Explained: Why The Warehouse will have to reveal its climate position but Farmers won't

9th July 2022

Big businesses will have to reveal their climate situations beginning in 2023. But many of our most popular companies aren’t covered. Eloise Gibson explains.

This article originally featured on Stuff and was written by Eloise Gibson. 

Big businesses will have to reveal their climate situations beginning in 2023. But many of our most popular companies aren’t covered. Eloise Gibson explains.

It was a world-first law that – ministers said – would bring climate resilience “into the heart” of business decision-making.

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act was intended to hit climate change where it hurts: in the financial markets that drive the economy.

Starting next year, about 200 of our biggest companies will have to reveal their emissions and the risks that climate change poses to their business.

This is more than an arcane set of company reporting rules.

The hope is that shining a light on reality will drive investment away from climate-wrecking activities and towards cleaner, more future-proof ones.

If it works, it will benefit all of us.

But less than a year after the law was passed, tensions are emerging about who and what the disclosures are for.

Is it enough for the reports to help the climate by raising corporate awareness and helping investors? Or should they also inform customers, employees and the rest of us?

Why make companies report on climate?

Many analysts believe that redirecting the global flow of money is the only way the world will meet its climate goals.

Some companies disclose their climate credentials voluntarily, often using guidelines from an international group called the Taskforce on Climate-related Financial Disclosures (TCFD).

But many large New Zealand companies publish no information at all about the risks climate change poses to their profits, whether it be from floods, droughts, supply chain disruptions or rising cost to pollute.

This can make polluting and climate-threatened industries look more valuable than they are, the Productivity Commission has warned. Businesses that publish their risks voluntarily may feel as if they’re making themselves vulnerable.

Compulsory regimes are on the way in New Zealand, the EU, the UK, Singapore, Canada and even the United States. New Zealand’s law was first to be passed, in October 2021.

Since then, an independent agency called the External Reporting Board (XRB) has been writing the rules that will the law teeth, in consultation with businesses. Some climate-focussed NGOs, iwi and others have also made submissions.

Shining sunlight

The External Reporting Board usually takes care of setting accounting and auditing rules.

At first, it didn’t want to write climate standards, but when April Mackenzie took over as chief executive in late 2019, she urged the board to reconsider.

“Transparency shapes society and is the best way to get the best outcomes for society,” she says.

“For me personally, it wasn't about saving the planet per se. It was about [the fact] that transparency shines. It’s the best sunlight.”

Originally, the XRB was going to recruit a separate climate standards board to work within it, as it has for accounting and auditing standards. This was what Cabinet was told was expected when it signed off on the disclosure regime. But in the interests of speed and urgency, the board changed tack and used existing board members to steer the standards, with the help of an external advisory panel.

The standards are still in draft form, and they’ll open for a final round of public feedback this month.

Who gets sunlight?

Not all big companies will get a dose of sunlight.

When Commerce Minister David Clark announced the law change, he said it would “create a level playing field.” That’s true when it comes to comparing entities that are covered by the standards: banks, big investors (managing $1 billion in assets or more), big insurers and large companies listed on the New Zealand stock market, plus ACC and the NZ Super Fund.

However, private companies and most overseas-listed companies aren’t covered.

As a customer, this leads to patchy results. If you’re deciding whether to buy your sheets at The Warehouse or Farmers, for example, only the listed Warehouse Group will be covered by the requirements.

Stock market operator NZX pointed out to the standards board that five of the top eight greenhouse gas-emitting companies in New Zealand are not listed on the New Zealand stock exchange.

Direct competitors will face different requirements, says Lloyd Kavanagh, a partner at MinterEllisonRuddWatts and member of Lawyers for Climate Action, a group which made submissions on the standards.

Want to cool your world?

Plant trees in your area

Learn HowSponsored byTrees absorb the greenhouse gas carbon dioxide and store the carbon as wood, locking it away. If vast tracts of forests are planted, significant quantities of emissions will be removed from the atmosphere, limiting the global temperature rise. In addition, trees protect us from the heating climate, by providing shade, breeze and water vapour. Native species also provide homes for native birds and other animals.

For example, Kavanagh says, Port Napier would be covered by the disclosure obligations as a large listed company that meets the market cap, but the unlisted Eastland Port will not.

It’s a similar story for large, NZX-listed companies competing with overseas-listed rivals, who won’t be required to come clean by the law.

If the point of disclosures is purely informing investors, this makes sense: the law covers entities taking large sums in investments from the public, or who are managing large investments themselves.

However, official briefings released to Stuff under the Official Information Act show Climate Change Minister James Shaw at one point asked officials to consult on adding private companies, saying the “size and impact” of a company should matter more than its ownership.

When Cabinet considered the issue, it was told climate disclosures were meant to be read in the context of companies’ annual financial reports, which only listed companies have to make public. Officials told ministers the regime couldn’t simply be extended to private companies.

Stuff asked Ministers Shaw and Clark if the current coverage was too narrow, in a set of questions sent to their offices on Tuesday at 7am. We twice followed up, and Clark’s office indicated we’d get a reply from him, but that hadn’t happened at noon on Friday.

You talking to me?

Focussing businesses’ and investors’ minds more sharply on climate change could certainly help all of us.

"When businesses understand how they themselves are likely to be impacted, they're going to be more energetic in addressing the issues that will impact all of us,” Kavanagh says.

But if companies are only speaking to investors in their climate disclosures, they’ll probably write in the language of financial statements. Making the reports more user-friendly was a theme of submissions from climate-interested groups.

The draft standards say the primary users are investors, typically people who are used to wading through pages of numbers.

"Unfortunately, we think there's a natural temptation to try to stay with a narrower definition that... people are used to in relation to financial reporting. But the stakes are quite different here,” Kavanagh says.

“If a company... is particularly exposed [an employee] may want to make their own choices about where they work. [So] whose understanding are you writing for?,” he says.

Briefings to ministers show government officials formed the view early on that the most promising approach was to “focus on the investor and the impact of climate change on the returns to the company”.

In a 2019 briefing to then-Commerce Minister Kris Faafoi and Climate Change Minister James Shaw, advisers rejected proposals for a wider reach because “it is not clear to us what practical uses other audiences would have for this information.”

Barry Coates, founder of ethical investment charity Mindful Money, vehemently disagrees with that.

“They're saying [it] is basically for shareholders. But this is climate disclosure. This is for everyone in society. This is for workers. It's for consumers. It's for members of the public. It's for NGOs. It's for anyone who's concerned about the climate... you can't sit there and pretend and say, Oh, no, this is just for the people who own the shares.”

However, Mackenzie, the XRB chief executive, thinks the division between investors and other people is being overstated.

“We certainly have not viewed the investor as a narrow group of people. We believe that investors’ information demands have widened, and widened quite quickly over the last half a dozen years... Investors want to invest in responsible corporates that have a social licence to operate,” she says.

“To try and draw these two groups as completely separate groups is a little misleading, because there are many investors who are very much focused on these wider issues.”

In any case, she says, the law is restrictive. “If you look at the legislation ... it was very clear that it was to be aligned with [the international investor disclosure framework] and that it was very much focused on moving capital,” she says.

The same tension – who is this really for? – enters the debate in other places.

Another flashpoint is defining what counts as material –and therefore what companies have to disclose.

Mindful Money and the lawyers’ group want companies to disclose any material impacts they have on the climate, even if it didn’t contribute to their annual emissions, and even if it won’t affect the company’s value. That’s not what’s proposed, though.

“If it doesn't impact on the company value, then the company doesn't have to declare it. It just makes absolutely no sense,” says Coates. “Investors don't think like that. Companies don't think like that any more.”

Which climate future?

One thing most submitters – including most business submitters – agreed on was that having shared rules is a good idea. One notable exception was Business NZ, which argued for a voluntary system.

But it’s one thing to agree to stress-test your business against a range of climate futures, and another to work out what those futures might look like. Especially when everything from future emissions to technology, to potential wars, is unknown.

Lawyers for Climate Action wanted the Government to task the Reserve Bank with setting a central, shared range of climate scenarios, rather than letting industries come up with their own. This didn’t happen.

"We certainly would have been more comfortable if the scenarios were centrally mandated, so that everyone is working on the same set,” says Kavanagh.

Coates agrees: “There is no common base. And that is also a major, major problem.”

Instead, the XRB is asking industries to get together to agree on the risks and opportunities for each sector, and come up with sector-specific scenarios for businesses to use.

Companies will have to assess themselves against three possible futures: a temperature rise of 1.5C, a rise of 3C and a third one somewhere in the middle.

Mackenzie says that having the scenarios designed by one central agency would have made them too high-level.

”Really, the most important thing is that you give it a go and that we get entities looking out much longer, much further than some of their current planning horizons,” she says.

But is giving it a go the most important thing, or is it about getting accurate information that’s comparable between companies?

”Those things are not necessarily mutually exclusive,” says Mackenzie. “It is not ‘give it a go, don't care about it’. It's give it an honest go... looking at feasible pathways. You're going to have to disclose what assumptions you've made.”

”Anyone interested in this entity, either buying its products or investing in it or a commentator from media can compare and contrast to [others] within a sector [and say] do these assumptions look feasible and plausible?”

Could the average person really judge whether a set of future assumptions stack up?

“It's not about modelling,” says Mackenzie. “It’s about explaining to your investors, ‘Here is a little description of what might happen under 1.5.C. This is what we have assumed will be the physical risks and the transition risks. And we've tested that, and we've looked out into the future’.”

”We won't get 100% comparability across these companies on day one. But... the quality of the analysis and the quality of the scenarios will improve quite quickly.”

What if companies refuse?

Compliance with the new rules will be watched over by the Financial Markets Authority (the FMA), the same watchdog that monitors regulatory compliance by Kiwisaver providers and other companies selling investment products.

Originally, the bill imposed criminal liability and a fine of up to $50,000 if greenhouse gas emissions figures in the reports didn’t meet the legal standard – in line with penalties for breaking financial reporting laws.

However, a supplementary order paper released to Stuff under the Official Information Act shows at least one of the ‘big four’ accounting firms (which are KPMG, Deloittes, PriceWaterhouseCoopers and Ernst and Young) told government officials they wouldn’t take on the work of preparing emissions reports for their clients if there was a risk of criminal conviction.

The big firms would be “on a learning curve” preparing climate pollution reports, policy advisers told Shaw, and they didn’t want to deter them from doing the work.

The FMA still has the power to warn firms that aren’t meeting the standards, and, in some cases, issue injunctions. And there are still financial and criminal penalties for not filing the reports at all.

What’s next?

Coates fears the standards are all but set, but Mackenzie insists they are open to changes.

The full draft standards will be unveiled on July 28 and anyone will be able to comment, she says.

“It's far from finished. We truly welcome input from anyone in any form,” says Mackenzie.

The board aims to have the standards finalised in December, ready for implementation in the 2023 financial year. There’ll be a review two years later, to assess how well they’re working. A set of wider, voluntary standards is on the cards, too.

“What will be issued in December is not the end of the journey,” says Mackenzie. “This is all new. It's not like the good old financial statement reporting that we've all been doing for 100 years.”

“We all need to learn to think differently.”