Businesses required to prepare for worst eventuality of ‘hot house’ climate

This article originally featured on Newsroom and was written by Matthew Scott. 

Gaps in data will pose challenges for businesses under a new regime of climate reporting

Businesses will have to consider at least three different futures when it comes to the climate crisis, according to draft climate reporting rules.

Final consultation opens today on the rules, changed to include a requirement that entities must develop strategies for at least three climate-related scenarios. The upper bound "hothouse" temperature scenario has been increased from a future of 2C rises to the grim potential of 3C global warming.

The law will require about 200 large financial institutions to file published reports on their strategy for adapting to climate change and reducing emissions, or answer to the Financial Markets Authority.

These include listed companies valued at more than $60 million, large-licensed insurers, registered banks, credit unions, building societies and managers of large investment schemes.

As businesses look up and down the supply chain to take stock of emissions, gaps in data could make life difficult.

Speaking in a webinar hosted by property data company CoreLogic earlier this month, Te Whakahaere director Mark Baker-Jones said there has been a lot of maturing from climate-reporting entities over the last six months, as they grappled with the impending new rules.

“We sort of rapidly went from zero to top speed putting in this legislative framework,” said the climate change risk advisor.

Many businesses were now seeing it as opportunity and moving investments into more carbon-friendly areas. However, gaps in data still provided significant challenges.

It’s a challenge Insurance Council of New Zealand chief executive Tim Grafton also recognised, pointing to the difficulties in reporting on the emissions of partners up or down the supply chain from you.

“It’s far more straightforward to be able to report your own organisation's emissions and much more difficult to report on the value chain that feeds through to you,” he said. “If we underwrite maybe a couple of million houses in NZ, what’s the greenhouse gas emissions of two million houses? Well, no-one actually knows the answer to that.”

The standards have been developed by the government's XRB External Reporting Board across two previous rounds of consultation, resulting in a raft of changes to the rules being put on the table now.

Dr Amelia Sharman, director of sustainability reporting for the board, said increasing the amount of scenarios entities must strategise for was important, as it shifted the idea away from a ‘good’ future and a ‘bad’ future.

Instead, there was a vast continuum of climate futures that lie ahead, carrying both a cause and an effect on the behaviours of climate-reporting entities. Sharman called them “movies of the future”.

“If you have three potential futures, they have different combinations of drivers, of temperatures and risks,” she said. “We are asking the entity to describe how its business model would survive and thrive or not in these scenarios.”

Businesses would then be required to publish these plans on the companies register and within their annual reports.

It’s the public getting to see what preparations companies have made to mitigate risk and lower greenhouse gas emissions that Sharman said was really transformative.

“I think they are a real game-changer,” she said. “Making the information available has really huge potential to transform the decision making by investors as they suddenly have all of the additional information.”

She said systemic overvaluation of high-emissions activity is currently rife due to a lack of information about its level of risk and future viability.

“This will open investors’ eyes to the short and medium term risks,” she said.

A report from earlier this year from Mindful Money has already shown New Zealand investors value putting their money somewhere ethical. The report showed 73 percent of surveyed New Zealanders wanted their funds to be invested ethically when using a KiwiSaver or investment fun, while 62 percent said it was important to them their investment makes a positive difference in the world.

Evaluating risk is the bread and butter for big players in the insurance sector, who have already put their heads together to determine the which climate scenarios they would be ready for.

Licensed insurers with more than $1 billion in total assets or annual premium income of more than $250m are obliged to report, so the Insurance Council invited the External Reporting Board to be a “fly on the wall” as they developed three scenarios the insurance sector might face in coming years.

Council chief executive Tim Grafton said they worked on plans for a 1.5C increase following an ‘orderly’ transition to climate response, a 1.8-2C increase following a ‘disorderly’ transition, and a ‘hothouse’ worst case scenario of 3C.

To do this the Council took a huge range of factors into account, from local NIWA data and estimates to recent climate change impact assessments from the Intergovernmental Panel on Climate Change and population projections.

With all that in mind insurers can get an idea of what the insurance “landscape” is going to be.

“We’ve produced a consensus view for our sector,” he said. “What happens next is each individual member needs to get into the balloon and fly over the landscape and see what that means for them.”

Climate change risks and emissions will be different for each insurer depending on investments they have in place and what they underwrite, Grafton said.

Now he’s looking forward to seeing other sectors getting together and producing their own plans, which will help the entire business world get an idea of how it might be gearing up to tackle the climate crisis.

“There's a lot of interdependence between banking and insurance, or energy and agriculture,” he said. “Being able to see how other sectors see the world playing out will inform how others see the world.”

Grafton remained cautious about the ability of this framework to mitigate risk for the sector, hoping to see further change brought through by the Ministry for the Environment’s adaptation plan.

“I don’t want to underestimate the very significant challenges that lie ahead linked to climate change,” he said. “There are some things that need to be brought in pretty damn quickly.”

The current round of submissions is open until September 26, with the rules expected to come into play with the first round of financial reporting in 2023.

There were 133 formal submissions in the previous two consultation periods, and hundreds of comments and questions.

Sharman said every single submission was reflected in changes made to the rules, which were developed following a ‘user-needs approach’.

Part of this includes a staged transition into stricter forms of climate reporting, with greenhouse gas emissions being reported from October 2024 and entities only compelled to report on patterns and trends once enough time has passed for them to become visible.

But once greenhouse gas emission reporting is fully assured, Sharman said the impact would go beyond the 200 current affected companies, as they will be expected to report on emissions up and down the supply chain.

“A bank's scope for emissions is the emissions of all activities it funds,” she said. “Collecting emissions information is just going to become a fundamental part of any organisation's data – you manage what you measure.”