Companies now have to imagine a hothouse climate - would they survive?
Imagine a future where a series of extreme weather events unfold in New Zealand over three months, killing people and devastating property. Theres a scientific consensus that climate change made them worse. The public has a surge of concern, and elects a new Government with a strong mandate to act on climate change. What would that mean for businesses? Under one possible future, the Government charges owners of petrol and diesel cars $100 a year to immediately cut transport emissions, while under another the Government bans fossil-fuelled cars, with obviously flow-on effects for car manufacturers. In another future, technology advances so quickly that trucking companies can run on zero-emissions vehicles much sooner than expected while banks strangle lending to those firms still relying on fossil fuels. In another, an influx of migrants from the Northern Hemisphere arrives in New Zealand to escape climate extremes, with impacts on companies affected by population changes. These are real examples of the kinds of scenarios businesses will have to confront under new climate disclosure rules, outlined by watchdog the Financial Markets Authority (FMA) at a July 20 seminar. After years of patchy, ad hoc disclosures , 2023 is the first year when many large companies have to keep compulsory records about their climate impact including the impact of their lending (banks) and investments (Kiwisaver funds). In a slew of reports due to land between April and the end of 2024, theyll have to reveal publicly not only their impact on heating the planet, but the heating planets potential impacts on them and how well-equipped they are to cope, or even thrive in different futures. As an investor, its obvious that you wont want to pour your money into a company that wont survive climate change. But even a person without a bean to their name should be able to get a better feel for how climate-savvy their bank, retailer or (in some cases) potential employer is, and whether theyll get through the changes that are coming. What exact scenarios are relevant depends on the company, but they have to think of futures where temperature rise hits 1.5C, 3C and one other scenario, at minimum. Although the change is designed mainly to inform current and potential investors, anyone should be able to use the reports to get a better look at how big companies are preparing. Until now, many have reported on such things using a purely voluntary system however consistent, compulsory disclosures should make it easier to compare the roughly 200 of the countrys biggest companies that are affected. The change covers large banks, Kiwisaver funds, insurance companies and big NZX-listed businesses, including some listed retailers and power companies . As well as emissions, these businesses will need to report on their climate goals, as well as more skills-based measures like the level of climate planning and awareness in their boards and senior management. The market watchdog that will be enforcing the new rules the Financial Markets Authority says it will start by educating companies that dont comply with the disclosures, then ultimately crack down on anyone not responding to tailored feedback. Amongst other requirements, the new rules will force companies to confront climate change by analysing how their business could fare in different futures, depending on variables such as how fast countries reign in emissions, technology developments, social shifts, new laws and other factors. Those futures are business-specific. For example, a coastal airport might study different sea level rise scenarios, while a dairy company may look at changing consumer demand for low-emissions products. A bank may examine what happens to its loan book if its clients make losses on their fossil fuel assets, or if rural mortgages fall over during a slew of longer droughts. Jenika Phipps manages a seven-person team at the Financial Markets Authority, which will read company disclosures and assess whether they comply. She says the rules are more about coming clean on what you are doing or not doing so you can be fairly judged as opposed to requiring any particular action to reduce a companys impact. Here and overseas, climate-watchers hope that directing investment towards cleaner and better-prepared companies will stop what the Productivity Commission has called the systematic over-valuation of dirty assets. Questions Phipps team will be asking include: Does the board know anything about climate change? Are they looking to upskill? Do they even monitor anything to do with climate in the organisation? Do they identify climate risks? Maybe they don't, maybe they do, she adds. Phipps says being aware of the risks (and preparing) is something any business should be doing anyway and it might help them see new opportunities, as well as downsides. Some of the flooding events that have happened recently, like in the Hawke's Bay and Auckland, that disrupted supply chains for the horticulture industry there's a business risk there, and they're being made worse, she says. Ultimately, the world needs to transition to a low-emissions economy. So there's the risk of your business not doing that, and basically not being a viable business because it hasn't kept up with changing technology or changing consumer preferences, or changing laws in terms of subsidies or taxes or bans. The EU is tightening up a lot in terms of putting in trade restrictions , and only wanting low-emissions products. If you're not keeping up with that world transition to a low-emissions economy, there's a business risk, she says. Some industries have already joined together to come up with a shared set of future scenarios, which individual companies will have to tailor to their individual needs when they carry out a risk check. Phipps says, even with the new rules, not all company reports will be directly comparable therell still be scope to choose different approaches, or use different scenarios to gauge how their businesses might fare. But their analyses have to be plausible, they have to be challenging, internally consistent [and other things], she says. We'll go back to them saying, What's the proof? What underlying scientific data from the IPCC or Niwa, or another credible organisation are you relying on to make that assumption? People will be able to rely on those disclosures, because we'll be checking the underlying data. Phipps says the regime is new, so enforcement will start out educative and constructive. For the first year of reports, we are going to be focusing on reviewing as many reports as we can, and providing feedback. It will be phone calls, emails, meetings, letters, as well as a monitoring report for everyone. We will very much expect entities to improve on that feedback, particularly if they're given individual feedback. And that will be the focus of the second year of reporting, you know [to see] that they have improved to reasonable degree, she says. If we aren't seeing improvements, then we would be looking at the standard enforcement response.