Net Zero trends in NZ and beyond
The latest UN IPCC report is clear that only by making deep, rapid cuts to emissions can humanity have a chance of staving off the worst harms from climate change. It notes large finance gaps for both low carbon transition and adaptation – that is, investing in resilience against climate impacts already in play.
"If climate goals are to be achieved, both adaptation and mitigation financing [will] need to increase many-fold. There is sufficient global capital to close the global investment gaps but there are barriers to redirect capital to climate action,” the report said.
Sustainable finance approaches are changing capital flows globally. Sustainable finance refers to taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. The relevance of these considerations to company directors is clear.
Finance opportunities are opening up to businesses that can show they’re on a credible long-term transition path aligned with a net zero by 2050 future, and that they are meeting robust environmental and social targets. Conversely, companies without credible transition plans will eventually face higher costs and/or restricted access to financial products and services.
Below is an overview of key drivers of sustainable finance in Aotearoa New Zealand. These are relevant to all directors, especially those in high-emitting businesses and hard-to-abate sectors.
Net zero pledges
Almost 600 financial institutions have committed to setting net-zero targets through the seven finance sector-specific, voluntary net-zero alliances under the UN Race to Zero.
The 126 signatories to the Net Zero Banking Alliance, for example – including five major banks operating in New Zealand – have pledged to align their loan books and investment portfolios with net zero emissions by 2050, and to set an intermediate target for 2030 or sooner using robust, science-based guidelines and focusing first on the most emissions-intensive sectors.
Another driver of institutional investors in New Zealand is the Crown Responsible Investment Framework. It requires that Crown Financial Institutions (CFIs) actively seek all opportunities to drive the climate transition, from education and active engagement to investment into climate solutions, where consistent with their investment strategy.
The NZ Super Fund, which has signed up to The Paris Aligned Investment Initiative Net Zero Asset Owner Commitment, has shifted about 40% of its overall investment portfolio to market indices that align with the Paris Agreement, the international climate change treaty.
Climate disclosures and transition plans
It’s one thing to have an aspirational target; quite another to have a costed plan and accountability for getting there. 2022 saw growing attention on the need for credible plans detailing how businesses and sectors will transition to net zero.
New Zealand is one of the first countries to mandate climate-related financial disclosures. Though only larger businesses (insurers, banks, non-deposit-takers, investment managers and larger publicly listed companies) are currently covered by the new climate reporting rules, as part of their ‘Scope 3’ reporting obligations, reporting businesses will be seeking emissions counts from the small businesses that supply them, so the effects will ripple out across the economy.
A reporting entity must describe its governance body’s oversight of climate-related risks and opportunities, including how that body ensures the appropriate skills and competencies are available to provide such oversight. It must also disclose how its assessment of climate-related risks and opportunities are informing strategy and planning, including transition planning. From next year, there will be a requirement for assurance over emissions disclosures (the External Reporting Board/XRB is currently consulting on the draft assurance standard).
Meanwhile, the International Sustainability Standards Board is on track to issue its first global sustainability standards in June.
In late 2022 umbrella group Glasgow Finance Alliance for Net Zero (GFANZ) published a guide to developing ‘real economy’ transition plans, including sector-level plans.
The Investor Group on Climate Change (IGCC) has also released guidance on what investors expect from corporate transition plans.
The UK has established a taskforce to develop a ‘gold standard’ transition plan, and in February called on businesses to start publishing detailed decarbonisation plans this year.
In mid to late 2023, the XRB intends to issue guidance to support New Zealand entities when making their transition planning disclosures. This guidance will be informed by close engagement with key international players in this space, including the UK Transition Plan Taskforce.
Stewardship Codes and investor engagement
Globally, more investors are adopting stewardship approaches, and the range of activities they’re undertaking is expanding. To accelerate this further, jurisdictions are developing Stewardship Codes, with more than 40 codes globally.
New Zealand’s inaugural Stewardship Code was launched last year and has 16 signatories. It defines stewardship as creating and preserving long-term value for current and future generations by responsibly managing and allocating capital.
Its nine principles guide investors to incorporate ESG matters in their investments; design and implement engagement policies; vote responsibly at shareholder meetings and disclose the nature and outcomes of their stewardship; and aim for greater collaboration, including with policy makers.
Uptake of the NZ Stewardship Code reflects a wider trend away from divestment and towards constructive collaboration with companies, with a view toward creating long term value. Increasingly, companies are being asked more ESG questions by investors, and the questions are getting more granular. There’s also move towards collaborative engagement among responsible investment leaders.
ESG deal-breakers and litigation
Another example of growing investor scrutiny is a 2022 Forsyth Barr report giving ESG ratings of 57 NZX-listed companies.
ESG can be a deal-breaker. A 2022 Simpson Grierson report on offshore investment into New Zealand found more than a third of international investors surveyed had walked away from an M&A deal with a Kiwi company due to ESG risks in the past 12 months.
At the same time, climate litigation is on the rise globally. In its annual litigation outlook, New Zealand law firm MinterEllisonRuddWatts picked the trend would show up in New Zealand this year.
Directors are being targeted in investor climate action. In 2021, impact-focused US investment firm Engine No. 1 ran a high profile campaign to replace four members of ExxonMobil's board of directors as part of a wider push for the company to address climate risks. Despite Engine No. 1 owning only 0.02% of the oil company's shares, its campaign was successful, and ExxonMobil has since set more aggressive GHG emissions reduction targets and upped resources for its Low Carbon Solutions business unit.
This March, the Financial Times reported that two of the UK’s largest pension schemes, which together oversee £130bn in assets, would vote against the renewal of top directors at BP and Shell at their annual meetings unless both companies promise to do more to tackle carbon emissions.
Also in England, in what’s believed to be the first case of its kind, environmental lawyers ClientEarth have sued 11 directors of Shell over the oil major’s climate strategy.
Meanwhile, regulators are moving to address greenwashing by financial firms. In March, the Australian Securities and Investment Commission took its first action for greenwashing, against Mercer Superannuation. In New Zealand, the Financial Markets Authority has reviewed a sample of funds labelled green, sustainable, ethical or responsible and found shortcomings in their disclosures.
Sustainable finance market
2022 saw a proliferation of sustainability-linked loans and bonds, with $2.2 billion of loans executed by early December to borrowers from a widening range of sectors, including hotel/tourism, local authorities, financial services, horticulture and viticulture.
New Zealand domestic borrowers issued $6.3b of Green, Sustainability and Sustainability-Linked Bonds in 2022 — double the 2021 volume.
The Government also issued its first Sovereign Green Bonds in 2022. This is expected to stimulate the development of capacity to assess impacts of green projects. Expertise in managing green bonds is expected to ripple through all infrastructure projects, over time bolstering the local green and socially-responsible financing market.
However, according to Bloomberg, last year was the first year the global green bonds and loans market declined as inflation and geopolitical tensions rose. This could see more businesses seeking finance from private equity and private debt.
Read more about recent sustainable finance deals on the Centre’s website.
ENDS
Further reading:
2022 Sustainable Finance Progress Report (Centre for Sustainable Finance)
Directors’ Preparation Guide (XRB)
Directors’ Guide to Climate Governance
Unpacking stewardship in Australasia in 2022 (RIAA)
