Investing for the future

Climate change is a topic that is increasingly on board agendas and we are seeing progress in the transition required. In some areas New Zealand can claim to be leading, notably the world-first legislation mandating climate-related disclosures for our largest companies.

But the global landscape in relation to ESG (environmental, social and governance) is evolving rapidly. To remain competitive New Zealand directors and business owners need to be flexible to the global shifts, and we need to ensure our business sector is equipped with the support it needs to adapt.

The impact of the mandatory disclosures on New Zealand businesses will be significant. While only our largest entities are directly in scope of reporting requirements (including listed issuers and banks), the impact will cascade through the economy.

Organisations that are required to disclose need to understand and report greenhouse gas emissions across their end-to-end value chain – from suppliers through to customers. For banks, this means the financed or ‘Scope 3’ emissions relating to their business lending.

This is leading to in-depth conversations with customers to understand their transition pathway and will inevitably drive the development of further sustainable finance offerings to help businesses reduce emissions and tackle climate risk.

Mandatory disclosures will drive transparency and increased scrutiny from the market, but will also drive innovative responses to aid transparency. For example, we are seeing a range of new B2B carbon measurement solutions and platforms, responding to the growth in demand from companies in the supply chain and customer base of larger organisations.

We are also now seeing other markets and close trading partners, such as Hong Kong, Japan and Singapore, follow with their own mandatory reporting regimes. The UK has already mandated climate disclosure and Australia’s Treasury is consulting on a scheme.

Many organisations will need to report in multiple jurisdictions, so it is critical there is consistency between standards applied in different countries. Helpfully, New Zealand’s External Reporting Board (XRB), which sets our disclosure standards, has been explicit about the need to monitor these international developments.

About 200 finance issuing entities in New Zealand are also beginning to make climate-related disclosures and, in 2022, ASB released its first Climate Report 12 months ahead of schedule, outlining the risks for customers.

Standards and comparability between markets will need to extend beyond compliance. Last year, New Zealand trade delegations to the US and Europe received a strong message that our exports will need solid sustainability credentials if we are to compete internationally.

Last December, the EU introduced the world’s first carbon tariff which will apply to high-emission imports such as iron, steel and cement. Primary produce is not in scope, but this signals strong intent and direction of travel globally. That this was passed during the cost-of-living crisis and increased energy insecurity shows sustainability is not something that can be deprioritised until other problems are solved.

Regulators are also taking steps to understand climate impacts on financial stability. The RBNZ is increasing its efforts to stress-test bank balance sheets to understand vulnerabilities, which will likely lead to increased capital requirements for lending to higher emitting sectors and those businesses slow to transition.

As a result, the finance sector must play a supportive role to ensure capital flows to sectors committed to transition to lower emissions. A good example is transport, where New Zealand’s light vehicle fleet is acknowledged as among the least efficient in the developed world.

The government’s ‘feebate’ scheme is encouraging household uptake of EVs, and the market here is now starting to develop. According to Stats NZ, in early 2022 the value of imported EVs for personal use more than tripled to $543 million. Hybrid electric vehicles and plug-in hybrids increased more than 60 per cent ($242m) and more than 140 per cent ($46m) respectively. New Zealand’s top-selling vehicle in September 2022 was an EV, and in early 2022 electric bus imports overtook diesel buses, for the first time.

Innovation around finance products is a developing area to support this growth. One of ASB’s sustainable finance products is targeted specifically at low carbon initiatives, providing a more competitive rate to companies investing in technologies to lower emissions. For homeowners, the Better Homes Top-Up offers a competitive interest rate for lending to fund energy-efficient home improvements or vehicle purchases.

Although we are facing into the climate crisis, the critical ESG issues concerning investors and policy-makers are broader than climate, encompassing biodiversity (the focus of the recent UN COP15 conference in Canada) and human rights concerns, such as modern slavery.

The EU, UK and Australia already have legislation that requires organisations to report on their modern slavery risks and how they are addressing them. Modern slavery legislation is now also in the pipeline for New Zealand, with consultation closing last year.

In the business community across all sectors, we are witnessing a huge upsurge of interest in ESG and the benefits it can deliver. It is important we maintain momentum regardless of what other priorities emerge. Deferment is not an option; investing in sustainability now is vital to ensure we have a resilient and prosperous New Zealand in the future. 

ASB published its FY22 Climate Report last September.