Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill

I seek leave to present a legislative statement on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill.

ASSISTANT SPEAKER (Hon Jenny Salesa): Leave has been sought for that course of that action. Is there any objection? There is none.

I move, That the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill be now read a first time. I nominate the Economic Development, Science and Innovation Committee to consider the bill. At the appropriate time, I intend to move that the bill be reported to the House four months and one day after it has had its first reading.

Climate change provides the overall context for the bill that we have before us today. On 2 December 2020, the Government declared a climate emergency, committing New Zealand to urgent action on reducing emissions. By declaring a climate emergency, we joined the over 1,800 jurisdictions in 32 countries to do the same and to commit to reducing emissions to avoid a more than 1.5 degree Celsius rise in global warming.

There are a number of actions the Government has taken in response to that climate emergency, not least amongst them is the setting up of an independent climate commission which will set carbon budgets—we have one in draft, currently. We’ve done things like biofuels sales blend mandating, we have committed money to enable councils to decarbonise the public transport fleet by 2035, we’ve nominated clean-car import standards, and so on and so forth. But this bill today, I am convinced, will be one of the most important things we do in this Parliament.

This bill today is a world first, and I want at the outset to acknowledge the Hon James Shaw for his leadership in the work that we are passing through the Parliament today. I think when he speaks—and I expect he will shortly—he will relate to the House the thinking behind his involvement in the development of this bill. I believe it’s going to make a very real difference, and I believe it’s one, as I’ve said, of the most important things we’ll do, and that goes back also to the leadership of our Prime Minister, the Rt Hon Jacinda Ardern, in labelling climate change this generation’s nuclear-free moment. We are here today to make a real difference, longer term, because it is the right thing to do. Climate change is about intergenerational equity as much as it is about saving the planet.

We know that climate change is real. It presents real risks to our survival as a species, as well as to the ecosystems that surround us. It also presents risks to the financial sector. There are risks currently of stranded assets, as business models change, as we adapt to a world where we need to take action. We are exposed to risks of sea-level rise. We are exposed to physical risks. There are risks, currently, to our supply chains, and our goods and services in the future will have to travel through low-carbon and more resilient routes.

These risks are real. The risks to investors are something that we’re thinking about today, and as we do that—as we think about where capital is invested in future, and send clear signals around reporting—what we’re doing is providing better market information. We know that markets, basically, are about information. They are about making sure that investors know where capital is wisely put and where it is unwisely put. So if that capital is going to assets that are going to make for a better, more climate-friendly future, that is something we want to see more of. If investment is going into assets that could end up stranded as we move away from a polluting culture and from outdated technologies, well, that means we have the inefficient allocation of capital, and that means less effective markets.

So for those of us who are passionate about markets—and I suspect there’ll be a few, but maybe not everybody in this place—we will, I hope, universally extoll the benefits of these measures in this Parliament. While it’s a world first, and we’ve worked closely with the UK on this legislation, it’s also true that other countries are looking very closely. The EU has signalled an interest here; I’m sure the US will start to move soon. We will be the first but we will be one of many that move towards making sure we have better information, more standardised information, from markets so that we have more efficient allocation of capital, for a better future for all citizens in this country and around the world. This is a meaningful thing that we are doing here today.

So, having said that by way of introductory comment, I realise I’m halfway through my speaking time already. I do feel passionately about this bill, but I want to speak to some of the detail.

The main aim is to move to a position where the effects of climate change become routinely considered as a part of business investment decisions. It’ll contribute towards that goal we’ve set of becoming carbon-neutral by 2050. Effectively, it does this by requiring around 200 of the largest and most important businesses participating in the New Zealand financial markets to disclose clear, comparable, and consistent information about the risks and opportunities presented by climate change, some of the stuff I’ve spoken to already: where the assets present risks, where they’re likely to have a future that’s less certain, and so on. That current lack of reliable information about the impact of climate change on business is serious, because it can lead to mispricing in the markets, the mispricing of assets, and the misallocation of capital, and that means that investors, lenders, and other decision makers cannot then make the right decisions. There is risk of corrections in the market which can be abrupt.

We know that climate change doesn’t just present risk; it also presents opportunities. That information, where it’s clearly presented, shows where people can invest wisely in the future. Trillions of dollars will need to be invested globally by 2050 to achieve the Paris Agreement goal of keeping the increase in global temperatures to within 2 degrees Celsius of pre-industrial levels and to pursue efforts to limit the increase to 1.5 degrees.

New Zealand businesses are well placed here to take advantage of those opportunities. It’s really important to remember that, in areas like energy production, food production, and pollution reduction. The disclosure regime will contribute to this, and it will help, I am sure, attract investment more broadly.

I suspect it will also lead to a situation where those who are not currently included in the bill will be considering how they report, because they will be trying to attract investment as well. The standards that the XRB—the External Reporting Board—sets for this financial reporting will be something that other entities will be looking to, as they want to attract capital in the future.

So there’s four main elements to the bill. The first is it introduces mandatory climate-related disclosures for most listed issuers, along with large registered banks, licensed insurers, and registered managers of investment schemes. Secondly, it requires that the disclosures be made in accordance with climate standards that will be issued by the External Reporting Board—known as the XRB to those in financial circles. Thirdly, the Financial Markets Authority—known as the FMA—will be responsible for enforcing compliance, and it will do that under its current existing statutory powers, including monitoring the disclosures. Fourthly, the XRB will be able to issue guidance material on environmental, social, and governance reporting and other wider aspects of non-financial reporting.

So those are the concrete bits of this. As I’ve said, folks around the world are looking at this, and I suspect we’ll see many other regimes look similarly. Late last year, the International Financial Reporting Standards, the foundation that looks at international accounting standards, consulted publicly on a proposal to establish a sustainability standards board with a climate-first mandate. So there you go, the global accounting movement is shuffling in this direction as well.

So I’m mindful of the time, Madam Speaker, but can I say that there is evidence around the world that people are seeing the opportunity here to guide companies to give the opportunity for companies to present clear information to markets so that markets can make the right decisions into the future, and if I can just, in the time remaining, give a couple of examples of recent investments. This is to give a scale of the opportunity. A study has found that, globally, we need $6.3 trillion a year in infrastructure through to 2030—

💬 Angie Warren-Clark: How much?

—$6.9 trillion—and that’s around thinking differently about how we do infrastructure. We’ve had estimates: UBS, the Swiss bank, calculated it would take US$140 trillion to decarbonise the energy supply more broadly. I’ve got a list of statistics. These are the kinds of investments that will be needed to keep climate change below 1.5 degrees Celsius—below pre-industrial levels.

So, in closing, can I acknowledge the leadership of the Rt Hon Jacinda Ardern and the hard work and foresight of the Hon James Shaw in this work. I am committed to successfully implementing these reforms, and I thank those who have worked on them before me.

That legislative statement is published under the authority of the House and can be found on the Parliament website. The question is that the motion be agreed to.

Given Minister Clark’s comments, I think it’s appropriate to acknowledge the millions of people around the world who will be tuning into this highly important and world-leading debate. I think the Minister might find that we’re probably not as far ahead of the rest of the world as he thinks and claims we are, and I’ll go into that in some detail. But I think it’s fair to say that if one picks up a textbook on financial accounting and turns to chapter 1, the definition of financial reports is, in plain English, to provide information useful for decision making, or words to that effect, and we’ve got a very, very mature and robust framework for the provision and reporting of financial information. It’s set out in the Financial Reporting Act and the Financial Markets Conduct Act. As the Minister says, it’s overseen by the External Reporting Board (XRB), and they provide for the accounting standards and financial reporting standards that are consistent with generally accepted accounting principles, and that’s a longstanding convention and law.

When I was studying accounting a million years ago, we were already moving away from financial-only reporting and into things like triple bottom line reporting and elements of meeting organisation’s corporate and social responsibility. The nomenclature may have changed over time, the imperatives may have changed over time, but good companies will provide a range of non-financial performance information as well, in order to inform stakeholders, who are staff, their customers, and, indeed, capital markets.

In terms of the climate reporting, in reading this bill I was prompted to refer to some research from the professor of accounting at the University of Otago, Professor David Lont—my former lecturer, actually—who has done a tremendous amount of work on the links between disclosures of greenhouse gas emissions and company stock prices, and as long ago as 10 years ago, he was reporting the very nimble, almost real-time impact that disclosures of greenhouse gas emissions had on stock price. He analysed Canadian and Standard & Poor’s 500 data that was publicly available of those organisations that voluntarily disclosed this information, and noted that the stock price was affected almost in real time, in the same day that that information was released.

Actually, the really interesting part of that was not only was it the stock price of the firms that did disclose greenhouse gas data, so too was the stock price of those companies in the same markets that did not. So if one thinks of an oil company or a petrol retailer that disclosed—good or bad—their stock market price was affected, but if another competitor had not disclosed, and was not doing the sort of things that that company was doing, they would be negatively affected. So there is a much more mature, I think, element of the link between the information capital markets than perhaps the Minister portrayed. He nods, and I hope that that is in agreement with that.

One of the things that I think we don’t have, though, is a robust taxonomy, or framework for reporting, and I think the Minister used the words that I had already written down, by coincidence—“clear, consistent, and comparable”—because for the information to be the most valuable, it has to have those attributes. It’s actually for that reason and because we are starting from a point where I don’t think there is the level of accepted comparability and consistency and clarity that the XRB, at least, are going to have to take quite a bit of time and consult, I hope, with good people like Professor Lont to be able to come up with an agreed set of standards that that is able to be compared.

I am initially disappointed on that basis, then, that the Government recommends to this House that the report-back date be four months, and for that reason the National Party will be opposing the report-back date. But as it is that the devil is not in the detail of the bill but in the XRB’s work in terms of developing those reporting standards and taxonomies, our rebuke will be much more mild than it otherwise might have been on that point. I do worry. We’ve got a lot to do over the next four months, particularly with an important Budget coming up, but I hope we don’t skinny this up. I’m not sure if the Minister mentioned which select committee this is going to. Is it the commerce select committee?

💬 Hon Dr David Clark: Education—

Education—

💬 Hon Dr David Clark: —sorry, the Economic Development, Science and Innovation Committee.

Economic Development, Science and Innovation Committee. Well, the members of the Finance and Expenditure Committee will be disappointed by that. This is an accountant’s dream—I may even substitute myself on to that committee.

I want to come back to this issue of the scope of those climate-related disclosures because, on page 2 of the general purpose statement in the bill, I was fascinated to read this: “The Bill also provides for the XRB to issue guidance on a wider range of environmental, social, governance … and other non-financial matters that can be applied by entities on a voluntary basis.” Now, the concern is not that we do that. The concern is that one of the things the Finance and Expenditure Committee did yesterday—as recently as yesterday—was hear from Treasury on the Auditor-General’s report into the Government’s accounts for 2019-20, and the critique of the Auditor-General was that the non-financial performance measures across Government entities was low and inconsistent, and that’s been a narrative that I’ve heard for 13 years now.

Treasury came and talked about “We’re good at counting widgets, but we’re not that good at counting outcomes.”, and I don’t say that to criticise anyone in Government, or in the public sector. It’s to illustrate how very difficult this can be, and how important it is that we get it right so we’re not imposing even very large companies with the burden of reporting on matters that are quite esoteric or difficult. So I do want to just express that concern that I think what we do need to have is perhaps a more staged process where we can evolve this over time, as we do with financial reporting standards, starting with the stuff that we can agree that we can do, measure, and report, and then perhaps evolve into some of those broader issues around environmental sustainability.

The last thing I would say about the purpose of the bill was that I think the Government might be a little over its skis on the degree to which the purpose of the bill is actually to influence investment. So it says, “Financial markets globally can play a major part in shifting investment away from emission-intensive activities and towards low-emission, resilient development pathways.”, and that’s true—it can. But I’m not sure that the legislation can do that. The legislation is designed, I hope, to do what chapter 1 of every financial accounting text says—that is, to provide information useful for decision making. We’re not going to change the world of capital markets with this Act when it’s passed, but I think we are going to be able to shine a light on things that are important to all of us, actually.

What worries me a little bit about the language in that purpose is the potential to demonise individual companies when the goal is to take a holistic and global approach to greenhouse gas emissions reduction, because there are going to be a number of sectors and companies that, despite their best efforts, will still have net-positive carbon emissions. Their efforts, however good, will not change that until we wholly transition to a carbon-negative—not a carbon-neutral—economy, and that could take generations. So that concerns me a little bit—that we’ve got to make sure that we have, effectively, neutral reporting measures, not ones that seek to be punitive or punish companies.

Now, that said, if a company is performing badly and that’s reflected in their reports, then fair enough. That should come up in the same way that if a company is performing financially poorly, then the stock market and their investors will react accordingly. But we’ve just got to be a little bit careful not to get too over our skis on that.

The last thing I would say—and I think Mr Bayly is also going to raise this—is there are some concerns around the penalties regime, which the regulatory impact statement did say was well above what was being recommended by officials, because I think what we want to do is encourage good behaviour, rather than punish bad behaviour. But, with that, the National Party will be supporting this bill at first reading. I’m optimistic—not yet confident, but optimistic—we will be able to support it through all stages, and that’s why I’m concerned about the four-month report back. But let’s hear what the submitters have to say, and let’s have a good select committee process.

Madam Speaker, thank you for the opportunity to take a call on the first reading of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. I’d like to acknowledge the Minister, the Hon Dr David Clark, for bringing this bill to the House, and, as he said, this is world-leading legislation. I’d like to also acknowledge the Hon James Shaw for the work that he has done in this area. I actually first met the member in 2013 in the Coromandel, and he has been consistent with his messaging the whole time that I have known the member the Hon James Shaw, so I’d to acknowledge the work that he has done to, in effect, lead us towards this point.

Climate change is real. Climates have always been changing, but this time there’s one big difference: the changes are principally man-made. The issue has become urgent because the pace of change is accelerating, and in terms of the financial industry, the financial industry has a twofold responsibility. On one hand, it needs to prepare itself for the negative effects that climate change will have on its business and on its customers. On the other hand, the financial industry can play a significant role itself in terms of mitigating the economic risks and entering the low-carbon economy by providing appropriate products and services. It’s that second part that this bill seeks to address here, which is in terms of the financial industry playing an active role in terms of mitigating climate change.

Governments are starting to introduce policies to tackle the causes and combat the effects of greenhouse emissions, and these policies will alter the economics of entire industries. They will effect company share prices, both positively and negatively, and the Minister alluded to that. Climate change policies will have an effect on a number of industry sectors. The most sensitive sectors, as I see it, are either energy-intensive, such as cement, aviation, metals, or energy industries—as I believe my colleague may talk about in his contribution—such as oil, gas, coal, and power utilities. Early action is needed to provide greater certainty for businesses, long-term investment, and technological change.

That leads me on to the bill and the purpose of this bill, which is how the bill introduces a mandatory climate change disclosure regime for specified FMC reporting entities under the Financial Markets Conduct Act. I believe that many businesses are not aware of the impact climate change has on their businesses, strategies, and financial positions.

💬 Andrew Bayly: What an outrageous statement.

The member opposite says that that is outrageous. I look forward to his contribution, and I thank the member for the support of his party, as well. I don’t believe it is so outrageous, because while this issue has been around for a long time, it’s really just in the past few years that we have seen businesses, in a way, really open their eyes to this issue and realise that those businesses can play a leading role in this area, as can our country.

I just highlight quickly the four main things the bill does. It requires climate reporting entities to prepare climate-related disclosures, and this will give more information to those businesses around their carbon footprint and the role that they’re playing in terms of their investments. It enables the External Reporting Board (XRB) to prepare and issue climate-related reporting standards. The Financial Markets Authority will be the independent regulator for specified FMC reporting entities, and the fourth thing the bill does is enables the XRB to issue guidance on non-financial reporting.

So I will leave my contribution there, but just acknowledge that as a country we have been world-leading in the past in many areas. I am proud of the work that the Minister has done on this piece of legislation, as we are the first country in the world to bring this legislation to Parliament, and while we may not be the biggest country in the world, we certainly can play a leading role in this area. I commend this bill to the House.

Thank you, Mr Speaker. It’s a pleasure to be talking on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, first reading.

First of all, I just want to check that that member who just sat down, Jamie Strange, actually just said that businesses weren’t aware of their climate change obligations.

💬 Jamie Strange: Some businesses.

Some businesses. Well, first of all, I’d like to take issue with that comment, because I think businesses have adopted ESR reporting for years, particularly the type of entities that are included in this bill. In fact, they’ve been leading the Government in many ways around that thinking. It’s been regularly in place, that type of ESR reporting—environmental, social responsibility - type reporting—for probably 15 years, particularly at the level of entities that are captured by this bill.

So what does this bill do? It introduces “mandatory climate-related disclosure requirements for certain [firms] … considered to have a higher level of public accountability, including listed issuers, large banks, large non-bank deposit takers, and large insurers, and large managers in respect of managed investment schemes.” My colleague the Hon Michael Woodhouse noted that we will be supporting this bill. And just before I start talking about the bill in detail, I just want to be clear that National supports the desire and intent to reduce our carbon emissions. After all, the National Party signed up to the Paris accord. So I want to put that on the table. But that does not mean that a bill like this does not have some failings. We will be supporting it to first reading, but there’s some significant issues in this bill.

The first is, I suppose, the paternalistic approach that is taken. The bill says that the primary purpose of this proposed intervention—and I’m referring to the regulatory impact report. The primary purpose of this proposed “intervention”—that’s the word written by Government officials—is to promote the efficient operation of financial markets through greater transparency and more information.

Now, I’d have to say to you, first of all, that businesses do need to understand their obligations and responsibilities, and most directors—certainly, I would say, every single director of any of these organisations—if they haven’t been considering it, they are in serious issue, particularly if you’re a listed company, because there is a requirement under the listing rules to have regard for these types of issues. And so this is an overlay to what’s already in the listing rules, trying to impose this mandatory requirement on directors.

I think we’ve seen a little bit of this coming out of the Government. We’ve seen it yesterday in the debate with Mr Robertson’s letter to Air New Zealand—this sort of thought from this Government that they know best, they know how to control business, and that they should be controlling business. And the thing that worries me about this bill is how this bill requires an absolute mandatory requirement on it.

The second thing—and I just do note that there were a number of submitters on this consultation around this bill, and there were a number of supporters, and I acknowledge those, but there were some detractors, significant organisations, who opposed it on various grounds: Business New Zealand, Chapman Tripp, and the New Zealand Stock Exchange, as I just alluded to. The worrying thing about this is, whilst I understand the intent to disclose, and we’re going to talk about the comply or explain aspect of it, the bit that worries me about this is how it will lead to different decision-making.

Now, at a high level, global level, it’s fine. We want people to not invest in emission generating businesses, or certainly reduce their level of investment in those and migrate to clean energy type investments, particularly into better types of technologies. But I put it to you, the way it’s phrased and the way that it’s going to operate will mean if you take, for instance, a concrete producing company, which, we all know, produces a lot of emissions, and if a pension fund wanted to invest in a new technology that produced an element of green concrete but still produced a lot of emissions, but much lower than the current level of emissions—i.e., we’re getting a better outcome, and because concrete is still a requisite requirement of our construction industry—I would dare say that a pension fund is going to be very, very unlikely to contemplate an investment like that, because of the public notification of that and the possible victimisation as a result of the disclosure around that investment.

I think that means that we’re going to see many of these types of organisations, many of them professional investors, particularly the funds, choosing not to even contemplate investments that would otherwise lead to a better environment for the world, and certainly for New Zealand, by reducing their emissions. I think that’s a real shame. I don’t think the bill foresees that. I think that the proposed bill is rather hard and fast in saying, “Thou shall not invest in those things, because if you have to, you have to disclose it, and then you’ve got to go through the explanation of that.” And I think that’s a very difficult environment for people who want to be seen to be investing in better technologies that reduce emissions over time.

The other aspect of it is this. I don’t understand fully the “complain or explain” option. If you were to take that argument I’ve just put forward, how does that operate? Hopefully, during the select committee process, that will be fully explained. I know there’s some issues in the regulatory impact report on it, but it’s unclear what and how it will operate.

But I just want to also highlight that there are some risks around this bill, and it’s worthwhile just noting them. Again, they’ve been prepared by independent Government officials. The first one is introducing this bill at this particular point in time with the fallout from COVID and whether businesses are likely to be under greater pressure than usual for the next few months or years. I think that’s less of a concern, but it’s certainly a concern. But also, the Financial Markets Authority (FMA) considers that confidence in the new regime will be undermined if it proceeds as currently proposed, because they consider there is an initial impracticality of compliance by managers of registered investment schemes. So, again, my colleagues spoke about the short duration to put this in place. Also, as the current proposals apply to the FMA reported entities and not to private and non-issuer companies, it may be considered an additional barrier for those companies listing on the stock exchange. That is a possible barrier. I don’t think it’s insurmountable, though.

But the other thing is the issue of penalties, which I find quite considerable. They’re covered in new section 461ZC in clause 7. So just to be clear, every director of any of these entities will be perhaps a little bit surprised to know that at a personal level, if they don’t comply with the requirements—and there’s an issue about what the requirements are—it is a five-year jail term or $500,000 fine or at a business level a $2 million fine. So here we are. We’ve got pretty hefty fines for mandatory disclosure on a regime where we don’t yet know what is going to be reported and how it’s going to be reported, because we haven’t had the feedback from the reporting board, and, secondly, we don’t know how auditors are actually going to be able to undertake the role of checking these statements. There’s a need to actually upskill them once we know what the framework is that they need to measure whether a company is actually complying or not.

I think these are all very practical questions. I seriously think the short report-back date is one of the issues, but the implementation date is going to be quite something for even these very large companies to be able to comply quickly, or otherwise face, at a personal level, a fine of $500,000 or imprisonment for a period of five years.

Tēnā koe, Mr Speaker. It’s a pleasure to take a call on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. I do want to acknowledge the optimism from the benches opposite, although the previous speaker, Andrew Bayly, just seemed to indicate that, actually, investing in businesses that are supportive or promote green practices is a bad thing. Here on this side of the House, we would think that it’s quite opposite.

Can I acknowledge Minister Clark and Minister Shaw for the work that they’ve done in this space in getting the bill to this particular point in time. This is an omnibus bill, and it’s an important one, because it will, effectively, amend three pieces of legislation: the Financial Markets Conduct Act, the Financial Reporting Act, and the Public Audit Act. The implementation of what will be a broad policy across a number of important entities—the focus there is on the non-financial reporting components that this bill does provide. It will, as previous speakers have indicated, assist us as a country in getting to that net zero carbon emissions by 2050 as the starting point moving forward.

Yes, there is a lot around new Part 7A within the bill, and the previous speaker touched on some of the offences. I’d perhaps like to adopt the view that strong offences will serve as a strong deterrent to ensure that there is compliance with what is expected of those in the sector.

I want to just very briefly turn to the purpose of the bill, which has been also touched on. There are, as the documents indicate, a number of specific purposes of the bill. The first is around ensuring that, effectively, there will be a new routine to business as usual when it comes to business, investment lending, and, in the insurance sector, the underwriting decisions that flow from that. Secondly, a purpose is around helping reporting entities better demonstrate responsibility but actually forward thinking and foresight in terms of their consideration of the wider issues around the climate sector. The third one is around that smart approach and a more focused allocation of capital and how we smooth the transition, as well, to a more sustainable low-emissions economy.

I accept Mr Woodhouse’s earlier comments that there are a number of organisations in our community and in this country who are already doing some good work in terms of non-financial disclosures. There is absolutely a desire in the community sector and the not-for-profit sector, and this piece of legislation as a proposal will, effectively, ensure that there is consistency within the business sector as well. Climate change will have a huge impact on businesses moving forward all around the country, and the fact that not-for-profit sectors are already aware of that, and businesses are as well, will provide a helping hand in terms of moving us forward together, which is, obviously, really, really important.

Previous speakers have touched on the requirement that the disclosure materials will need to have the three Cs, being consistent, being comparable, and being clear about the information in that particular climate-related space. But also the information needs to be reliable, and what’s proposed in this bill will seek to deliver exactly that. So it is really, really, important in that particular space.

Getting back to the requirements of the entities which fall within this bill, they will be required to do at least four things, and I don’t intent to go through the list of those entities that would be part and parcel of this. But firstly it would require preparation—preparation of climate statements in accordance with climate standards. That’s the first thing. The second is a requirement to obtain an assurance in situations where greenhouse gas emissions disclosures are made, and there’s a whole separate process that’s outlined in the bill around that. The third is the publication of the statements, which will allow for accountability in the public sector, public sphere, as well. The fourth thing is, and it might come as some surprise to many, actually keeping and retaining those records around the statements and the disclosures.

What I’ve found really interesting is that the information that the Ministry of Business, Innovation and Employment have provided indicates that, actually, the majority of large New Zealand entities provide little to no information on what climate change might mean to them, or they are reporting in inconsistent ways. So I look forward to the select committee process. There seemed to be a little bit of a suggestion as to which select committee this may go to, but part and parcel of this will be hearing from submitters. I commend the bill to the House.

Thank you, Mr Speaker. I rise most enthusiastically to support the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. This bill has actually been quite a long time coming. Back when I was the modest Opposition climate change spokesperson and was invited by the Hon Tim Groser, the Minister for climate change at the time, to observe at the Paris climate talks, I found myself sitting at the back of a room in which Mark Carney, the Governor of the Bank of England, and Michael Bloomberg, of Bloomberg, were launching their task force on climate-related financial disclosures. Neither of them are given to particularly flowery language—you could describe them as dry in their economic bent; very dry—yet some of the language that they used was actually quite extraordinary in the context that they were describing.

One of things that they said was that they had formed the assessment that there are literally trillions of dollars of unquantified and undisclosed risk sitting on corporate balance sheets around the world, related to climate change—trillions of dollars of unquantified risk sitting on corporate balance sheets—and that that represents a significant risk not just to those companies and not just to their shareholders but actually to the financial system itself. So their recommendation was for countries and businesses to move towards climate-related financial disclosures. Later on, the Green Party made a request of the Hon Steven Joyce who was Minister for economic development at the time, when he was putting together a Productivity Commission round of reports, and we were delighted that he accepted our request for the Productivity Commission to do a report on the transition to a low-carbon economy.

During the course of that process, the Insurance Council made a submission to the Productivity Commission saying that if you looked at current reporting law, the standard fiduciary duty of directors is to disclose material risk to their shareholders, and, of course, the Insurance Council would know that there is significant material risk to businesses from things like sea level rise or increasingly frequent and severe droughts, floods, fires, storms, and so on. Yet even though you could interpret the fiduciary duty as therefore requiring companies to disclose climate-related risks, they weren’t. There were an absolute handful at the time who were making these kinds of disclosures. So their recommendation to the Productivity Commission got carried forward into a Productivity Commission recommendation, and their report, when it came out in 2008, was that the Government move to a mandatory complier-explain disclosure regime.

Now, what kind of risks are we talking about? The Hon David Clark, who I thank for leading on this bill and bringing it to the House, described two forms of risk, one of which is what you would describe as physical risk. That’s, as I mentioned before, things like floods, fires, droughts, storms, sea level rise, and so on, which could threaten the physical assets of a business. And having listened to this debate, one of the things I want to note is that this isn’t just about the emissions that a company produces. You could be a zero-emission business and still be at risk because your assets, your business, are at risk from those physical risks. So you could be an absolutely perfect player in terms of your own pollution that you put into the atmosphere but still be facing material risk. So that’s one form of risk.

The second form of risk is really stranded asset risk, and that is where your emissions are significant. So what we know in kind of broad terms is that we are unable to burn 80 percent of the oil and gas reserves that are known around the world if we are to have any hope of staying within the 1.5 degree threshold for global warming. What that means is that the companies that own those reserves or have rights over those reserves and have valuations listed on stock markets based on the extracted, processed, and sold value of those reserves are facing, potentially, colossal write-downs in the value of their business because everybody knows they’re not actually going to be able to extract and monetise those fossil fuel reserves. So that’s the most obvious case of stranded asset risk, but there are others as well.

So this has wound its way since the Productivity Commission report. Chapman Tripp did a legal opinion which used, in legalese, quite strong language that actually the directors should have a duty to report on climate-related financial risk. Also, Adrian Orr, the Governor of the Reserve Bank, weighed in because he shared the assessment with the Bank of England and other reserve banks around the world that non-disclosed climate-related risk actually could present a significant risk to the financial system itself and the stability of the financial system over which he obviously has some responsibility.

So given all of that, that is why we went and consulted in 2019—about 18 months ago—to say, “Shall we move to a mandatory complier regime system?”, and 79 percent of the respondents to that, the vast majority of which were either individual companies or industry associations, supported a mandatory regime, and 84 percent of them said that the international standard that’s emerging from the task force on climate-related financial disclosures, led by Mark Carney and Michael Bloomberg, was the appropriate system to use for Aotearoa New Zealand. Why was that? I mean, it’s quite astonishing that you would have such massive support from the business sector for a new regulatory reporting regime, and it’s because they know that in order to get the efficient allocation of capital, you need full transparency. You need everybody to be able to see everybody else’s risk, not just your own, and if I as an individual company want to do the right thing and disclose the risks that I’m exposed to but one of my competitors is not reporting, then I’m actually exposing myself to risk by the very act of reporting, whereas if you have a mandatory regime that requires everyone to report, everyone’s cards are on the table and capital can be allocated according to the risk profile of the different businesses.

The second thing is that there is a risk here that you would get competing reporting regimes proprietary to different accounting firms or different NGOs and so on, and so it was felt that just as the generally accepted accounting principles that were raised by the Hon Michael Woodhouse before, you need a set of standards here that apply equally so that we’re comparing apples with apples rather than apples with oranges in all cases—to have, as he said, a taxonomy that everybody has agreed to.

So that’s why the business community was so supportive of a mandatory complier regime scheme, using the Task Force on Climate-related Financial Disclosures as the basis, with the external reporting board, the XRB, as the developer, because, of course, that is their meat and potatoes—to develop reporting standards.

There are a number of companies in Aotearoa New Zealand that have led the way on this. There are probably about a dozen that have produced some form of report in the past. I’ll just draw on one so far, which drew my attention, although I want to acknowledge that there are others as well. Over this last summer, Westpac produced their first climate risk financial disclosure statement, and one of the things that they disclosed in that is that in their view about 2 percent of their mortgage book is exposed to climate risk. And that was new information to them. Now, you might say 2 percent doesn’t sound like much, it’s not a lot, but if you know how the balance sheets of large banks operate, if it gets to about 9 percent exposure, they start to experience access-to-capital problems. So 2 percent is not actually that far away as presenting material risk. So you can see that that information actually then becomes extremely useful for them to start to be able to move forward.

So New Zealand is the first country to introduce legislation, which I’m delighted about, but we’re not the only one, and we’re not alone either. The United Kingdom have said that they are going to be moving fairly rapidly towards a mandatory regime—in fact, they might even get there in legislation faster than we do, apparently; it’s what their goal is. The United States has just announced that they’re considering it, and there are something like 60 other countries around the world as well.

So I’m delighted that we’re able to do this. I want to thank the Hon Dr David Clark for taking this on, and I do appreciate that bipartisan support that has so far been illustrated in the House for this bill.

Thank you. This omnibus bill will amend the Financial Markets Conduct Act, Financial Reporting Act, and the Public Audit Act 2001, but it is a very single, broad policy to broaden non-financial reporting by requiring and supporting climate-related disclosures, and it’s mandatory. This bill will have no impact on reducing emissions or meeting our international climate change commitments but will increase costs to business. In New Zealand, we already have an emissions trading scheme (ETS) and a Climate Change Commission to set up a plan to meet our international climate change obligations. Increasing bureaucracy on companies, the 200 or so organisations, will make no difference. It will not lead to smarter, more efficient capital being deployed, and it won’t help the smooth transition to a more sustainable, low-emissions scheme.

The emissions trading scheme is the most efficient and first way to achieve carbon reductions, and increasing regulation will in fact make meeting our climate change obligations harder. The Minister of Commerce and Consumer Affairs has produced a world-class press release, but this is not world-class law—or it’s not a world-class bill. Minter Ellison, the law firm, also asks: why is this not also applying to Government departments, Crown and local authorities, who should also be legally obliged to follow the new climate-related financial disclosures? Simply an expectation that they disclose in line with the law is not good enough, in their view, given Government departments, Crown and local authority entities may compete with listed entities. It’s very important there’s a level playing field and they have at least strict requirements. Further, many such entities are major emissions producers and polluters, and yet there is no mechanism to address that.

From ACT’s point of view, the bill simply addresses another layer of bureaucracy, imposes costs and all, while the Climate Commission is also coming up with its final recommendations. So how does this all fit together? It won’t reduce climate emissions. It will increase the amount of reporting. Think about all the wasted paper and trees that’s going to occur for a bill that won’t do anything. SkyCity Entertainment, as an example, suggests that to do this high-level report, they’ve had an indicative cost of around $1 million that they believe could be spent on sustainability issues. And, as importantly, it could also affect loans to farmers and horticultural players across the agritech sector because the banks will not lend in the normal fashion to these organisations.

For the reasons that we’ve suggested, there’s no impact on reducing emissions. It brings a layer of bureaucracy and cost and capital distortion to the New Zealand market, and, even though we have global names being mentioned today, we at the ACT Party want to look after New Zealanders. We have the ETS climate set-up to meet these obligations, and we must insist on a trading playing field for Government entities versus listed entities as a non-negotiable aspect. For that reason, the ACT Party will be opposing this bill at introduction.

Thank you, Mr Speaker. Thank you and I’m glad to be taking a call this afternoon on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. Last year in December, this House declared a climate emergency. And with that declaration, we are needing to change, and I’m glad that many individuals, businesses, and communities are changing, but action from this House is required for us to achieve our aims by 2050.

So I’m proud to be standing in support of this piece of legislation, and being one of the first countries in the world, as the Hon James Shaw said, to introduce laws requiring us to disclose the impacts of climate change on businesses—both the risks and also the opportunities. I want to thank the Hon Dr David Clark for his work and, following on from the Hon James Shaw, thank you for your work in this space, and we look forward to taking it to the next stage. I commend this bill to the House.

This is a split call. I call Nicola Willis—five minutes.

I welcome the opportunity for Parliament to consider this bill. The reason for that is that I am a big believer that we can bring market mechanisms to bear on the challenge of addressing climate change, and we can, by using market mechanisms, create strong financial incentives for the private sector, for businesses, and for individuals to innovate and to make changes that will mean fewer emissions. This bill, I think, could potentially be a step to ensuring that the market can more properly react to the challenge of climate change and make changes to business practices accordingly.

I can’t help but think that this is the sort of bill that may not have happened if we had a different leader of the Green Party. I want to commend Minister James Shaw for his recognition that climate change will never be an issue that can be solved by the Government acting alone, nor is it an issue where we need pit business against Government; in fact, the best thing we can do is motivate businesses and individuals to see the upside and to innovate in order to address climate change. I think that that is a constructive approach to take.

So in creating further disclosure requirements around climate-related issues, what does that achieve in terms of the market? Well, first of all, if done well, it can ensure that better risk assessment takes place. It can facilitate better capital allocation so that consumers and investors can be more aware of how the activities of a particular financial entity are both contributing to and addressing climate change, but importantly, also, so that investors can understand where the risk for a company may lie if it continues with a current set of activities that will actually further climate change emissions or that will put the financial stability of that entity at risk. These disclosures, done well, can also help with strategic planning.

But, of course, the challenge always with a Government-mandated set of reporting requirements is getting the balance right between the good aims of transparency and consistency, and the flip side of that, which can be that companies face a heavy compliance burden, and where the reporting is not relevant to their activities, or it potentially creates significant costs in its collection that aren’t outweighed by the benefits. So it is important that we get this right.

I am encouraged by the fact that many commercial entities in New Zealand listed on the NZX—banks, insurers—have already started this process of reporting to their stakeholders where they sit in terms of climate change risks, opportunities, and the way they conduct their activities; what they see coming on the horizon. I’m encouraged by the fact that many of those same entities have welcomed a bill of this sort because they know that it would provide consistency across entities and across agencies.

But I think, as I say, that it is very important that we analyse this. I note the recommendation that this bill go to the Economic Development, Science and Innovation Committee. I have to say, Minister Shaw, I’m a bit surprised by that—not Minister Shaw’s responsibility, but I note that in reference to his earlier speech—because, I think, as many members will agree, fundamentally this is an issue about business reporting, financial reporting, and I would have seen a strong case for the Finance and Expenditure Committee to be the select committee that assesses this bill. I also want to register my concern and National’s concern with the shortened report-back period of four months. These are detailed disclosures with far-reaching consequences for the commercial entities involved and a thorough select committee process is warranted.

So National supports this bill and we look forward to a thorough select committee process. It is important we get this right.

Thank you very much, Mr Speaker. It’s important that every part of the New Zealand economy plays its part in addressing climate change and doing what we need to do as a country and an economy to get to that point. And I think it’s a matter of pride, actually, for this country to be a world leader in this regard. I support this bill. I think it’s a good idea.

I have heard the concerns that have been raised, particularly by the member from the ACT Party, Damien Smith, that this is simply more regulation and won’t lead to achieving our goals. I would say that that is another example of saying, “Yes, we need to do something about climate change.”, and then, when the opportunity arises, opposing it. This will lead to providing the information not only to businesses but also consumers and investors into who’s actually doing their bit and what businesses need to do to do their bit. I mean, we will never get to a net zero carbon future by 2050 if we don’t bring in measures like this.

So on that basis, a very simple point that this is going to create a market that is fully informed. And it will be beneficial to businesses, because I guarantee that this requirement will highlight areas where they can improve and become more efficient that they hadn’t identified themselves. Therefore, I’m very happy to commend this bill to the House.

Thank you, Mr Speaker. Like the former speaker, Kieran McAnulty, I’m very happy to rise in support of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. I’m very pleased to be the third member based in Dunedin to do so today. Perhaps I’m not as passionate about markets as the other two members from Dunedin who spoke before me, but I am very passionate about climate change and very focused on addressing climate change, both the adaptation piece and the mitigation piece, and this bill tries to do a bit of both.

So I also agree with both of my colleagues from the beautiful Dunedin that the standards set by the External Reporting Board (XRB) need to lead to disclosure and reporting that is clear, consistent, and comparable. I hope that at the select committee, there will be some expansion on identifying what the risks and opportunities are that are relevant to setting these standards.

I just want to note one other thing, and that is that under the Financial Reporting Act, the External Reporting Board—that XRB—is a Crown entity. It’s independent, and it states that there’s to be four to nine members with knowledge of things like business, accounting, auditing, finance, economics, or—always very important—law. Now, there’s an addition here to add expertise in sustainable development, and I think that’s a very fine idea.

So there’s been some discussion as well about what select committee this bill will be sent to. I sit on the Environment Committee and am sad that it’s not going to come to us, but I’m sure the select committee will get very thorough and thoughtful submissions on what is a very important and world-leading piece of legislation. So I commend the bill to the House.

Thank you, Mr Speaker. It is a pleasure to speak on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. I think there’s been some interesting points made across the House, particularly from the ACT member, about regulation and so on. I take the point—he made quite a few points about the emissions trading scheme. Then we heard the chief whip over there from the Labour Party saying that we won’t get to net zero by 2050 without this bill. I can assure the member that we will, because it really has little to do with that at all.

We do support this bill. We do share some of the concerns that the ACT Party speaker raised about whether this is the most efficient way to report on these things. I would have thought, actually, that it’s in businesses’ interests to report on this and do a damn good job of it, because, actually, their investors are looking for that. People are looking for a lead on these things. They want to know that the companies that they use for goods and services—in this case, banks, insurance companies, and so on—are reflecting their own views. We know that most of New Zealanders, or the vast majority of New Zealanders, want to get to net zero by 2050, and they want to deal with companies that also want to do that. So having a system in place where we can be assured that we’re dealing with companies who actually are doing what they say they are is a good thing. So we don’t dispute that at all. But we have to do that in a way that’s the most efficient manner for the companies as well, because we don’t want to foist more unnecessary costs on them; we want it to be easy to work with. That’s something that will be all teased out through the select committee process.

I do wonder—it does make me scratch my head a bit that it’s going to the Economic Development, Science, and Innovation Committee. All due respect to the members of that committee; however, the Finance and Expenditure Committee would have been a more natural home for a matter such as this to be considered. Like the member from Dunedin—I come from the South as well, but not quite that far south. But Rachel Brooking was saying that she’s on the Environment Committee. So am I, but I don’t think we’re the right committee to have a bill like this—albeit that some people sit on both. But that committee is focused on the environment, and this is, while it’s got an environmental focus, actually a finance bill.

This is about reporting for large companies. We’re talking about large companies here, with assets of a billion dollars or more, or, in the case of insurance companies, with revenue of more than $250 million. They will have very good processes in place already for all of their reporting and recording. What they want, and they’ve already expressed this view, is a standard that is well-known and everybody sticks to it. I think that’s a great thing. As we say, on this side we’re just a little bit concerned, and we’ll find out in the select committee that this is the best way to achieve that goal. So it’s with that in mind that I commend the bill to the House.

Thank you, Mr Speaker. I’m delighted to have an opportunity to speak on this revolutionary bill. It’s an exciting piece of legislation, and normally people don’t actually get too excited about accounting standards. I don’t understand that personally, it’s something that I find very interesting, but this is legislation that, for one of the first times in the world, ensures that we will have reporting on climate-related risks, that large entities will be required to understand and to report on the climate-related risks that they are facing.

Information is power. Information helps us to understand the world, to understand our place in it. Information helps us to understand how we may be affected by events. Information helps us to understand what actions we may be required to take. But we need to have that information in the first place. We need to have the information about our investments, about the places where we live, information about how the world may affect matters that are important to us. And this is what this bill does.

I wish to particularly commend the speech by the Hon James Shaw when he talked about the risks of climate and he talked about how that affects investment decisions, when he talked about the issues around understanding risk, understanding climate, and ensuring that we all know what is going on; how it does create risks for companies. It was a very interesting speech, and I think he exactly targeted those particular issues very well indeed.

I wish to add to that analysis that was presented by the Hon James Shaw. In terms of understanding the risk that we face with investments, so that as individual investors we understand it, so that as people dealing with companies and with large entities we understand it, so companies understand each other—I think that’s what’s really important about this bill is it forces companies, it forces large entities, it forces financial institutions, to understand themselves, to understand for themselves what their own exposure is. So it’s having that in-depth understanding.

All too often, companies and large entities have a tendency, perhaps, to avoid thinking about certain issues. They don’t have to. This bill will force them to understand their own risk profile before they can report it onwards, and understanding their own risk profile with respect to the climate will enable them to take action themselves to manage their own affairs too. So it has that double purpose sitting in it. So I think that is part of the risk that we need to understand and that companies need to understand.

I think there are a number of matters in this bill which will need very careful review by the select committee, and they are interesting issues. I first of all want to focus on something that I hope that the select committee will pay due regard to. If we look at new section 461O, inserted by clause 7—it is going into the financial markets legislation, I think—it talks about what a climate reporting entity is. Now, not all entities will be required to do this climate reporting. It says that a climate reporting entity is someone—and this is what I hope the select committee will examine—who is a listed issuer of securities, a registered bank, a licenced insurer, a credit union, a building society. Of course, all these institutions have something in common; they deal with investments and they deal with money, and they deal with it on the part on behalf of retail investors, as well as dealing with it in respect of banks and institutional investors. Are there other entities that should be included in that list of climate reporting entities? That is an issue that I hope that the select committee will give some thought to as it works its way through this bill.

However, it is not all banks, it is not all credit unions, it is not all licensed insurers, and so on, that will be required to report under this; it is only large climate-reporting entities. That is what the bill intends at this stage. So that then becomes a question as to what is a large climate-reporting entity. Now, the suggestion offered in the bill at this stage is that a large entity is an entity that has total assets, in the previous two accounting periods, that exceed a billion dollars. Is that the right threshold? Should it be more? Should it be less? Now, the estimate is that around about 200 entities in New Zealand will be required to report under this bill if it becomes law. Is that threshold set at the right level? I would hope that the select committee will examine that, as well. Perhaps by setting it a little lower, another group of companies could be brought in; there could be a natural sort of place where the line falls. So I hope the select committee will examine that, as well.

There is something else in this that I find very, very interesting, and that is the role that has been set aside for the XRB. Now, the XRB is the External Reporting Board, and as an accountant I find them to be a very interesting entity. What is interesting about this is that in terms of developing these climate-reporting standards, we’ll be relying on a group of professionals, a group of accountants, a group of people involved in the financial markets, a group of people who understand what goes into a set of financial statements, to spend some time thinking about what should be reported and how it should be reported. And there will be a process for doing that; a process of developing a standard and putting an exposure draft out and getting comments back on it.

What it does is it draws on the civil institutions of our society to consider exactly what should be reported in a climate standard and how it should be reported. We are drawing on the expertise of professionals, and I think it is a very important role for professionals in our society. I also, as a former accountant and someone who still in some ways understands the world through, you know, double-entry journal entries—which is a bit sad—I think that accountants have a great deal of value to offer in this space and that their accumulated knowledge of the way that financial statements work will actually be very, very useful in this regard. So the XRB will develop this standard, and then the large climate-reporting entities will be required to comply with it.

But there is another aspect to this reporting that the XRB will be developing standards for, and it is a suggestion which I think—well, it’s in the bill at this stage—the select committee should actually give some serous regard to: that, as well as issuing a standard on financial reporting around climate issues, the XRB is going to be empowered to issue non-binding guidance that relates to non-financial reporting on some matters; so non-financial reporting on other issues that may relevant with respect to climate.

So that is an interesting change. It gives them scope to move beyond just reporting on the financial accounting and on the balance sheet risks and on the numbers, and think about some of the other issues. And I think that is an interesting expansion of the XRB’s path. Now, it is not required to do this, but it may do so; it may issue guidance. So, again, in this regard, we are relying on the External Reporting Board to actually have a really serious think about what could be done in this space and how we could improve our reporting on climate. And we are doing it in order that we may all make better decisions, that we may all understand the risks we face, and that we may all respond to them in an appropriate fashion.

So this is an interesting bill. As a member of the Environment Committee, I would have loved for this to come to the Environment Committee, as well, because I would have thoroughly enjoyed working through it. But I know that whichever committee it is sent to will do a thorough and good job looking at this interesting bill and ensuring that we do the best in terms of developing a way of reporting on climate risks that can lead the world and can develop something that other countries may also be interested in too. So it is a fantastic bill. I commend the Minister for this bill. I look forward to watching its progress through the House.

The question is, That the

Motion agreed to.

Bill referred to the Economic Development, Science and Innovation Committee.

Instruction to the Economic Development, Science and Innovation Committee