Opinion: Climate reality and the role of finance in accelerating the transition of the NZ economy

Rising interest rates and persistent inflation were defining economic themes in 2022. The economic impacts are universal and, worryingly, also have implications in the world of investment for climate change mitigation.

Some have concluded that these economic conditions will result in delayed action on climate change, when in reality, these pressures underscore the need to accelerate investment. If for no other reason than the sooner we act, the lower the cost of change will be.

While the physical risks from climate change are clear (as the weather events of early 2023 have shown), transition risks are perhaps less immediately obvious, but no less real. These include changing policies and regulation, evolving consumer preferences, stranded assets, litigation liability, investor appetite and availability of capital. All of which can translate into financial risks for companies.

This underscores the criticality of the mandatory Climate Related Disclosures reporting regime, which will apply from 2024. Reporting will bring greater clarity and focus on the climate-related risks businesses face, driving accountability to effectively manage those risks and take advantage of opportunities. Around 200 of NZ’s most economically significant entities, including BNZ, will be subject to the regime. Over the last 12 -18 months these businesses have been reviewing and reporting on (or preparing to) their most pressing physical and transition risks.  This work enables clear goals to be set, policies refined, and climate sustainability embedded into strategy, product development and risk management

Climate transitions

The Intergovernmental Panel on Climate Change (IPCC) says greenhouse gas emissions must peak by 2025 and then decline by half during this decade if we are to limit future heating to 1.5°C above pre-industrial levels. Confronted with this reality, much of the financial sector has already moved from the ‘why’ to the ‘how’ of financing the transition.

BNZ’s role is to support customers to transition their businesses to a net zero future. During 2022 BNZ assessed and engaged with some of our highest emitting customers, to understand their transition planning and how we can support them on that journey.

We discovered that overwhelmingly NZ businesses are committed to addressing climate change.  Yet too few have a publicly available transition plan with adequate detail to demonstrate their emissions will reduce in line with a 1.5°C pathway. The development of credible, science-aligned transition plans needs to be a priority for businesses in high emitting sectors, with many international frameworks available to help businesses understand what good looks like.

We anticipate that businesses that take the opportunity to transition, will reap the related competitive advantages and enable a smooth transition for the NZ economy.

The SME Challenge

While larger businesses are more likely to have the resources to develop transition plans, many SMEs may struggle to find the capacity to do so. There’s an important role for banks to support SME customers with tools and by delivering insights to help them navigate their transition to a net zero future. A great example of this is the Climate Action Toolbox, which is a tool to help businesses measure their emissions and build an action plan to address them. Banks and investors need to do more of this in 2023 and beyond to enable faster change.

Catalysing the transition through investment

The flipside of climate risk is climate opportunity. We are entering a phase aptly named the “Great Reallocation of Capital” as financial capital increasingly flows towards green, low carbon businesses and projects.

Banks can support this reallocation of capital by providing products that help incentivise investments in transition, like Sustainability-Linked Loans, Green Loans, and Green Bonds. In 2022 we saw the Government launch its Green Bond Framework and issue its first sovereign green bond – we expect this to catalyse further demand for sustainable investments in New Zealand. An ongoing trend in 2023 will be the continued innovation around these types of products, broadening their availability to a wider range of customers.

Going further, together

An oft-quoted maxim is “if you want to go fast go alone, if you want to go far go together”. Businesses can choose to go fast themselves, however the challenge in transforming the global economy to a low emissions model is immense. Achieving this kind of systemic change requires collaboration and partnerships across government, the private sector and civil society. Excellent examples underway in NZ include the Aotearoa Circle, Toitū Tahua: Centre for Sustainable Finance and the Centre for Climate Action on Agricultural Emissions, a Government and Food & Fibre Industry Joint Venture addressing agricultural supply chain emissions. For businesses wanting to show leadership and shape the future of their industries this sort of collaboration is essential.

Time for Action

The ‘Tragedy of the Horizon’, a term coined by Ex-Governor of the Bank of England, Mark Carney, describes how the impacts of climate change will be felt beyond the traditional horizons of 5 or 10 years – imposing a cost on future generations that the current generation has little incentive to fix. The paradox of this is that once climate change becomes decisive for a well-functioning economy it may already be too late. The message is clear, it’s now or never, 2023 needs to be a year of action for banks and their customers alike: develop credible transition plans and start making decisions and investments required to achieve them.

This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article. Any opinions in this article are not necessarily shared by BNZ or anyone else. References to third party websites are provided for your convenience only. BNZ accepts no responsibility for the availability or content of such websites.