Climate crossroads
The following is an except from the Top five issues for directors in 2022 focussing on Climate Crossroads.
Climate Crossroads
“We are, after all, the greatest problem solvers to have ever existed on Earth. If working apart, we are a force powerful enough to destabilise our planet. Surely working together, we are powerful enough to save it.” – Sir David Attenborough at COP26
Boards have a very real opportunity to be a powerful force in taking action on climate-related issues and reducing the environmental impact of their organisations. This year the 2021 Director Sentiment Survey saw a rise to 48% of boards saying they were engaged and proactive on climate change risks, which is up from 35% in 2020. Although engagement is increasing, there’s still some way to go for many boards as we reach a critical juncture on the road to creating a sustainable future.
An ambitious COP26 – but will it deliver?
The 26th meeting of the Conference of the Parties (COP26) in Glasgow saw a raft of ambitious announcements, new targets, and pledges to try to reach net zero emissions by the middle of the century. But frustration with dramatic gestures and talk, is raging – epitomised by Greta Thunberg’s “No more blah, blah, blah!”
In signing New Zealand up to new targets (which received the full ambit of reactions) the Minister of Climate Change, Hon James Shaw warned that “This decade is make or break for the planet. To stand a chance of limiting global warming to 1.5˚C, the science shows we now have about eight years left to almost halve global greenhouse gas emissions.”
Government announcements included a new Nationally Determined Contribution (NDC) target to reduce net greenhouse emissions 50% below 2005 levels by 2030, driven by the Emissions Reduction Plan (ERP) due out in 2022. This will be supplemented by paying for reductions in other countries, especially in the Pacific. New Zealand also signed up to the methane pledge, with the goal of reducing methane by 30% by the end of the decade.
At COP26 Mark Carney (former head of the Bank of England) announced the United Nations Glasgow Financial Alliance for Net Zero, a coalition of global investors, banks and insurers controlling US$130 trillion in assets, which would commit to net zero emissions in their investments by 2050. Another ambitious target, but one that will also drive more climate disclosures and scrutiny.
A sustainable financial system is critical to accelerating progress to net zero. In August 2021 Toitū Tahua, the Centre for Sustainable Finance was launched to implement the Aotearoa Circle’s Sustainable Finance Forum Roadmap for Action, and advance a sustainable financial system that incorporates environmental, social and economic considerations in financial decisions.
Sustainability reporting taking off
Climate and broader sustainability reporting is here and on the road to becoming standard business practice.
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 ushers in mandatory climate-related reporting. The External Reporting Board (XRB) is establishing the reporting framework based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) on governance, risk management, strategy, metrics and targets. The XRB has already started consultation on a new standard with phase one focusing on governance and risk management.
Climate-related disclosures will be mandatory for large listed companies with a market capitalisation of more than $60m; large licensed insurers, registered banks, credit unions, building societies and managers of investment schemes with more than $1b in assets; and some Crown financial institutions (via letters of expectation). Subject to parliamentary approval, these entities could be required to make disclosures in 2024.
Reporting under the standard is primarily for investors but the XRB acknowledges the wider stakeholder interest. The XRB’s new mandate also extends to issuing guidance on ESG matters. As part of the guidance the XRB has initiated a project considering Te Ao Māori in the context of reporting in Aotearoa New Zealand.
The XRB is already well underway with developing a standard, which it has plans to introduce quite quickly. This poses an extra challenge for reporting in New Zealand, as we will need to ensure we are aligned with global developments.
At COP26, there was another step towards harmonising the global approach to sustainability and ESG reporting with the introduction of the new International Sustainability Standards Board (ISSB). The new board will consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation (VRF, which houses the Integrated Reporting Framework and the SASB Standards). The initial focus of the ISSB will be working on the prototype climate standard and is expected to extend into other ESG areas.
Although the standard will initially only apply to select entities (eg, larger entities in the financial sector) we can expect wider application, including as requirements filter through supply chains, and sustainability reporting becomes the norm alongside financial reporting.
The advancement of climate-related disclosures will also drive more ESG disclosures from organisations. The true value of this reporting will be realised when it goes beyond compliance and is used to drive strategic thinking and decision making across organisations, and realises the goal of reducing emissions.
Pointers for 2022
- Benchmark the climate capability of your board and executive team to identify where you need to build competency.
- Identify and assess the top two or three climate-related risks for your business to help ensure your business strategy is resilient in a low-carbon future.
- Get started immediately. Understand the business improvements needed in your business to drive the sustainability and reputation of your organisation. Don’t be afraid to share your experience and your plan of how you will improve each year.
See all top five issues for directors in 2022 on the Institute of Directors website.
