New Zealand Equity Monthly September 2024
New climate-related disclosures seen bringing both benefits and challenges
Wednesday, October 9th 2024, 1:42PM
By Mei Zi Ho, Research Analyst Nikko AM
Nikko AM NZ issues its first climate report under new disclosure regime in July
Nikko Asset Management New Zealand (Nikko AM NZ) released its first annual “climate statement” under New Zealand’s new climate-related disclosures regime in July. The framework requires approximately 200 organisations, including large publicly listed companies, to release reports on how their activities may impact the climate and the effect of the climate on their businesses. The first annual reporting periods for the disclosures began in January 2023. Covered entities, including Nikko AM NZ, are required to report based on standards issued by New Zealand’s External Reporting Board. As an asset manager, Nikko AM NZ primarily covers its asset management portfolios in its own climate statement. This means that explanations on how we assess climate risks and opportunities in our funds form a large part of our disclosure. It should be noted that we already do this in our investment process. Given the nature of our industry, climate-related opportunities and risks form part of our risk assessments alongside liquidity risk, management risk and other such considerations. The new regime, however, has made the process more formalised than before. In other words, we are now required to document a larger amount of information and release it in the form of a climate statement.
Scenario analysis in disclosure process seen providing new perspectives
Creating Nikko AM NZ’s first climate statement has given us a sense of some of the benefits and drawbacks we feel the disclosure process involves for covered entities. On the plus side, for example, from the perspective of an asset manager, the scenario analysis part of the process has enabled us to view our portfolios through a different lens. Specifically, our climate statement examines three climate change scenarios that have been adopted across New Zealand’s asset management industry: an “orderly” scenario with average Earth temperatures rising by 1.5°C compared to 1850-1900 levels, a “too little too late” scenario with temperatures rising by more than 2°C compared to the same period, and a “hothouse” scenario with temperatures rising by more than 3°C compared to 1850-1900 levels. Our scenario analysis considers how portfolios may perform against this range of different possible futures. In addition to the additional perspective this provides, we feel that the scenario analysis aspect of the process gives us a useful starting point for discussions in engagement with investee companies.
Cost of creating disclosures among challenges seen for covered entities
As mentioned above, we feel that the disclosure process also poses certain challenges for covered entities. One recurring theme we have found through discussions with investee companies and peers is that meeting the requirement is a time-sensitive and costly exercise. In our view, this may create a barrier to listing on New Zealand’s stock exchange, especially for smaller companies with limited resources. In addition, from our perspective as an asset manager, the need to report on a fund-by-fund basis makes acquiring data quite a challenging process. In our opinion, these challenges highlight the importance of balancing the amount of money and resources needed for the disclosure process with the intended purpose of the climate statements, which is to improve climate action.
Important information: This document is prepared by Nikko Asset Management Co., Ltd. and/or its affiliates (Nikko AM) and is for distribution only under such circumstances as may be permitted by applicable laws. This document does not constitute personal investment advice or a personal recommendation and it does not consider in any way the objectives, financial situation or needs of any recipients. All recipients are recommended to consult with their independent tax, financial and legal advisers prior to any investment.
This document is for information purposes only and is not intended to be an offer, or a solicitation of an offer, to buy or sell any investments or participate in any trading strategy. Moreover, the information in this document will not affect Nikko AM’s investment strategy in any way. The information and opinions in this document have been derived from or reached from sources believed in good faith to be reliable but have not been independently verified. Nikko AM makes no guarantee, representation or warranty, express or implied, and accepts no responsibility or liability for the accuracy or completeness of this document. No reliance should be placed on any assumptions, forecasts, projections, estimates or prospects contained within this document. This document should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions stated in this document may change without notice.
In any investment, past performance is neither an indication nor guarantee of future performance and a loss of capital may occur. Estimates of future performance are based on assumptions that may not be realised. Investors should be able to withstand the loss of any principal investment. The mention of individual securities, sectors, regions or countries within this document does not imply a recommendation to buy or sell.
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