NZ's climate reporting standards have yet to push change for fund managers

That was a surprise for the Aotearoa NZ Investor Coalition for Net Zero when working on its third State of Climate Investment in NZ report.

Its members are now wondering if some fund managers were too busy implementing the new climate reporting rules to take concrete climate action.

That may have also been a factor in the low response rate. More than 100 organisations were contacted in September and October 2023, but only 13 responded.

Last year, around 80% of the top 10 fund managers took the time to reply.

This year’s response still represents around $230 billion of assets under management – around two-thirds of NZ’s total.

The coalition's three core members are the Investor Group on Climate Change, Mindful Money, and the Centre for Sustainable Finance.

Mindful Money co-chief executive Barry Coates said overall, the survey results showed the investment sector wasn't yet using its capital and influence to drive the transition to net zero.

An unexpected outcome

The new climate reporting standards didn't appear to have helped.

"We thought that would be an impetus for fund managers to take this seriously, and to put in place strategies and plans for action and start to reduce their emissions.”

Centre for Sustainable Finance CEO Jo Kelly noted that nearly two-thirds of NZ fund managers had no targets to invest in companies contributing to the climate transition, compared to a third in Australia.

Coates suggested Australia’s fund management sector was simply larger and more sophisticated than NZ's.

Australia is still working to implement climate reporting standards, whereas they are now in place in NZ.

“One of the things that’s been suggested to us is the pressure for reporting deadlines coming up,” Coates said. “The difficulty that fund managers have found in climate reporting has meant that all of their attention is poured into that rather than doing anything about climate action.”

That could also explain the far smaller response to the survey, although Coates said they had contracted out much of the surveying and follow-up, which could also be a factor.

“I still think the data and the analysis are really useful. I’m not sure that the conclusions would change significantly if we had more respondents.”

Not 'a fluffy moral thing'

The survey found the biggest driver for climate investing was a growing acceptance that climate factors impacted the financial performance of investments, cited by 67% of respondents, compared with regulatory requirements at number four (44%).

Only 22% said demand from retail investors was driving climate investment, although that was double the 11% who faced demand from institutional investors.

Coates said respondents weren’t taking steps on climate action because of government regulation, but because it was good financial management.

“I think that’s really healthy. Increasingly this is not seen to be a kind of fluffy moral thing for fund managers to do.

“For taking this into the mainstream of the finance industry, I think that’s a really important finding.”

Raised stakes for fund managers

Despite low levels of target setting, 85% of investors did measure emissions across their portfolios, whether they published the emissions profile or not.

It's an improvement on last year's report, where only 50% had completed or partly completed measuring emissions.

The second year of NZ’s mandatory climate reporting regime will include mandatory transition plans for climate reporting entities (CREs).

The survey found that few fund managers had climate transition plans. More than half (54%) said they would complete one within the next 12 months. Coates said that should help the situation.

"Once they have put stuff down on paper and the board has to sign off on it, it raises the stakes on that."

There was a danger that climate-related disclosures would just become a form of tick box and compliance reporting “rather than what they were naturally intended to be, which is a driver of strategy and action”.

Convergent climate reporting

Coates said NZ's reporting standards could be more prescriptive than they were.

"The ISSB [International Sustainability Standards Board] standards are much clearer about 'give us a one-page statement of the way you’re managing your climate risks and use the following measures to describe that'. We don't have that."

There had been pressure on the External Reporting Board (XRB) to adjust the standards to align with those new international standards, he said.

That wasn't on the cards for now but the door was open for the future, Coates believed.

Kelly said NZ had been the first to develop climate reporting standards, and the XRB was required to do that work. She expected NZ’s standards to be harmonised with international standards over time.

That wouldn’t happen straight away because CREs were still adjusting to the new system.

XRB review in 2025

XRB chief executive April Mackenzie responded that both the ISSB and XRB standards were based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). "Although the ISSB standard is more prescriptive in some areas, the two sets of standards are aligned and interoperable."

The XRB understood from the ISSB that no corporation or fund manager had yet reported against the ISSB's standard, known as IFRS S2.

"Until the reporting evidence comes through, we consider that it is too early to make commentary about whether the ISSB standards will result in greater comparability."

Mackenzie said the XRB had been closely engaging with the ISSB and its work since its establishment. The XRB would start its post-implementation review of the NZ standards next year.

"This review will specifically look at alignment with the ISSB’s standards, and the other climate standards in operation globally such as the European climate standard and the forthcoming Australian climate standard."

A new taxonomy for NZ green investment

Meanwhile, the Centre for Sustainable Development this week published recommendations to develop an NZ "taxonomy" for sustainable investment. These were drawn up by an independent advisory group as requested this year by Climate Change Minister Simon Watts.

The group defines a sustainable finance taxonomy as "a standardised framework for classifying economic activities according to their environmental performance".

The word "sustainable" is thrown into much investment talk. Such a taxonomy would provide a standard definition of what that actually means. The European Union has already put this in place and Kelly said NZ needed to align with its trading partners.

The advisory group had looked at simply adopting overseas standards, but NZ had its own laws and a taxonomy framework needed to exist within them.

"So, you have to do the work at home to make sure that they are usable here," Kelly said.

The actual design of the taxonomy will follow. One recommendation is that its use would be voluntary, at least for a bedding-in period.