NZ's climate-related reporting regime: an ideologically-driven white elephant?

This screams work for lawyers to me.

Source: Open Art

When I started working for National Business Review in 2015, I started covering the electricity industry in more depth than previously, largely because two of the major NZX-listed generator/retailers had their head offices in Wellington, where I'm based, whereas most of my colleagues were Auckland based.

One thing that struck me was, apart from the odd diehard, nobody in the industry was at all interested in arguing about climate change.

The industry as a whole seemed to me to have decided it was a given, and that moving to renewables was a desirable thing to do.

The focus was on the practicalities of achieving that, as well as the question of what we should do when our lakes were too low and the wind stopped blowing. (Solar then, and even now, was still very small in NZ.)

In my view, the previous government was not just myopic but downright stupid in insisting that we should move our electricity generation to 100% renewables.

In vain did the industry tell the government that we were going to get to about 95% renewables without any need for a push from government, but that the last 5% was going to be prohibitively expensive and that the government would have been better looking for other low-hanging fruit.

In vain did the industry argue that gas should be regarded as a transition fuel and that gas-fired peaker generators were the best answer for that last 5%.

Like a safety valve

That's because gas-fired peakers can be started up and closed down rapidly when, as their name suggests, electricity demand peaks and when the lakes are low and the wind doesn't blow.

Thus the white elephant of the Onslow project was born – by the time the current government axed it last December, the cost had blown out to $16 billion, four times the original estimate, and lord knows how much it would've cost if it had actually proceeded.

“This hugely wasteful project was pouring money down the drain at a time when we need to be reining in spending and focussing on rebuilding the economy and improving the lives of New Zealanders,” energy minister Simeon Brown said when he announced its cancellation.

But the time and money spent on the project wasn't the only cost; arguably it was the previous government's ban on oil and gas exploration and discouragement of gas-fired peaking power stations that has contributed to the current spike in electricity prices.

In May this year, national grid operator Transpower said the country needs more peakers but instead we've been closing them and the generators were naturally disinclined to invest the millions of dollars they cost – Todd opened one in Taranaki in 2020 that cost $100 million – while Onslow was still on the table.

Dwindling local gas supplies

The lack of exploration means our gas supplies are dwindling to fire the peakers we still have.

Instead we're importing lots and lots of coal to burn at Huntly – according to MBIE data, we imported more than 323,000 tonnes of the stuff in the year ended March, much of it for electricity generation.

Coal is far worse for the environment than gas.

While coal imports in the latest year were down from more than 614,000 tonnes in the previous year, the June 2023 quarter appears to have been unusually light – just 34,000 tonnes compared with nearly 396,000 in the June quarter of 2022.

Then there's the transport costs and emissions of getting the stuff into Auckland or Tauranga and trucking it to Huntly

So the law of unintended consequences seems to have triumphed over the previous government's myopic and ideologically-driven good intentions.

I'm now wondering whether the same could be true of the amendment to the Financial Markets Conduct Act, section 7A, which mandates that most of the companies listed on NZX, as well as a number of other businesses, are required to produce annual climate-related disclosures.

The legislation stipulates any company with a market capitalisation of $60 million or more is regarded as “large” for the purposes of the Act.

Which is astonishing. Yes, there are some NZX-listed companies with lower market caps, but almost all our listed companies are regarded as small by global standards.

These are actually quite small companies

Even in NZ, most investors would agree a $60 million company is very small.

It looks like most fund managers are also required to produce these reports – the example given in the legislation is a fund manager operating three funds with total assets under management (AUM) of more than $1 billion – NZX's Smartshares had $11 billion in AUM at Dec 31 while Fisher Funds Management's was more than $18 billion at the same date.

The reports have had to be produced from early this year for companies with financial years beginning Jan 1, 2023 with those with later starts to their financial years following.

As far as I can see, there's huge variation in how detailed each company's report is.

Channel Infrastructure, which had a market cap yesterday of $575.7 million, produced a 125-page report while Infratil, which has a market cap of more than $10.21 billion, put out a 43-page document and its 51%-owned Manawa Energy, with a market cap of more than $1.3 billion, put out a 44-pager.

Turners Automotive Group, with a market cap of nearly $383 million, produced a 17-pager, Eroad, which has a $248.8 million market cap, put out a 16-pager, and Vista Group, with a market cap of $717.8 million, put out a 31-pager.

More variations

Other companies incorporated the required disclosures within their annual reports – Ryman Healthcare's for example, which has a market cap of $3.2 billion, took up 24 pages of its annual report, while fellow retirement village operator Summerset, with a $2.57 billion market cap, put out a separate 40-page report.

What drew my attention the situation in the first place was NZX's own annual report. It has a market cap of $410.6 million and its report, published in February, incorporated its climate-related disclosures and included the word climate 177 times.

It presented the results of a survey it conducted with Abley CarbonWise of its own employees' greenhouse gas emissions travelling to and from work.

“Based on results from the survey, NZX commuting emissions for 2023 were 173.8 tonnes of CO₂ equivalent. This means, on average, an NZX employee emitted 0.51 tonnes of CO₂ equivalent over the past year,” NZX said.

It said that 22% of trips were walked or cycled and only 19% of trips were made by solo car drivers.

“This indicates a strong level of active travel and low car use compared to the average New Zealander.”

Frankly, I found this bewildering; we really want our stock exchange operator spending money on producing such results?

Is anybody reading these reports?

The chair of one company which put out a hefty separate report told me he'd surveyed the company's institutional investors and not one had read it, although one said it was in their to-read pile. It doesn’t look like these reports hold compelling information for investors.

The penalties of failing to comply are massive; not only are the companies themselves liable, but every one of their directors is too.

The penalties are prison for up to five years, or a fine of up to $500,000, or both, for individuals caught by the Act and fines of up to $2.5 million for their companies.

That screams work for lawyers to me – what director could live with such exposure without doing their best to ensure they're compliant with something that, frankly, the average director is ill-equipped to deal with.

How on earth is all this report writing helping to reduce NZ's emissions? Yes, they're setting themselves reduction targets, but is it within companies' powers to require employees to take the bus or train instead of driving? Or to ride bikes?

Air NZ said late last month that it had pulled the plug on its 2030 emissions reduction targets and it's widely expected other companies will follow suit.

Air NZ's reasons were that matters beyond its control, such as the availability of new aircraft, the affordability and availability of alternative jet fuels, and global and domestic regulatory and policy support, “remain challenging.”

Why such onerous penalties?

Why are the penalties for not reporting such matters correctly so onerous, particularly when much of this is so new?

MBIE produced a regulatory impact statement in October 2022, which was before a lot of the details had been finalised, but it made no attempt to quantify the economic impact.

MBIE did make a few enlightening statements such as: “Climate reporting is relatively new and New Zealand is one of the first countries to introduce a mandatory regime requiring reporting against a national standard,” it said.

“It was difficult to quantify the scale of the problems as the analysis is focussed on a new regime that is not yet in force.”

MBIE aslo noted that “financial market participants do not currently have access to the information to assess and price” the risks and opportunities posed by climate change.

It looks to me like this law is imposing colossal costs on our productive sector for dubious benefits.

One director estimated each report could cost between $50,000 and $100,000 to produce but another source said some were costing as much as $250,000.

The Financial Markets Authority (FMA) has since granted limited exemptions to some overseas registered banks and insurers and to some foreign exempt issuers (FEIs) with a dual listing on NZX.

Will companies flee NZX?

The report on the latter does note: “We have been told there is a risk that some NZX FEIs will decide to drop their secondary listing on the NZX as a result of the compliance burden imposed by the new climate reporting duties under Part 7A, and other foreign issuers may be deterred from seeking a secondary listing on the NZX in future. This could limit growth of our capital markets and investment opportunities for New Zealanders.”

So why would any NZ company contemplating a stock exchange listing choose NZX? We've already seen some NZ-based companies skip out of NZ to make their primary listing on ASX.

If they're incorporated in NZ, that might not allow them to avoid having to produce NZ climate-related reports, however.

An obvious solution to that would be to move their incorporation to Australia or another jurisdiction that doesn't impose such onerous requirements.

The FMA does say that mandatory climate reporting is coming in the US, Singapore, Hong Kong and Canada and it notes voluntary climate-related reporting is common in these countries.

But did NZ have to be first? And will these other countries impose such draconian penalties?