This opinion piece aims to guide directors, board members, and investment professionals in New Zealand on what they can and should do to address climate risks in their decision-making processes.

Climate change science and regulatory response

The authors discuss the regulatory response to climate change risks, which has led to the disclosure of climate-related financial risks by organisations. The United Kingdom Financial Reporting Council has published guidelines requiring companies to report on climate risk where it is material. The UK Department for Work and Pensions has set new disclosure requirements to further integrate environmental, social and governance (ESG) factors, including climate change, in pension scheme reporting. The European Commission also requires certain large listed companies to report on environmental risks. Climate-related risks are now viewed as clear financial risks that should be included in organisations’ risk management and reporting frameworks.

Disclosure of climate change risk

This section covers the disclosure obligations of company directors and managers of retail managed investment schemes. The report states that directors of many companies must ensure their companies disclose material climate change risks. Companies that are large or have public accountability must prepare and file general-purpose financial reports that comply with generally accepted accounting practice (GAAP). GAAP requires that such companies make sufficient disclosure to enable users to understand the impact of relevant events and conditions on the companies’ financial position and performance. If the company fails to do so, directors who can show they took all reasonable steps to ensure the company complied with its reporting obligations would have a defence.

Managed investment schemes and climate change

The report provides guidance on the professional duties of scheme managers and how they should address climate change risks in their decision-making. Managed investment funds that contain a focus on ESG or climate change impacts must consider these principles when making investment decisions. Scheme managers should take an evidence-based approach and seek expert advice before making investment decisions. The report also outlines the obligations of scheme managers to take into account climate-related risk when investing and, where the risk is material, to take appropriate action to reduce any undue exposure to climate-related financial risk in the fund.

Conclusion

This report concludes that climate change risks are a growing concern for businesses and investors in New Zealand and around the world. Obligations for company directors and managed investment scheme providers are evolving and expanding, driven by the growing recognition of the material financial risk climate change presents for businesses. Moreover, there is no legal prohibition on responsible and thoughtful investment on ESG factors. Therefore, directors and scheme managers should appropriately adjust their decision-making processes to address climate risk. The report also notes that ESG investing increasingly recognises the financial impact of ESG considerations, with the Fiduciary Duty in the 21st Century report, concluding that failing to consider long-term investment value drivers, which include ESG issues, in investment practice is a failure of fiduciary duty.