Climate Disclosures - capitalising on financial markets
This year New Zealand became the first country in the world to begin reporting under mandatory climate-related financial disclosures, with around 25 disclosures released to date. Two recent analyses of these disclosures by KPMG and Te Whakahaere Ahuarangi highlighted the challenges for directors.
The analysis by KPMG published by Chapter Zero identified four key themes in how companies are tackling climate disclosures: The time-intensive nature required to compile the report through a lack of sustainability resources, too much time spent on reporting instead of making/implementing real change, a lack of insights from data, and the need to shift focus from compliance to investment. The fifth theme, recognising the early days of the new regime, was missed opportunities.
The analysis by Te Whakahaere Ahuarangi: Climate Change Advisory Services showed a majority of New Zealand companies have failed to integrate climate-related considerations into their business operating model, with a marked difference in comprehensiveness and quality submitted in the disclosures. They noted some exhibited real strengths, particularly in showcasing strong board oversight and strategic direction, others were yet to set actionable and quantifiable targets.
This indicates that New Zealand companies are not fully on board or do not understand the importance or purpose of climate-related financial disclosures. The purpose, of course, is to provide clear data to investors on how their companies are managing systemic climate risks, identifying opportunities and impacts, and providing transparency in their planning as to how they will adapt their business to respond to climate change.
Poor quality climate disclosures are a concern. Directors are responsible for the accuracy of their disclosures, yet many feel they have little visibility on this.
The results also reveal that despite having real opportunities to leap ahead of competitors, many New Zealand companies are struggling to maximise the opportunity to innovate in the climate space. This may be related to New Zealand’s low productivity and the manual approaches to disclosures.
International financial trends in climate disclosure
Globally, there has been a shift in the financial system towards investing that is informed by good quality climate-related investment data. Climate-related financial disclosures are intended for investors and companies making poor quality disclosures risk excluding themselves from potential investments.
The global IFRS accounting standards body that now maintains the older TCFD disclosure system, released the IFRS S1 and S2 sustainability standards last year, with S2 specifically focused on climate disclosure.
A shift in investor focus was strongly highlighted in the recent IFRS Sustainability Symposium held in New York earlier this year, which I attended. Symposium speakers brought deep experience across the financial and climate disclosure ecosystem.
The overwhelming message was that climate disclosures are now a crucial part of the financial system, evidenced by a strong and rapid adoption of S1 and S2 by global regulators and stock exchanges by all of our major trading partners, including Australia, UK, Singapore, Malaysia, India, Canada, Japan, South Korea and many more.
Speakers made the point that companies will be treated differently by the financial system depending on the quality of their climate disclosures:
- Ratings agencies, funds and lenders will favourably rate companies with quality climate disclosures, and down-rate companies with poor quality climate disclosures, directly impacting funding/cost of capital and share price.
- Particular attention will be paid to climate disclosures that focus on risks, opportunities and transition planning, which shows a business is responding to market signals and aligning with where change is heading.
- Data quality is key - current climate disclosures are not easy for analysts to interpret, especially when they contain unnecessary and emotive information, data omissions, and do not correctly follow disclosure standards.
- Trade-exposed businesses are now alert to the need for high quality climate disclosures which are becoming a key part of international trade.
Where to from here?
The international message is that companies producing better quality climate disclosures will receive clear benefits.
Conversely, companies with poor disclosures may be downrated, funding and insurance may become more expensive, and share prices may be impacted.
Early analysis of New Zealand climate disclosures suggests most organisations are not embracing high quality climate disclosures and that directors and the C-suite need to better integrate climate disclosures into their business.
Further, they need to prioritise the needs of investors who require accurate information, underlining the importance of data being understated and accurate, rather than exaggerated or unachievable. This is a hot topic in Australia where greenwashing is taken seriously.
Software such as ClimateTracker can help executives, boards and advisors gain better visibility of their climate position and claims, and transition climate disclosures into business operations quickly and easily. They are designed to simplify and automate climate disclosure reporting to Aotearoa New Zealand government standards, giving C-suite and boards in-depth analysis of disclosure data and providing real-time comprehensive insights, at a glance.
Dougal Watt is Executive Technology Advisor at Watt Consulting and the cofounder of ClimateTracker. He leads a global software team and is currently New Zealand’s only certified Open Group Distinguished Architect – one of few people in the world to hold this qualification.
