The sun tries to break through as the smoke haze from the Australian bush fires clouds Auckland skies in January. Photo / Dean Purcell
The IPCC's forecasts are devastating. New Zealand is vulnerable to the impacts of climate change as can be seen in the illustration above.
The Covid-19 pandemic has also exposed major weaknesses in our society. But we can — and must — do something about it.
The Sustainable Finance Forum says the current financial system is contributing to environmental degradation and entrenching inequality across many measures.
"We are rapidly consuming finite pools of natural and social capital to produce financial capital," the forum says. "Simply put — this is unsustainable. Collectively, we need to change the way investment and lending decisions are made, so that environmental, social and economic factors are integral and negative impacts, both immediately and over the long term, are avoided," says the forum in its Roadmap for Action launched in Wellington and Auckland this morning.
New Zealand is well-placed to capitalise on the growing determination among key business leaders to meet the environmental and societal challenges we face. The incoming Labour Government has highlighted social issues, sustainability and the environment as key drivers at the centre of its thinking.
Promises to bring forward the goal of 100 per cent renewable electricity generation, accelerate the electrification of transport and back emerging technologies such as green hydrogen will all bring attractive investment propositions.
Prime Minister Jacinda Ardern's speech on election night reinforced her commitment to build back better from the Covid-19 crisis. "Better, stronger, with an answer to the many challenges New Zealand already faced," she said. "This is our opportunity to build an economy that works for everyone, to keep creating decent jobs, upskill and train people, to protect our environment and address our climate challenges, to take on poverty and inequality, to turn all of the uncertainty and hard times into cause for hope and optimism."
Last month, Climate Change Minister James Shaw announced New Zealand would be the first country to introduce a mandatory climate-related financial disclosure regime — a big shift toward sustainable investing. The regime will apply to banks, credit unions, and building societies with total assets of more than $1 billion, from 2023.
Shaw said while Australia, Canada, the UK, France, Japan and the European Union are all working towards some form of climate risk reporting for companies, "New Zealand is moving ahead of them by making disclosures about climate risk mandatory across the financial system."
The policy was endorsed by Nobel Prize-winning economist Joseph Stiglitz: "Once again, New Zealand is leading the world. It led the world in showing how democratic countries could manage the risks of Covid-19," he said. "Now, New Zealand is leading the way in showing how we can help manage the risk of climate change."
The NZ Super Fund was quick off the mark to release the first report in line with the Taskforce on Climate-related Financial Disclosures (TCFD) showing its carbon reduction policies have given $800 million dollar gains to NZ Super.
The report is based on recommendations from the TCFD and also updates the fund's emission reduction targets through to 2025.
The Super Fund must factor in the impacts of climate change on the markets we invest in and the businesses we own," said CEO Matt Whineray. "As the global energy system transitions away from fossil fuels, some assets might become obsolete, uneconomic or lose value. Changing weather patterns and extreme events might expose other investments to increased physical risks."
This recently released report is seen as an example of what a disclosure report could look like for a large institutional investor.
One of the core elements of the Super Fund's Climate Change Investment Strategy is to reduce the carbon intensity of its investments and its exposure to fossil fuel reserves.
"Although still in an early stage, it's positive to note that after running the strategy for several years we haven't seen an adverse effect on performance," says Whineray. "In fact, the carbon exclusion policy has added approximately $800 million to the Fund and about 60 basis points per annum to performance since it was brought in. So not only has this approach reduced what we considered to be an insufficiently rewarded risk, it has also added return."
"Having met our 2020 targets we have set new, more ambitious targets and now aim by 2025 to reduce the emissions intensity of our portfolio by 40 per cent and fossil fuel reserves by 80 per cent," says Whineray.
The growing appetite among investors for ESG investment opportunities may also help the NZ Government to deliver on its productivity, social and environmental goals — and provide additional capital towards fuelling a New Zealand economic recovery that is long-lasting and sustainable.
But, first some perspective. The heavy issuance of bonds worldwide aimed at tackling the effects of the Covid-19 pandemic could push the size of the "sustainable" debt market to a new record this year, according to Moody's.
The ratings agency forecasts the volume of newly issued debt based on environmental, social and governance principles could reach US$375 billion this year, up by more than US$50b from last year.
Even so, the sustainable bond market remains relatively small — accounting for about 5 per cent of the total global bond mark. The rate of investment in green bonds has declined from prior forecasts.
Global investor Blackrock, with more than US$7 trillion assets under management, is pointing the way.
In his annual letter to CEOs this year, Blackrock chief executive Larry Fink said the importance of serving stakeholders and embracing purpose was becoming increasingly central to the way companies understand their role in society.
"A company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders. A pharmaceutical company that hikes prices ruthlessly, a mining company that short-changes safety, a bank that fails to respect its clients — these companies may maximise returns in the short term," wrote Fink. "But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.
"By contrast, a strong sense of purpose and a commitment to stakeholders helps a company connect more deeply to its customers and adjust to the changing demands of society. Ultimately, purpose is the engine of long-term profitability.
"Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing scepticism from the markets, and in turn, a higher cost of capital.
Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital."
The ambition of the Paris agreement is to limit climate change to 1.5 degrees of global warming above pre-industrial levels. The 2018 Special Report from the Intergovernmental Panel on Climate Change (IPCC) on Global Warming of 1.5 degrees states that achieving this will require an economic change with "no documented historic precedent" in terms of speed and scale. We need to reduce global emissions by 45 per cent by 2030, and be net zero by at least 2050, ideally sooner. The IPCC estimates this will require a 600 per cent increase in capital for low-carbon technologies and energy efficiency by 2050.
Even with 1.5 degrees of warming it's estimated that the implications of climate change to the natural environment are material, for example:
● 4 per cent of all land will undergo a transformation from one ecosystem to another, with 13 per cent transforming at 2 degrees (primary industries account for approximately 8 per cent of New Zealand's GDP)
● We will lose 70-90 per cent of coral reefs, with 99 per cent lost at a temperature rise of two degrees (an important source of food and income in the Oceania region)
● Global annual fishery catch will decrease by 1.5 million tonnes, with a decrease of 3 million tonnes at 2 degrees (accounting for 0.7 per cent of New Zealand's GDP and 3.2 per cent of export in 20155)
● An ice-free arctic summer will occur once per century at 1.5 degrees compared to once per decade at 2 degrees
● At 2 degrees, sea level rise is estimated to hit approximately 1m by 2100, with 68,000 buildings in NZ located on land below this level with a replacement value of $19 billion.
● An estimated 170,000 buildings sit within 3m of current sea-level and would be impacted by storm tides and wave floods, with a replacement value of $52 billion. This is approximately 10 per cent of all private dwellings in New Zealand.
These estimates don't include the costs of adapting other infrastructure such as
transport. It also only considers the impacts of sea-level rise. Climate change will also cause changes in rainfall, extreme weather events, heatwaves, and a significant number of other climate hazards. It will impact health, food and water supply, tourism, migration, domestic security, and significantly alter life as we know it, even at 1.5 or 2 degrees. Co-dependencies within our economy will lead to further impacts that cannot yet be understood. The banking sector alone lends around $190 billion in home mortgages, which cannot be withdrawn as risks change like insurance.
There are also emerging risks from not setting out realistic decarbonisation plans aligning to a two-degree future. These include increasing risk of litigation or exclusion from international trade as a penalty for slow action. In other words, there is a very significant cost to inaction — the base case is not the status quo.
These are the impacts of a 2 degree world. Current global proposed mitigation plans have us on track to 3 degrees of warming or higher. Potential damage is not linear with an increase in temperature — 2 degrees is significantly worse than 1.5 degrees. At 3 degrees, things get exponentially worse and we reach the point of no return.
Source: Sustainable Finance Forum interim report
• The Sustainable Finance Forum, co-chaired by NZ Super Fund CEO Matt Whineray and Westpac's GM Experience Hub Karen Silk, is set up under the auspices of The Aotearoa Circle — a unique partnership of public and private sector leaders committed to the pursuit of sustainable prosperity.
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