Financial reform is fundamental

Lucie Drummond of Mercury. Photo / Supplied

If New Zealand is to make a smooth and successful transition to a low-carbon economy, we will need to reset our financial systems says Mercury Energy's Lucie Drummond.

Drummond is Mercury's risk assurance officer and is involved with the energy company's input into the Financing the Future interim report — a document that aims to chart New Zealand's route to creating a financial system underpinning sustainable social, environmental and economic wellbeing goals.

The Aotearoa Circle's work aligns with Mercury's internal goals: "Sustainability is front and centre for us as a renewable energy company. We see financial system reform as a fundamentally important part of that," she says.

Drummond says investors in general are increasingly interested in learning about a business's long-term sustainability.

"Providers of capital have been increasingly looking for this information since about 2008 or 2009. At the same time we've been working internally to look at our material value drivers.

We've been looking a broader suite of values than just the financial ones.

"Aotearoa Circle is a great initiative because it brings together public and private organisations to have a joined-up approach on key issues."

She points to the leadership already being shown by Canada, China and the United Kingdom. China's approach is mainly driven top-down by government leaders concerned about the consequences of rapid industrialisation. These circumstances are quite different from those in New Zealand. However, the UK is motivated by a need for economic regeneration and keeping its status as a financial hub during otherwise turbulent times.

Drummond says there is a similar opportunity for New Zealand to build relevance.

"This report gives us the ability to look at what has already been developed in those countries and then think about how we can take them and create something unique for the New Zealand market."

One of the key differences is that New Zealand has a far larger proportion of small and medium companies.

Say Drummond: "It is great that the Aotearoa Circle report will include a roadmap. We need this, so that any change isn't seen as insurmountable or as a challenging and bureaucratic overload for smaller companies.

"They have fewer resources available to adapt and change."

New Zealand's listed companies are already seeing changes. Drummond says the roadmap will draw on this experience and lessons from the bigger companies will be adapted to work for smaller businesses.

Drummond says there are clear benefits from taking this approach. "We're talking about changes in the way financial capital flows to recognise a broader definition of value. If the providers of capital can test these ideas with the bigger players first, then, naturally, they will become more comfortable with providing it to those smaller companies."

She says there's a distinct shift towards this kind of investment giving an example of changing attitudes at insurance companies: "During a recent visit to talk to underwriters, we saw insurers moving away from companies that are heavily reliant on fossil fuels. They are now saying they will no longer underwrite those risks. We're seeing other key players making significant steps as well."

Drummond relates these changes to the rise of the ESG — environmental, social and governance — approach to investing. This is where investors take a long-term view and look at all implications before committing finance; already there is divestment from fossil fuels.

"New Zealand is already at 85 per cent renewables for the electricity sector," explains Drummond. "So, I wouldn't expect to see a massive shift in terms of divestment in terms of the electricity sector here. It's a massive driver in overseas companies because they face a much bigger challenges decarbonising their electricity markets. If there's a negative focus in New Zealand, it is more on transport. The question there is difficult: you're thinking about how to shift the financial systems to help incentivise the changes required."

Drummond says there has been a high level of engagement in preparing the interim Financing the Future report.

"People are picking it up, understanding the system change required and then providing feedback. That will be used shape up the final report and proposed roadmap.

"Active participation will be the key. We want to have something that works. Getting people to participate in the process is the way to ensure that happens. As a business we'll be looking at it in terms of how it shapes and influences the direction that we are already following."

Drummond doesn't expect this to pose a major challenge for Mercury.

"We have an expectation that the report is aligned to our thinking in terms of the systems that we are already creating internally. Our business is looking to help New Zealand on its journey to a low-carbon future."

She expects education will be a key focus, saying this applies at a number of levels, including consumer education. One of the more powerful issues will be governance and whether there is a capability gap when it comes to the new business landscape.

"I don't think this is in any way an insurmountable barrier.

"Even if your view of the status quo is that you have a governance suite who are less familiar with discussing environmental and social risks, New Zealand directors are well versed at using the tools available to them to get up to speed."

Read the Sustainable Finance Report here.