Is climate-related disclosure a matter of compliance, or a strategic path to building resilience and attracting capital?

Our view is that it is the latter. While New Zealand’s mandatory reporting regime is still in its infancy, this early stage provides an opportunity to focus on embedding resilience and long-term value creation rather than viewing disclosure purely as a compliance exercise. The tangible benefits to primary users are still emerging and may take several more years to be fully realised.

Last Wednesday’s much anticipated announcement from the NZ Government sets out the outcomes of MBIE’s earlier consultation on Climate-Related Disclosure reform¹. The key decisions include:

Lifting the threshold for listed issuers from $60m of market capitalization to $1b.
The consultation proposed an option to raise the threshold to $550m, which was thought to be in line with the Australian regime.

Removing MIS managers from the climate reporting regime.
The consultation proposed to raise the threshold for reporting to $5b (consolidated at the manager level or at scheme level).

To offer some context, within the Australian Climate Disclosure regime, the last wave of entities falling under the regime (known as 'Group 3’entities) will cover entities which have two of the following criteria: at least $50m of consolidated revenue, at least $25m of gross assets and at least 100 employees. In addition, asset owners (such as superannuation funds) with assets under management of $5b or more are included in the Group 2 entities. Note the substantive difference in materiality between the New Zealand Climate reporting entities threshold and their Australian counterparts.

It is expected that those changes will be welcome from many reporting entities who have expressed concerns about compliance costs; however the disclosures intend to offer transparency on climate risk, the impacts of which remain not yet fully understood.

Climate risk is not a typical business risk, in the sense that it is (among other characteristics) complex. Risks from one system can cascade into other systems, and the nature of this risk is deeply uncertain, as the past is not a good indicator of what to expect, and society response (or lack thereof) have a great influence on our emissions.

It is therefore crucial that not only larger companies manage their climate risk and build strategic resilience through transition planning and opportunities, but also they have clear governance and risk management processes to cover climate risk. Ultimately, smaller entities will also need to understand their vulnerabilities in their portfolio or supply chain and test their business models in different future settings.

This is true as well for fund managers. While capturing financed emissions for the full portfolio with a high level of confidence will remain a challenge, a prudent approach grounded in insights from scenario analysis and robust view of capital market assumptions is essential. While most market data providers have a tamer view of the long-term impact of climate risk on their portfolio, there are other analyses revealing a considerably starker picture such as:

“The report, which applies Ortec Finance’s proprietary 2025 climate scenarios to the investment portfolios of the 30 largest Australian superannuation funds, shows that on the current high warming trajectory, where global temperatures exceed 3°C by 2100, portfolio returns could decline by up to 38% by 2050.²”

Perhaps there is some inspiration to get from across the Pacific: most US firms have increased their sustainable investments this year despite lesser pressure from stakeholder groups and anti-ESG pushback sentiment.³

We would therefore suggest that listed entities who are impacted and MIS managers not abandon their emerging climate risk management practice, and consider maintaining their transparency efforts in this space but do so in a manner that is pragmatic, efficient and beneficial to investors and stakeholders.

Footnotes

Sustainability