returns to parliament and will be enforced by the country’s Financial Markets Authority. They will be initially enforced on a “comply or explain” basis, meaning companies will need to publish their risks or explain why they are unable to do so.

NZ Climate Change Minister Shaw said the standards would be drafted to capture the most relevant climate risks, while giving financial services companies some flexibility.

“Many large businesses in New Zealand do not currently have a good understanding of how climate change will impact on what they do,” Shaw said.

He added the changes would “bring climate risks and resilience into the heart of financial and business decision making. It will ensure the disclosure of climate risk is clear, comprehensive and mainstream”.

The New Zealand insurance sector has given a cautious welcome to the new rules.

Tim Grafton, chief executive of the insurance council of New Zealand, told StrategicRisk that the sector “supports better information gathering and analysis by entities for disclosure purposes which facilitates better decision making and risk management, while providing reporting entities with market incentives to manage risks and take advantage of opportunities”.

Grafton said high-quality disclosures “help investors, lenders and insurers to properly assess the long-term value creation of companies and make better informed and more responsible decisions”.

However, he said more work needed to be done around the details of the new regulations, such as the potential penalties for non-compliance. He said it was important that the new laws took into account the potential difficulties in modelling an organisation’s climate risks.

“While we strongly support the TCFD and moves towards mandatory disclosures, including for general insurers, it is important these disclosure requirements are introduced in a way that is consistent with evolving international practice, and recognise the nature and structure of the general insurance sector in New Zealand,” Grafton said.

“Regulators in many jurisdictions are looking at introducing disclosure requirements, but few, if any, have yet to do so, due to evolving approaches to methodologies, scientific modelling, and economic and physical risk scenario analysis. There are risks if disclosure is rushed and of poor quality – for example, market moves based on incomplete or ill-considered analysis,” he added.

RIMS Australasia chapter president Eamonn Cunningham said organisations in New Zealand needed to carefully weigh the “level or granularity of detail” they will have to provide.

“The last thing any enterprise wants is to be compelled to provide information that may be regarded as commercially sensitive. This can be a difficult call to make, and it opens you up to action if you make the wrong decision.”

He said companies needed to be mindful of the cost associated with the disclosure regime.

“The other obvious caveat here is cost. If you are obligated to disclose, the effort involved, and associated cost may not be inconsequential,” he added.