Pandemic trumps climate; but not for long

In reporting climate-related financial disclosures, it pays to report early, to tell a meaningful and relevant climate story and to seek to improve each year because an organisation’s reputation and long-term survival will depend on it. By Felicity Caird.

The Coronavirus pandemic and its wildfire spread around the globe is the defining event of 2020. It has dominated headlines, policy-making, how we live and work and, to an extent, political fortunes.

The pandemic has also played a starring role in boardrooms, according to the Institute of Directors’ (IoD) and ASB’s 2020 Director Sentiment Survey*.

Sixty percent of respondents said their organisation was adversely affected by Covid-19, while just over a quarter cited the pandemic as their single biggest risk factor. No surprises there.

However, something else spread like wildfire this year, too: Actual wildfires. Freak storms raged, extreme winds blew and too many people found the sea creeping closer to, or crashing through, their door. Climate change flouted lockdown rules and continues to wreak havoc.

Yet, with that other pressing challenge monopolising attention, climate did not get the traction on boardroom agendas that it otherwise might have.

Just 35 percent of survey respondents agreed that their board is engaged and proactive on climate risks and practices in their business; the same proportion as last year. However, it is significantly higher for publicly-listed companies, at 52 percent.

Few (though still some) would argue with the likes of Sir David Attenborough, whose 2020 witness statement called for bold and urgent action to halt our inexorable march towards self-destruction.

The political will appears to be there. Our Government declared a climate emergency in December 2020, at the same time setting a target for the public sector to become carbon-neutral by 2025.

The stakes are rising for directors, too. In 2019, the Aotearoa Circle Sustainable Finance Forum released a legal opinion determining that directors’ fiduciary duties of due care and diligence require them to consider climate-related financial risks when making decisions and factor them into risk management and strategy.

Meanwhile, in September last year the government announced that climate-related financial disclosures (CRFD) would be mandatory for publicly-listed companies, large insurers, banks and investment managers.

New Zealand was the first country to introduce this type of mandatory reporting. Others quickly followed suit, with the United Kingdom announcing a similar move in November 2020.

Under the new rules, around 200 large domestic-based entities will have to report on their exposure to climate risk based on standards devised by the External Reporting Board (XRB); these standards are aligned with a global framework (TCFD) to ensure information provided is internationally consistent and credible.

CRFDs are likely to become mandatory for reporting periods that end in 2023. This is a short timeframe, so boards need to start preparing now.

Some are ahead of the game. Forty-two percent of directors of publicly-listed companies (who responded to the sentiment survey) said their organisation had disclosed climate-related risks and/or the impact of climate change on their organisation in their latest annual report.

This is encouraging. However, without a common reporting framework it is difficult to compare information across companies, while the maturity of thinking and analysis varies greatly.

It’s crucial that companies do not treat the new reporting regime as another compliance burden, or simply a box-ticking exercise.

The information provided needs to be relevant, meaningful and comparable to promote wider understanding of the potential impacts of climate change and to support informed decision-making. It also provides an opportunity to create value.

Early adopters, such as Meridian, which has now produced two reports under the TCFD framework, are vocal about the value of embedding climate into corporate strategy and long-term thinking.

While public interest in climate transparency is growing, investors are also driving change. Access to the growth and development potential afforded by global capital is a real opportunity for organisations with verifiable green credentials.

In November 2020, BlackRock (the world’s largest institutional investor) added a substantial holding in Meridian to its ESG portfolio.

Progress on climate issues cannot happen without collective action. Boards should be prepared to lead from the top, prioritising climate disclosure and transparency, driving action to reduce environmental impact, and building their organisation’s climate competency – both within the boardroom and beyond.

At a practical level, boards could start by evaluating their own environmental skills and experience and appointing or upskilling to fill gaps.

This is a pressing matter for all entities, not only those captured by incoming mandatory reporting rules.

It pays to report early, to tell a meaningful and relevant climate story and seek to improve each year. Not just for public interest, or greater access to capital, or because it’s a regulatory requirement – but because an organisation’s reputation and long-term survival will depend on it.

* The IoD’s and ASB’s Director Sentiment Survey takes the pulse of New Zealand’s governance community. The 2020 online survey of IoD members ran between 1 October and 20 October and had 914 responses. The full report can be viewed at www.iod.org.nz   

Felicity Caird is the Institute of Directors’ general manager, governance leadership and membership.

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