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Climate change is all of our business

Newsroom logo Newsroom 17/06/2021 Allan Brent
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Biodiverse ecosystems are, quite literally, lifesaving. Here's why we cannot separate ourselves, nor our financial markets, from this fragile equation.

It’s no secret we’re living in an increasingly unstable climate. Apart from the disastrous effects climate change is wreaking on biodiversity and humanity at large, the crisis is changing our financial landscape too. Shifting policy about emissions presents significant risks to businesses, especially those with high emissions.

Climate-related disclosures - otherwise known as environmental disclosures or sustainability disclosures - are a means for transparently communicating these risks to key stakeholders. Put simply, they serve as financial incentives for the sustainable allocation of capital, “shifting investment away from emission-intensive activities and towards low-emission, resilient development pathways”, as it says in the explanatory note of the Government’s Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill currently before Parliament.

Consider a coal power plant. Because government policy about emissions is likely to change, businesses with high emissions will soon have to disclose to their shareholders that the asset risks being stranded in future. The logic goes that by implementing this new disclosure tool we’ll see investments flow to lower-emission performers. This will improve both climate responses and investment performance.

Pushes towards environmental reporting schemes are blossoming across the globe. Internationally, states are exploring how to create appropriate and rigorous incentives for climate-conscious markets.

In Europe, the most significant step has been the development of the Non-financial Reporting Directive and its entry into member states’ legislation. Last week, the G7 nations confirmed plans to make it mandatory for corporations to report climate impacts and investment decisions, described as a “truly historic agreement” in global economic strategy.

The purpose of such regimes is to provide evidence that enables an open and honest conversation about investment choices, giving investors “consistent and comparable information about the environmental and social impact of companies”. When we understand our environment, and we’re honest about the way it’s changing, we can make better decisions to reduce harm, respond to unanticipated changes, and push investors towards opportunities that are financially and environmentally sustainable.

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill has been hailed by experts as Aotearoa New Zealand’s “most significant” climate policy to date. However, its success will depend largely on the details of the reporting regime. In its current form, the disclosure tool aims largely at the causes of climate change: businesses that cause emissions that accelerate climate change, which is bad news for investors. The same tool also works by looking at the effects of climate change on businesses: assets that will be impacted by rising sea levels must disclose these risks to shareholders. 

Climate change is, of course, an urgent and complex crisis. We can all agree the outlook is bad and therefore any shifts towards a low-emission economy are good. It requires integrated and creative legislative solutions and this bill presents a start in the right direction.

But what is often forgotten in moves towards ‘green economies’ is the ultimate ‘why’ underpinning them. It’s worthwhile to remember these reporting schemes are not a grand commercial strategy to save the economy but, rather, a decision on behalf of our biological heritage, our communities and the life-sustaining systems that keep us alive. The legislative approach to risk reporting must support this logic.

Aotearoa, like many other countries, is now faced with the twin crises of climate change and biodiversity loss. As has been discussed at length, biodiversity loss directly harms the wellbeing of communities throughout the country. Currently, many biodiversity conservation initiatives lean heavily on non-governmental contributions from iwi and hāpu. And even though not all biodiversity loss is climate change-induced, the dramatic loss of species and ecosystems exposes us all (and our financial markets) to increased risk through climate change.

As Professor Jacinta Ruru, Dr Phil Lyver, Nigel Scott and Deborah Edmunds argue, “Biodiversity loss is a critical issue not just for Māori but for all within New Zealand, with many sectors of our society and economy relying on its integrity and function”. If we’re really concerned about the climate crisis, we should be concerned about more than just its risks to business - but also everything else upon which ‘business’ depends.

But non-climate-related biodiversity loss isn’t explicitly addressed in the bill’s current disclosure scope, so businesses threatening native ecosystems won’t have to report such risks.

While much biodiversity loss is caused by climate change, commercial development activities continue to harm ecosystems in ways that aren’t directly linked to the climate crisis. For example, marine ecosystems in the Hauraki Gulf are on the verge of collapse due to excessive fishing activities - with crayfish recently classed as ‘functionally extinct’. The aggressive use of herbicides and insecticides in forestry and agricultural practices presents significant risks to future pollinators or soil biomes upon which these industries rely.

Human activity is driving this degradation and yet both examples - along with many more - will undoubtedly worsen with the climate crisis as weather events become more frequent and extreme. To do our part in tackling these challenges, detailed and well-implemented reporting requirements are needed - and sooner rather than later. As Newsroom’s Marc Daalder has argued, in the environmental space, “the nerdier and more inconspicuous the policy” the greater its likely impact.

Biodiverse ecosystems are, quite literally, lifesaving. They are responsible for the air we breathe, the water we drink and the food we eat. We cannot separate ourselves, nor our financial markets, from this fragile equation. In other words, we should not confuse ‘business’ with the ultimate object on which climate change will wreak its impact: the ecosystems our survival depends on. Without robust, regulated protection of our natural resources, and the ecosystems that sustain them, there would be no balance sheets or financial markets to worry about.

Any chance at social, human and financial stability for future generations will depend upon the strength of our current efforts to restore both our biodiversity and climate. As environmental issues worsen, serious soul searching will be required from business directors.

The only way for companies to future-proof their assets to climate risks will be to take a long hard look at their organisation and ask themselves, honest to God, “What are all the risks we might regret not disclosing in future?” If directors go this far, they are almost certain to figure out their ‘non-climate-related’ environmental risks, and how they can improve them.

In the view of the Environmental Law Initiative, alongside others who have already addressed the issue, if the Government cares enough to mandate disclosures on a large fraction of environmental risk issues, and wants to be helpful to firms with that process, it should mandate reporting of all such risks. We know climate resilience and rich biodiversity are positively correlated. So why not implement a parallel biodiversity regime now and save ourselves the curse of ‘hindsight bias’?

While recognising this vision might seem ‘too big’ for what is envisaged as being solely a climate reporting regime, big efforts are required for big challenges. As the saying goes, the perfect should not be the enemy of the good. The cost is high but the return will be invaluable.

As a recent report by the Paulson Institute aptly puts it: “The payoff will come in the form of improved natural resilience that benefits us all: greater food, water, and economic security; a more stable climate; reduced risk of pandemics, and, not least of all, the intangible benefits nature brings to us every day. To that end, valuing nature and closing the current biodiversity financing gap is, put simply, a smart investment.”

Read the Environmental Law Initiative’s submission on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill

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