A clear path to decarbonisation investment

Directors of New Zealand businesses are increasingly called to consider climate change as part of the company’s long-term strategy. Large and listed companies (climate reporting entities) are now required to disclose how they consider climate-related risks and opportunities and how these will be managed.

Financial institutions have begun making mandatory climate-related disclosures in accordance with the Aotearoa New Zealand Climate Standard 1. The New Zealand Bankers Association has developed and published a report on Climate scenario narratives for the banking sector, outlining scenario narratives and horizons to be used in climate-related risk assessment and disclosures, and a high-level set of climate-related risks that banks should consider as part of their risk assessment. The Financial Services Council has done similar work to help New Zealand’s fund management, life insurance and health insurance sectors.

While these scenarios are necessary, the Institute and Faculty of Actuaries in the UK highlights in its recent report The Emperor’s New Climate Scenarios, the disconnect between climate scientists, economists and model users in financial services, meaning that many of these scenarios likely systematically underestimate climate risk.  Because emissions keep rising, science based targets actually mean that net zero needs to be achieved closer 2030 than 2050. 

The climate-related disclosures are aimed at enabling New Zealand companies to remain relevant and respond to international customer, investor and regulatory expectations, while finding pathways to reduce their own emissions and those they are financing. 

Leading directors will see them as a chance to prepare their companies to compete and win in the global transition.

Decarbonisation and international trade relationships

The inaugural Climate Finance Summit between Aotearoa New Zealand and Australia in June saw Ministers commit to trans-Tasman alignment of sustainable finance frameworks, coordinating implementation of climate-related disclosures, best-practice modelling approaches to climate and positioning the region as a robust green finance market.

Additionally, the Australian government will provide policy certainty through the development of plans to decarbonise key economic sectors:

• Electricity and energy
• Industry
• The built environment 
• Agriculture and land
• Transport
• Resources 

Investors advised the Australian Government that government-guided sectoral plans are vital for attracting billions in new investment in decarbonisation in Australia. 

The Investor Group on Climate Change (IGCC) which represents AUS $30 trillion assets under management globally, states that clear emissions pathways, goal posts and policy for all sectors can provide clarity for investors and the companies they own, help guide business strategy, climate-related financial disclosures, and the allocation of private capital towards new technology and infrastructure. 

In making the announcement in July, the Australian Minister for Climate Change and Energy Chris Bowen heeded their advice. Development of the Australian plans will involve dialogue and collaboration with industries, experts and citizens, with Bowen aiming for six net zero sectoral plans that are robust, ambitious but achievable, and accepted by the broader community.

Decarbonisation plans for Aotearoa

In New Zealand, the Climate Change Commission estimated that the actions needed to transition into a cleaner economy will cost $34 billion from 2021 to 2035. To put this into context, Auckland Council estimated that the costs of recovery from the flooding and cyclone events in early 2023 could be up to $4 billion.

There is already a shift underway in capital allocation to adaptation. The government is announcing funding for cyclone recovery, infrastructure and community retreat from areas affected by cyclones and floods. While New Zealand’s first National Adaptation Plan was released in 2021, we do not yet have clear investment priorities for managing retreat, lowering the country’s risk profile and building in resilience over the mid to long term.

Government officials are preparing New Zealand’s second Emissions Reduction Plan (ERP2) to be released at the end of 2024. Key transition sectors are Agriculture, Built environment, Energy and industry, Forests, Transport, Waste and fluorinated gases.

Why does New Zealand need credible net zero sector transition pathways?

The ERP2 process is an opportunity for New Zealand to follow the Australian lead and develop science-based, internationally credible sectoral transition pathways for the country.  This would provide investors and companies a framework to develop and execute credible transition and adaptation plans. 

Industry and community input is critical for the development of these plans. Government won’t have all the relevant information, but is well-placed to play a strategic role, including enabling existing platforms for industry and communities to inform this work. Through this, business leaders can further their understanding of the transition opportunities, and build the capability to lead through the transition.  This capability is another key factor in New Zealand’s ability to develop attractive, investable opportunities at scale.

A credible strategy for decarbonisation and sustainability is already key to New Zealand’s economic value proposition.  Climate and nature are core components of trade deals with the UK, EU, Australia and 15 Asia Pacific countries, among others.

In the absence of these pathways, we will see increasingly constrained access to international capital and ability to attract overseas investment. The director community can play its part in helping advance these pathways for the overall wellbeing of Aotearoa. 

Toitū Tahua: Centre for Sustainable Finance is a member of the Chapter Zero NZ Working Group