Younger people are a big driver of change says Bridget Coates. Photo / Supplied
It is hard to over-state the transformation in our financial markets during the past year.
Sustainability — considering the long-term wellbeing of communities and the environment, including meaningful climate action and biodiversity protection — has become a top priority for corporations, nations and individuals across the world.
Environmental, social and governance (ESG) considerations are influencing decisions in every aspect of the financial markets. As one major New Zealand bank chief executive put it, demonstrating what your company is doing on ESG is no longer a nice to have, "it's table stakes" — the minimum to stay in the game.
Aotearoa New Zealand is very much a part of this vast global movement.
Our companies and banks source much of their capital from global markets, and global investors are increasingly insisting on sustainability proof points before they will fund new projects here.
Rising expectations and much closer scrutiny from consumers, investors and employees is re-directing money towards activities that will support a smooth transition to a low-carbon and equitable economy. A big driver of this change are younger, purpose-driven employees, who in a tight labour market can, and anecdotally are, being choosy about working for companies transparently walking the talk on sustainability.
There is an incredible amount of work going on across all parts of business and finance.
And everyone — from chairs and chief executives through to employees — is on a steep learning curve.
More than ever, leadership on sustainability means showing humility and courage, and engaging with stakeholders at a deep level.
In Aotearoa, many large companies are drawing on concepts and values from Te Ao Māori to bring the holistic and multi-generational perspective required.
There's a growing appreciation that only through working closely together — investors with the companies they invest in; bankers with the companies they finance; companies with all stakeholders, including competitors; and private lenders with public sector and Māori — can as a society tackle the systemic challenges we collectively face.
A key role for Toitū Tahua: Centre for Sustainable Finance is to support and facilitate this 'radical collaboration'.
In the 12 months since our launch we have brought together experts, organisations across the public and private sectors and Te Ao Māori perspectives to progress actions in the Sustainable Finance Forum's 2030 Roadmap.
Another key role for Toitū Tahua is building capacity: educating and upskilling people working in finance and all business leaders so they feel confident advising on or leading sustainability agendas.
Here's a snapshot of how that "radical collaboration" is playing out in Aotearoa.
Banks: knowledge, confidence and sustainable finance
Banks are actively upskilling staff with the information, understanding and confidence to advise business clients on how to measure and reduce emissions, and how to develop credible transition plans with science-based targets across the short to medium and long term.
One of the initiatives to come out of the roadmap is a new online certificate course developed by EY called the Sustainability Academy, which will be rolled out in large corporates, including banks, and other organisations later this year.
It's going to take trillions of dollars in investment globally for businesses to shift practices and technologies to low-carbon.
The Climate Change Commission estimates New Zealand alone will need $34 billion of new capital in the next 13 years to finance our transition, and this number is only likely to rise.
Governments simply can't foot the bill and private finance is stepping up with sustainable finance products: green bonds, sustainability-linked loans that offer lower interest rates for hitting sustainability targets; responsible or ethical investment analysis for investors (also known as ESG) and the leading edge of impact investment, which promises investors a social or environmental return, sometimes along with a financial return.
Analysis by Chapman Tripp suggests more than $8b of sustainable (green or social) bonds and sustainability-linked loans have been issued in New Zealand in the past 18 months, and that's not counting the country's first sovereign Green Bonds, which will be issued later this year.
Here's an example of how sustainability-linked loans work: Metlifecare has taken a $1.25b loan that integrates social and environmental goals.
Pricing for the loan is tied to the retirement village builder-operator achieving science-based targets for greenhouse gas emission reduction, 6 Green Star standards for construction of new villages, and increasing the number of dementia care beds in its portfolio six-fold.
In agriculture, examples include the Silver Fern Farms ($320m), Synlait ($50m), Southern Pastures ($50m) and Pamu ($85m) sustainability-linked loans.
Genesis, Kāinga Ora, Goodman, Contact Energy, Spark, Kathmandu, and several others have also taken steps to hold themselves accountable, with sustainable finance now forming part of their debt portfolios.
Momentum still lags behind the cracking pace set by other economies.
Boards: core strategy
Boards are highly conscious of the need for upskilling their directors and changing their board composition to ensure they have the required know-how and experience pool, so that sustainability is integrated into all major decisions.
Sustainable finance and new regulations (both reflections of shifting norms) can be drivers for change at the board level, but leadership is still arguably the most powerful levers.
In the Toitū Tahua webinar Banking on Net Zero, Metlifecare deputy chief financial officer Christine Lee reflected on the importance of the tone at the top: "While our sustainability journey has been relatively short, one of the reasons we were able to get going really quickly and really seriously is because we had a clear mandate from our owner, which cascaded down to the board level, and the CEO level."
John Duncan, deputy chair of the board of Kāinga Ora and a member of the Toitū Tahua leadership group comments that since the housing Crown Entity has embraced sustainable finance, no one talks about "sustainability" anymore.
"That's because the impacts on people and planet are now woven through all decision-making at the Kāinga Ora board table.
There's also an increasing desire for upskilling of company directors. A new course on climate governance being developed by Deloitte through Toitū Tahua, and related courses developed by the Institute of Directors through Chapter Zero, will help meet that appetite.
Investors: credible transition plans, active fund management
The ESG trend is driving a global resurgence of active fund management after recent dominance of passive, indexed funds.
This is because emerging best practice in ESG requires fund managers to be across the details of how the firms they invest in operate and interact with the wider world — for example, both a company's exposure and contribution to climate risks (dubbed "double materiality").
Once this data is available, fund managers can engage with companies to help influence positive change.
Another Toitū Tahua initiative is a new Stewardship Code being developed for New Zealand.
The code, to be rolled out later this year, will lay out expectations for this engagement for asset owners, fund managers, wealth managers, advisors and the like.
Increasingly, investors expect companies to have a credible plan for transitioning to net zero, not just a pledge.
The Investor Group on Climate Change (IGCC), which represents institutional investors with total funds under management of more than $3.6 trillion in Australasia and $33t worldwide, says hallmarks of "credible" plans include science-based emission reduction targets for the company's own operations and across its value chain (from raw materials to customers); a strategy to deliver on those targets that factors in the investment (capex) required; sector-specific commitments and actions in line with 1.5C decarbonisation pathways; and annual disclosure and monitoring that's externally verified.
Regulations, standards and data
That external verification piece has been difficult, partly due to gaps between competing ESG rating agencies, and to the dearth of data companies need to assess their baseline climate impact and risk, let alone progress on targets, for example.
But that's changing fast: in New Zealand, about 200 large equity issuers, banks, insurers, fund or scheme managers will need to make mandatory climate-related disclosures from the 2023 financial year on.
The External Reporting Board (XRB) will issue guidelines for reporting climate risk, bringing greater clarity and consistency.
And as all business leaders know: what gets measured, gets managed.
Similar mandatory reporting regimes are being introduced in the UK and the US. In April, the UK also set up a transition plan taskforce to develop a gold standard for corporate transition plans.
The Financial Markets Authority (FMA) has released disclosure guidelines for integrated or responsible investment products that help guard against greenwashing.
Meanwhile, by year's end, the International Sustainability Standards Board (ISSB), birthed out of COP 26 last November in Glasgow, will launch new accounting standards for sustainability that will be on a par with financial accounting standards used worldwide.
Another growing tool in the arsenal against greenwashing is the rather confusingly labelled green or social "taxonomy". In a nutshell, a taxonomy gives objective definitions of the economic activities — from making cement to delivering pizza — that are considered sustainable in a given region.
The EU, China and Australia are among those developing taxonomies. They're not without controversy — the EU one has come under fire for including gas and nuclear energy — but they provide a common language for investors, businesses and designers of sustainable finance products.
New Zealand's closest equivalent at this stage is the Sustainable Agriculture Finance Initiative (SAFI), guidelines developed by our local banks in conjunction with the Ministry of Primary Industries and the Aotearoa Circle.
SAFI is now housed within Toitū Tahua, and the frameworks have already underpinned the development of local sustainability-linked loans for Kiwi agribusinesses and farmers.
Inclusive finance
The roadmap also laid out a vision for an inclusive financial system, one in which financial products and services (low-interest loans, budgeting support etc.) are accessible to people who are currently excluded. There's a strong recognition that exclusion exacerbates deprivation.
In July, 2022, Toitū Tahua brought together more than 80 people from iwi, Māori and community organisations, regulators, government agencies, and corporates for a frank, immersive, discussion about the daily experiences of people dealing with financial hardship and exclusion, and how the system might be changed to be more inclusive, mana-enhancing and human/whānau-centric.
The organising group for the summit — the centre's inclusion group joined by Mercury community and sustainability leader Helen Tua and Good Shepherd chief executive Fleur Howard — are now figuring out how to harness the spirit of collaboration forged during the summit to co-design more inclusive financial services.
Across all areas of sustainability, there is much work left; more gnarly conversations to negotiate from the boardroom to the staffroom.
But at Toitū Tahua, we are heartened by the scale of change on the ground that we've witnessed and supported, just in our first year.
Now, everyone in business has the opportunity to harness the spirit of Kiwi innovation and to seek to live up to New Zealand's "clean green" image as we each identify how we can contribute to this historic tipping point.
(From left: Partnership Associate Bella Conyngham, David Tikao, Simone Robbers, Sir Stephen Tindall, Michele Embling, David Woods, CEO Jo Kelly, John McCarthy, chair Bridget Coates, John Duncan, Pip Best, Isabelle Smith, Fonteyn Moses-Te Kani. Absent: kaumātua Kevin Prime).
Toitū Tahua was set up in July 2021 to accelerate progress toward the Sustainable Finance Forum's 2030 Roadmap for Action.
The roadmap — which had input from over 200 people — recognises that the financial system is the "engine room" of the economy and that we urgently need to get money flowing into building an equitable, inclusive, low-emissions economy.
Toitū Tahua is funded by philanthropists and financial companies and governed by directors who are independent of corporate funders.
Toitū Tahua works in conjunction with its partners, which include major financial sector players, iwi and government agencies, to drive forward multiple projects in three main areas:
• Galvanising leadership and innovation.
System change requires that the people working within a system change the thinking behind their actions — in other words, mindset and culture change.
And this takes leadership.
With its partners, Toitū Tahua is holding events and webinars to showcase and inspire such leadership, conducting research to understand enablers and barriers for funding and financing the transition in Aotearoa, and investigating creating an 'impact economy hub' that would aim to redirect 5 per cent of mainstream funds into transition-aligned, direct investment
• Changing norms and standards. Toitū Tahua is spearheading discussions around developing a framework of guidelines or standards for transition investment to bring more clarity and consistency.
The Centre is also driving the development of a New Zealand Stewardship Code and impact investment guidelines, and has submitted on two major pieces of climate policy: the Emissions Reduction Plan and the forthcoming National Adaptation Plan.
• Building capability.
Toitū Tahua is coordinating the development of online training for directors (climate governance) and business and community groups (the Sustainability Academy), as well as a community of practice for investment managers to share experience and resources as they move towards building net-zero portfolios.
• Bridget Coates is Chair of Toitū Tahua — Centre for Sustainable Finance
OPINION: Tensions are likely to become more evident next year.