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What can businesses do now to prepare?
Climate change is a critical issue that will increasingly directly impact all aspects of business. As change continues to accelerate, businesses must consider climate risk in all aspects of the organisational decision-making process, or risk being left behind by those who are seizing the opportunities and responding proactively. The recent Climate Change Commission advice illustrates the urgency of climate change issues for business and underscores that regulatory change is coming.
In April 2021, the New Zealand Government introduced a Bill to Parliament to mandate climate-related financial disclosures. Around 200 organisations will be affected. This includes most NZX listed issuers, large registered banks, licensed insurers and managers of investment schemes. The Bill has been described as a world first and will lead to the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) - already being adopted around the world on a voluntary basis - becoming mandatory in this country.
In New Zealand, the proposed mandatory reporting requirements will support investors' understanding of the full financial implications of climate change on businesses. They will also force organisations (and their directors) to take responsibility for understanding and disclosing material climate risks like they have historically done for financial information.
Impacted organisations will be legally required to consider and disclose climate change risk via new annual ‘climate statements’. These will be based on standards issued by the External Reporting Board (XRB). Draft standards are to be shared from July 2022. They are being developed in line with the TCFD recommendations and will require organisations to assess the risks and opportunities of climate to their business across four thematic areas: governance, strategy, risk management, and metrics and targets.
Failure to appropriately disclose its climate risks could lead to fines for both an organisation and its directors. There is even the possibility of imprisonment for directors if an offense is deemed to be committed.
By starting to embed climate risk considerations into risk management and creating greater transparency through disclosures, we can mitigate the risks and transform businesses.
You may be well on your way to addressing some of the recommendations, but only in the early stages for others. Undertaking a formal gap analysis against the 11 TCFD recommendations can be useful to identify where you are further along and where you may require more focus and effort.
Talk to others in your industry, as well as banks and insurers to understand more about what might be asked of you. Review TCFD disclosures of peers to see how others have approached the exercise, including ‘placeholders’ they have used to identify their next steps where gaps were identified.
This will allow your organisation to effectively integrate considerations of climate change across your strategic, business and operating models.
Implement tactical responses that can be achieved easily. This could include reviews of governance procedures to see where climate responsibilities need to sit. Identification of physical and transition climate risks should also occur to inform other elements of the work programme, even if it is on a simplistic basis to start.
More strategic responses should be planned, for example scenario analysis to provide a long-term and strategic view of how business models and operations could be impacted by physical and transition risks. Start to integrate climate risk into your business’ existing risk management framework, and develop the approach to quantifying the risks via determining the key metrics and targets that will be used.
Steps will need to be taken to embed considerations of climate into culture and decision-making. Examples might include linking remuneration to climate-objectives, and wider staff training.
Disclose the business’ progress on the journey towards meeting the TCFD recommendations in your mainstream financial reports. Identify priorities to close gaps and strengthen robustness of reporting, that will be updated in subsequent years' disclosures.
Our Sustainability and Climate Change team at PwC New Zealand helps businesses to look at the bigger picture, by striking a balance between staying competitive, driving innovation and preserving our natural environment.
We have the resources and expertise to assist you and your organisation to stay ahead of the curve. We can support your organisation to mitigate risk and respond to the challenges and opportunities that a transition to a low carbon future represents, as we all work together to create a sustainable, environmentally responsible Aotearoa.