Hot ticket to the game

It will come as no surprise to directors that consumer preferences around sustainability, climate change and ethics are changing quickly. What we are seeing is the companies who are responding quickly to these consumer changes are starting to perform better than their peers in this tough operating environment.

Businesses embracing the demand for purpose-driven products and services are seeing the upside in revenue, margin, brand strength and ultimately shareholder value.

There are other benefits in catering to these changing consumer demands for ethical products and they include easier access to debt, access to equity through investors and a greater share of the talent pool.

ASB is observing this last trend in real time with many 18-year-olds to 30-year-olds seeking out strong values and commitment to community and the environment.

According to Bloomberg, global investment in Environmental, Social and Governance assets, or businesses that prioritise ESG, is expected to reach more than US$50 trillion by 2025. You read that right, USD$50 trillion or about NZ$88 trillion in approximately two years.

Whether your sales are business-to-business or business-to-consumer, tackling the challenge of climate change is now becoming a ticket to the game. Without it, businesses can find themselves locked out of a rapidly growing market.

In addition to changing consumer preferences, there are upstream changes underway as supply chain requirements for disclosure of large corporates start to flow through to the businesses they work with and supply to. Increasingly, big businesses will be requiring small businesses to disclose their carbon intensity and other metrics.

Looking downstream, business customers in higher emitting sectors will be asked by banks what their emissions are and will over time find it harder to source competitive debt capital to grow and protect their business from disruption.

In New Zealand, there are some great examples of businesses that are embracing this opportunity. Kathmandu is using circular economy principles in their apparel. Icebreaker outerwear is another 27-year-old industry pioneer that built their brand on merino, natural and premium products.

In fast-moving consumer goods, Pic’s Peanut Butter are certified carbon zero with climate positive status, as are Chia Sisters, from Nelson, who are also Living Wage and B Corp certified.

Central mandate for change 

In many ways the impetus for business to change is coming from consumers and their buying preferences, so in this sense governments around the world are playing catch-up. Nonetheless, as governments pledge net-zero commitments over various timeframes the focus is shifting to regulatory settings for large enterprises, such as banks.

All major New Zealand banks and financial institutions must now understand and report on the carbon intensity of their largest customers by 2023 in line with the Task Force on Climate-related Financial Disclosures (TCFD). In addition to banks, around 200 other New Zealand entities will be required to produce climate-related disclosures, including:

• All registered, credit unions, and building societies with total assets of more than $1 billion.
• All managers of registered investment schemes (other than restricted schemes) with greater than $1 billion in total assets under management.
• All licensed insurers with greater than $1 billion in total assets or annual premium income greater than $250 million.
• Listed issuers of quoted equity securities with a combined market price exceeding $60 million.
• Listed issuers of quoted debt securities with a combined face value of quoted debt exceeding $60 million.

Many directors will already be involved in these discussions with their financial partners as they are happening right now across the country.

The ASB Climate Report, released in September, is an initial assessment of the challenges and opportunities that climate risk may bring and how businesses will be supported on this journey.

While a large part of the report focuses on home and personal lending, it also looks at the impacts for, and risk of, climate change for businesses and directors. For the private sector it largely focuses on transition risk and also physical risk for food and fibre producers, and the commitment to back them to adapt to a changing environment.

The transition journey can be hugely complex and costly if not done well. This means actively supporting businesses and farmers with sustainable finance to help them reduce emissions and adapt. Examples of this include the Asset Finance Sustainability package, Green Buildings, Sustainability Linked Loans, Sustainable Transition Loans and the award-winning Rural Sustainability Loan.

The Reserve Bank’s Funding for Lending programme is also being utilised to support projects that meet sustainability or regional infrastructure criteria.

Guidance and advice is also important. In preparation for enhancing customers’ ability to transition and thrive in a net-zero future, investment in the capability of people is a priority.

In practice, this means relationship teams will be equipped to have a lot more conversations with business customers to understand what they are doing and how their ESG performance can be accelerated.

A carbon measuring, reporting and reduction tool is also being piloted. It will use automation to collect and process supplier invoice and ledger data, to generate a carbon footprint for businesses. While the pilot is limited to a small group of customers, the purpose is to help customers get a better understanding of their emissions profile to take tangible action to improve their carbon footprint.

There is a lot more that needs to be done to help New Zealand move towards a net-zero future, but one thing is clear. The opportunities arising from a proactive response to climate change should be a hot topic around the board table.