Business must come clean on climate cost
The world’s dirtiest companies are often not privately owned and not subject to disclosure regimes. Thomas Coughlan thomas.coughlan@stuff.co.nz
In part thanks to Covid-19, and in part thanks to the vicissitudes of a coalition government heading into an election, the Beehive is currently drowning in policy.
You can almost hear the dull cacophony of millions of pages of consultation documents, policy papers, and Cabinet minutes as they wend their way upwards to the Cabinet table.
One such proposal that looks destined to fall into the ‘‘after the election’’ basket (it was always going to land later in 2020) is an idea to get some companies to declare and report climate changerelated financial risks in their annual reports.
The proposal came from Climate Change Minister James Shaw and follows an international movement to get firms to be more upfront about how climate change will affect them. It’s got the backing of international heavy hitters like ex-Bank of England governor Mark Carney, who, whilst still in the post, warned of ‘‘huge’’ levels of unquantified and unreported climate change-related financial risk sitting on corporate balance sheets.
What it would mean is that certain companies (those issuing public debt or equity as well as financial sector institutions) would have to disclose the risks and costs of climate change on their business in much the same way as they declare other risks, assets and liabilities.
The argument in favour of declaration is twofold. Investors make decisions based on the information given to them. Disclosing the cost of climate change makes those investors more likely to direct their funds to companies trying to solve climate-related problems, and acts as an incentive for companies to reduce climate costs, so as to attract investment.
Institutional investors including our own NZ Super Fund and ACC have committed to reducing their carbon-intensive emissions. Part of that is politics – big funds want to look like they’re doing the right thing, but it’s also good economics. The writing is on the wall for the carbon-intensive economy, and that writing says ‘‘sell’’.
Many companies already disclose the impacts of climate change on their business. Reporting companies that have significant emissions trading scheme (ETS) obligations declare those costs. Likewise, some companies that are heavily exposed to climate change risks have been declaring openly how they plan to address and mitigate these concerns.
An argument could be made that company directors already have a legal obligation to their shareholders to disclose climate risks. But the word on the ground is that this isn’t happening to a meaningful extent.
Insurance companies, which are on the hook for many billions of dollars worth of climate change risks as properties become threatened by rising sea levels, told the Productivity Commission that, despite directors’ obligations, ‘‘few companies’’ actually report the risks ‘‘or take a sufficiently long view’’ when it comes to those risks.
The insurance companies’ wider point was that New Zealand lacked a consistent, clear way of reporting those costs, which potentially put off some companies. There’s a prisoner’s dilemma: one wants to be the first to declare they’re heavily on the hook.
The current proposals would make disclosure mandatory and could create a standardised way of reporting climate change risks.
Actually working out a standard for risk disclosure is more complex. Calculating your ETS obligation is one thing, but these proposals are about working out the ‘‘financial implications of climate change’’, to use the policy’s own wording. Calculating how more adverse weather events will hurt your crop yields is very different to an ETS liability.
The Government wants to implement a ‘‘comply or explain’’ scheme. That would mean business would either declare the risks, or explain why they couldn’t. It’s hoped that, over time, that would encourage businesses to move towards quantifying and declaring their risks.
These concerns are serious, but there is already an emerging, although not yet official, consensus on what needs to be disclosed and how. A G20 taskforce has been working on standards since 2015. It makes sense that any New Zealand system follow this, to ensure a level playing field.
It’s possible to overstate the effect of risk disclosure. The world’s dirtiest companies are often not privately owned and not subject to disclosure regimes. It won’t make any difference for dirty stateowned oil companies in Saudi Arabia, Russia and Brazil.
But it will help domestic firms get ready for the wave of change that’s coming down the pipeline. The costs of climate change aren’t just thing like the ETS, which are designed to blunt the effects of climate change, there’s also a cost of adapting to its most expensive effects. The sooner businesses act to mitigate these effects the better it will be for them.
The ability of our businesses to price those changes and respond accordingly is nothing short of a test to our entire political and economic system. Climate change is unavoidable. Businesses and governments will either change themselves to prevent its most harmful effects or, in the event they do nothing, those same businesses and governments will have to change to adapt to a new, hostile environment.
Unfortunately, both paths come at a cost.