New Zealand first country to make Banks disclose Climate related risks

New Zealand has announced to introduce a law that will enforce its financial institutions to report the effects of climate change.

If the law gets passed New Zealand will become the first country to introduce a law like this. The legislation was introduced on 12th April 2021 and would make climate reporting compulsory by 2023 if passed.

The proposed law will require financial institutions, including banks, insurers, and investment managers to explain how they would manage climate-related risks and opportunities.

The law applies to all banks in the country with total assets of more than NZ$1 billion (US$700 million) and insurers with more than NZ$1 billion in total assets under management. It is expected around 200 major organizations and several foreign firms will fall under the purview of this law.

Annoucement has come ahead of President Biden’s leader’s summit on climate (April 22–23), where New Zealand is invited along with 40 other world leaders.

New Zealand has committed to becoming carbon neutral by 2050 and generating all its energy from renewable sources by 2035. It also became the first country in the world to pass Zero-Carbon Act.

It would be interesting to note how this law plays a part in the animal farming sector. Cattle farming plays a huge role in generating New Zealand’s foreign income. Ironically, as per a study by New Zealand’s Ministry for the Environment, around 50 percent of New Zealand’s greenhouse gas emissions are a byproduct of its agriculture industry.

The next big sector which contributes to New Zealand’s greenhouse gases is transportation followed by manufacturing & construction. Last year, the government announced that requires local councils to eliminate fossil fuel buses from the public transport network by 2035.

Banks making climate-related disclosures

When you put money in a bank account and the bank gives you a certain rate of interest for putting that money, it does so from its earnings. The earnings happen when the bank takes that money and gives it out to either people as home loans, car loans, or lend it to commercial business.

The last one becomes critical, as banks give loans to businesses across the industry, their exposure to climate change is potentially immense. Severe climate-related events can have a severe repercussion on products and services, supply chains, and market closures, thus affecting the banks & financial institutions.

For example, climate-related events can cause disruption to the manufacturing facilities and affect global supply chains, increasing the chances of credit default by a business. The increased frequency of floods, and droughts can hinder the insurance industry’s ability to assess insurable risks.

Investors, regulators, and environmental activists are also putting pressure on companies and banks to disclose information related to their climate change risks. In recent times, central banks across many countries have started putting frameworks to assess climate-related risks.

In December 2017, a Network for Greening the Financial System was formed by the central banks and banking supervisory authorities from many countries. The objective of the network is to strengthen the response required to meet the goals of the Paris agreement and to enable the financial system to manage climate-related risks and promote sustainable development. Central banks of China, England, South Africa, France, Malaysia, Mexico, the Netherlands, and others are part of this network.

In late 2020, European Central Bank (ECB) published its guide on climate-related and environmental risks. Australian Prudential Regulation Authority (APRA) regulator of the Australian financial services industry also plans a similar guide.

The above frameworks were mainly voluntary or within the ambit of the supervisory bodies or central banks. The proposed law by New Zealand will make it mandatory for the island country’s financial institutions to declare their climate-related risks.

The financial sector also needs to play a part in the efforts to help fight climate change and New Zealand’s example has set the right tone for other global economies of the world.