How Cyclone Gabrielle will change the way companies account for climate change

Turner and Growers 30-hectare orchard on Puketapu Road, west of Napier, after the Cyclone Gabrielle floods. 16 February, 2023. Photo / Mark Mitchell

Cyclone Gabrielle and the Auckland anniversary floods will alter the way companies account for the likely impact that climate change will have on their businesses, PwC’s Karen Shires says.

“These events have probably made it [climate change] more real for people and companies,” said Shires, chief risk and reputation officer at the consultancy.

“It’s given us a far better understanding of the broader impacts,” she said.

She told the Herald companies might now start to build a lot more information into some of their future scenarios.

PwC's Karen Shires says last summer's cyclone and floods made climate change seem a lot more real for some companies. Photo / File

“If you think about the value of an asset, you have to think about whether that asset is impaired.

“You might have to think about things like: What if there are infrastructure impacts; what if you can’t access your asset; what if the supply chain is impacted if you can’t get raw materials; what if the soil is contaminated and how long is it going take for you to re-establish your fruit trees and vines.”

Shires said the flooding had been “horrible for the country but helpful for us to understand and adjust to what these climate impacts might be”.

Climate risk might start to show up in accounts in various forms.

“You might start to see it ... where these companies are looking at the useful life of their properties, plant and equipment.

“If a plant’s life is, say, 50 years, and if it’s in a flood-prone area, can you rebuild in that area? And is it economical to do that?”

Another area of potential risk was in sustainability-linked loans, such as green bonds, where an interest rate is linked to the company undertaking climate change initiatives.

“Not following those is going to create a higher coupon – so there is an impact in that area as well.”

Shires said climate change could mean certain assets get depreciated quicker as their useful lives are shortened, which would lead to higher depreciation and amortisation costs.

“You could also see impairment of assets as well, and you may see the carrying value of some of those loans go up because you are not meeting the sustainability requirements of the things that you have signed up for,” she said.

Insurance costs were also bound to go up after the floods.

“We are already seeing this. We are seeing the insurers shift to risk–based prices, particularly for flood risk, and I think they will extend that to other impacts, such as coastal erosion.”

In terms of companies’ annual reports, Shires said a lot of information was going into the “front half” of reports of those who want to be seen as doing the right thing.

“The challenge is that when you get to the back half, there is very little, so there is a disconnect between the course that you get at the front, and what you get at the back,” she said.

Last year, PwC released reports that looked into how climate change was reflected in the financial statements of NZX50 March and June reporters.

In its latest report, PwC looked at NZX50 companies reporting with balance dates between July 1 and December 31, 2022.

PwC examined how climate-related impacts on the financial statements were disclosed and how auditors considered climate-related impacts in key audit matters (KAMs).

Its research reveals eight of the 13 July-December reporters referenced climate change in their financial statements.

“This is a significant increase compared to March and June 2022 reporters when only six out of the 39 mentioned it,” PwC said.

In most cases, the disclosures continued to be brief and the impacts of climate change risk are not always clearly articulated.

“However, we are starting to see more companies providing entity-specific considerations compared to earlier reporters.”

The companies mentioning climate change in their financial statements included relevant disclosures in different parts.

“Over time we expect that climate risk, and its consideration, will become pervasive and referenced throughout financial statements, making disclosures far more user-friendly and helpful for decision making,” PwC said.

The impact of recent extreme weather events globally, Cyclone Gabrielle and widespread flooding in New Zealand drew further attention to the effects of climate change and the importance of understanding climate risk, it said.

“In New Zealand we have seen the wide-ranging repercussions including loss of access to premises or production facilities, power, communication, internet, soil contamination, food and fibre supply chain disruption and roading infrastructure fragility.”

PwC added: “We expect these events will influence future financial reporting as companies deepen their analysis of potential impacts and look to address the concerns of their stakeholders including investors and customers.”