Recent Climate Change Developments Affecting New Zealand Businesses

 Who should care?

1.           This article is particularly relevant for:

(a)             Businesses which are materially impacted by or have impacts on climate change such as primary industry, energy generators, shipping and logistics, manufacturing and any energy intensive industry;

(b)             Banks and insurance companies;

(c)             Institutional investors and fund managers.

Australia’s bushfires, and Northland’s drought, are the type of activities predicted under future climate scenario modelling and are difficult to ignore. On the business front, the NZ Institute of Directors has identified climate action as its top issue for directors in 2020[1] and New Zealand is currently experiencing a step-wise raising of the bar with regard to climate change regulation placing the onus on businesses to assess, report and respond to climate change. We report on three important recent developments below.

Development 1:  The Zero Carbon Act is now law – It will soon start to bite

2.         The Climate Change Response (Zero Carbon) Amendment Act 2019 (ZCA) passed into law on 13 November 2019 locking New Zealand into a low carbon development path and committing New Zealand to:

(a)           Reducing annual net greenhouse gas (GHG) emissions (excluding methane from agriculture and waste         sectors) to zero by 2050; and

(b)         Reducing annual biogenic methane emissions (methane from agriculture and waste sectors) to:

(i)               10% less than 2017 emissions by 2030; and

(ii)              Between 24% to 47% less than 2017 emissions by 2050.

3.         Biogenic methane is especially significant to New Zealand as it accounts for 42% of New Zealand’s total emissions,  the majority coming from agriculture.[2]

4.        These are incredibly ambitious targets given that New Zealand’s net GHG emissions grew by 65% between 1990 and 2017, and the only way NZ is managing to meet its earlier (substantially lower) Kyoto commitment is through the use of international offsets.[3]  The Government has even left open the possibility of bringing international shipping and aviation into this target at a later date. While NZ businesses are yet to feel the effect of these stringent national targets, meeting them will require significant emission reduction efforts from business across the board as well as a large expansion in forestry offset projects.

Emissions trading is the vehicle to drive reductions

5.               The Government has identified the NZ Emissions Trading Scheme (NZ ETS) as the key tool for supporting NZ to meet its emission reduction targets into the future which it is in the process of overhauling.   This means large scale carbon offset trading and offset projects which either reduce emissions or provide a sink for carbon will play an anchor role in NZ meeting its international targets.  While detail is still to come, it will involve an emission budget being set for each five year period (cap) on covered entities under the ETS who will be required to meet their targets by either making the emission reductions themselves or buying permitted offsets. 

Methane regulation remains a mystery

6.               What remains a mystery is how biogenic methane will be regulated. So far this has not been brought under the NZETS, nor has another mechanism been identified.  In addition it is not clear whether farmers will be able to offset methane emissions from their farms by utilising offset projects like those available to entities under the NZETS. Whilst emissions trading under the ETS has widespread bipartisan support, how to best regulate agricultural methane is likely to be a lot more contentious.  We consider farmers will need to play an active role in ensuring any scheme provides them with enough flexibility.

Development 2: Climate related financial disclosures likely to become mandatory

What’s happening?

7.               In October 2019 the Government released a climate-related financial disclosure discussion document for consultation.[4] The Government’s objective is to move to a position where the effects of climate change become routinely considered in business and investment decisions in New Zealand. The proposed regime would apply to entities which participate in NZ’s financial markets and require new mandatory “comply or explain” climate-related financial disclosure regulations based on those recommended by the Task Force on Climate-related Financial Disclosures (TCFD).[5]   Non-disclosure exemptions would allow for businesses to establish they are not materially affected by climate change.   

Who will be affected?

8.               Entities with public debt or security, banks, general insurers, asset owners (institutional investors) and asset managers (investment managers). The proposed disclosure requirements align with NZX’s existing recommendations that publically listed companies provide non-financial disclosure at least annually, including considering material exposure to environmental, economic, and social sustainability risks.   If enacted there is likely to be a flow on effect as insurers and capital providers apply pressure on businesses to identify and manage climate related risks and opportunities.  Thus, the new regime may have wider impacts on more businesses than those strictly caught under the disclosure regulations.

How will reporting be done and what’s required?

9.               A stand-alone TCFD report is proposed as part of standard annual reporting.  Alternative reporting and sustainability frameworks aligned with TCFD would also be acceptable under the new regime. Disclosures related to climate change would be required within the following areas: governance, strategy, risk management, metrics and targets.

Is this the same as reporting under current voluntary sustainability frameworks?

10.            No. While it seems on the surface to mirror the current voluntary reporting under frameworks like the Global Reporting Initiative (GRI), the TCFD emphasises disclosing forward looking information.  In addition to the standard reporting of past performance and emissions, it will require reports on the financial implications of climate change, both current and future.  Because the GRI and other leading  sustainability reporting frameworks have committed to ensuring their standards align with TCFD requirements, these standards are likely to be upgraded in response to new TCFD requirements.

Will it be audited?

11.            No.  Currently there is no requirement for mandatory assurance obligations, however the Government has signalled this could be reviewed within three years of a mandatory disclosure regime coming into force.

When would these requirements come into force?

12.            Consultation on this discussion document closed on 13 December 2019 and a summary report is currently being drafted. Feedback will require Cabinet consideration and ultimately Ministerial approval.  If approved, new regulations will be drafted and should come into effect around six months later.  

13.            We consider there is a good chance the regulations will eventuate, given the passing of the ZCA, and current amendments for the NZ ETS underfoot which have bipartisan support.  A consistent mandatory reporting framework for climate risk will be an important piece of internal scaffolding required for NZ to accurately take stock of its climate related risks, opportunities and emissions.

Development 3:  Directors’ liability for ignoring climate related risks to business

14.            A recent legal opinion by the Aotearoa Circle’s Sustainable Finance Forum[6] looked at the current legal position in NZ relating to the duties of directors to take into account climate change in their decision making.  It found that:

(a)          Climate change is a foreseeable risk of financial harm to many businesses.

(b)          Directors of NZ businesses are:

(i)     generally permitted to take climate change into account when making business decisions; and

(ii)    required to take into account climate change when it is a material financial risk to their business – failing to do so may breach their duty of care duties under the Company Act (s137) and expose them to liability.

15.            In particular, directors of companies affected by climate related financial risk must, at a minimum, identify that risk, periodically assess the nature and extent of the risk to the company, and take appropriate action.  The standard is what would a reasonable director do taking into account the risks faced by the company from climate change?  It is no longer credible to dismiss climate change by denying its existence. The debate has moved to whether the director’s actions were justified in light of the specific climate related risks faced by the company.  The focus of inquiry will be on the process and what steps a director or business took, rather than the specific outcomes.   Therefore it is important that a business has in place a process to assess, quantify and make decisions in respect of climate risks.

Climate Change is the tip of the ESG spear

16.            While the measures outlined above focus only on climate risk as the most visible and immediate non-financial risk impacting business, it is likely that over time such reporting and disclosure requirements will be extended to any non-financial Environmental, Social and Governance (ESG) issue which rises to the level of a material financial risk to business.  This could include issues relating to water, pollution, plastic and waste, as well as a raft of social issues which foreseeably impact upon, or are impacted by, a business.

17.            It makes sense for businesses reporting on non-financial performance indicators to include climate change as well as any relevant ESG parameter which may affect their business. 

Moving forward: The best defence is a good offence

18.            Given the major shifts underway, simply ignoring climate change and other ESG issues in the hope they might disappear is no longer a realistic option. Businesses will benefit from proactive action now to quantify and assess their climate and other ESG risks and opportunities and develop a proactive sustainability programme which includes ongoing assessment and voluntary reporting of all relevant ESG parameters, with climate as a cornerstone.

We have the tools to assist

CLM has a specialist climate change and sustainability practice as part of its Local Government and Resource Management team.  If you’re interested in the issues raised in this article or want help with your business contact Rachael Zame or another member of our team.

Updated: 6 May 2022