ROOM - PLUS: CHALLENGING AUDIT SCHOOL BOARD SHUFFLE DIGITAL RESILIENCE - IOD NZ
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board
FEB/MAR 2020
room
Magazine of the Institute of Directors in New Zealand
Plus:
Challenging audit
School board shuffle
Digital resilience
BOARDROOM DETAILS
boardroom SENIOR LEADERSHIP TEAM
Chief Executive Officer
BOARDROOM IS PLEASED
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INSTITUTE OF DIRECTORS IN NEW ZEALAND (INC) Dr Helen Anderson – Wellington
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The Institute of Directors has staff based Sarah-Jane Weir – Nelson PRODUCTION NOTES
at the National Office in Wellington, an office Marlborough Every effort has been made
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For National Office, phone 04 499 0076. sourced and produced using
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Kirsten Patterson, Chair; shown below.
Vincent Pooch, Dr Alison
Harrison, Alan Isaac
BRANCH MANAGERS
For a full list of branch managers,
see page 40.
When you have finished with
this magazine, please recycle.
CONTENTS
A note from the editor
The Agenda
This issue, we look at climate action and
moves by the government to introduce
mandatory disclosure requirements.
It is a rapidly-changing area of reporting
and governance and, whatever final form
the regulations take, directors would FEB / MAR 2020
be wise to keep an eye on local and
international developments. The IoD
14
has recommended to government that it INSIDE IoD
consider exempting smaller organisations
from any new mandatory requirements. 02 CEO letter –
A time for action
Continuing the climate theme, we look
at how boards can begin to think about
04 Upfront
the potential long-term impact of climate 38 Events
change on their organisations, perhaps
using a Three Horizons framework. 40 Out & about
The challenges facing auditors, and how
regulatory change or economic shifts FEATURES
could impact on audited accounts, are
explored through the eyes of outgoing 12 Climate science
External Reporting Board (XRB) Chief REPORTING
Executive Warren Allen and Financial CLIMATE IMPACTS 14 Reporting climate
impacts
Markets Authority Chief Executive
20
Rob Everett.
24 Challenging audit
We also highlight other changes in the
New Zealand governance landscape,
28 Change for school boards
touching on school boards, the impact
of technology and the importance of
30 Digital resilience for
directors
digital resilience.
33 Non-resident
It reads like 2020 is well underway director fees
already, doesn’t it?
34 Mapping social networks
36 Mentor notes
Aaron Watson ADAPTING TO CLIMATE-
Boardroom editor RELATED FINANCIAL RISKS AND FROM OUR PARTNERS
OPPORTUNITIES / KPMG
20 Adapting to climate-
related financial risks and
34
opportunities / KPMG
Boardroom is the magazine Cover and feature photo by
of the Institute of Directors MAPPING SOCIAL Daria Shevtsova from Pexels.
in New Zealand. iod.org.nz NETWORKS
Feb/Mar 2020 1
CEO LETTER
A time
for action KIRSTEN PATTERSON
CEO, INSTITUTE OF DIRECTORS
Tēnā koutou katoa
“ Red sky at night, shepherd’s
delight. Red sky in the
morning, shepherd’s warning.”
Anyone holidaying in New Zealand over In one of my first Boardroom letters Climate change has been in our “Top 5
the Christmas break would have had a when I joined the IoD in 2017 I wrote: Issues for Directors” three times in the
hard time relying on the old weather poem “Climate change is not ‘fake news’, past five years. This year we deliberately
as dust particles from the Aussie bush and sustainability is not just about the and consciously changed the concept to
fires turned the sky red all day. environment. In fact, climate change is climate action. The recent IoD/ASB 2019
becoming main stream and is now critical Director Sentiment Survey shows a lift
Much of our climate change discussion to long-term business sustainability.” in the number of boards that said they
here in New Zealand has focused on were engaged and proactive on climate
rising sea levels – too much water – Since then we have had NZ legislation change, but it was still only 35%, up from
while for our colleagues across the ditch introduced and we have had a legal 29% in 2018.
the rising temperatures mean they don’t opinion from the The Aotearoa Circle’s
have enough. Sustainable Business Forum confirming It seems 65% of us have more work to
that directors must assess and manage do this year.
If you have read BlackRock’s recent letter climate risk as they would any other
to CEOs, released on 15 January, you financial risk as “climate change presents
could be forgiven for thinking the author, a foreseeable risk of financial harm to
Larry Fink, has been reading Boardroom many businesses”. Ngā mihi
magazine and keeping up to date with the
IoD’s “Top 5 Issues for NZ Directors”. Our own Four Pillars of Governance Best Kirsten KP
Practice says at 1.3 Sustainability:
He writes that “climate change has
become a defining factor in companies’ • F ocusing on key strategic, social,
long-term prospects” and that “climate governance and environmental
change is almost invariably the top risks, and long-term business
issue that clients around the world raise sustainability, is fundamental to
with BlackRock”. He emphasises that good governance.
he believes we are “on the edge of a • T
o create value in a sustainable
fundamental reshaping of finance” manner requires organisations
that “climate risk is investment risk” to shift from short-term to long-
and that “every government, company term thinking.
and shareholder must confront
climate change”. • T
ransparency of corporate activities
and intentions helps build trust,
In echoing another of the Top 5 issues and aids business resilience and
we have identified for 2020 he also long-term sustainability.
emphasised that: “Ultimately purpose is
the engine of long-term profitability.” • T
he role of business is critical in
transitioning to a sustainable world.
2 BOARDROOM
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UpFront Director
Vacancies
Davos 2020 Director Vacancies is a cost-effective
way to reach our extensive pool
Stakeholders for a Cohesive and Sustainable World was the theme of the of membership talent. We will list
50th annual meeting of the World Economic Forum (WEF) held in Davos, your vacancy until the application
Switzerland in January. Over 3,000 business and world leaders (including deadline or until you find a suitable
President Trump and Greta Thunberg) from more than 100 countries came candidate. A full list of vacancies can
together to debate global issues of a political, economic, environmental be viewed at iod.org.nz
and social nature and to encourage international cooperation. Highlights
from the meeting include: Contact us on 0800 846 369
a shift in focus from technological the new 2020 edition aims to achieve Unless otherwise stated, the following
transformation to stakeholder “a better kind of capitalism” to positions will remain open until filled.
capitalism strengthen the long-term prosperity
of a company INSTITUTE OF DIRECTORS
stakeholder capitalism was promoted Role: IoD Canterbury Branch Committee
with the launch of the new Davos a major focus on the climate Closes: 18 March
Manifesto, The Universal Purpose of emergency with a greater
a Company in the Fourth Industrial understanding of the investment CARE GROUP
Revolution. The first edition of the risk of global heating. Role: Independent Director
Manifesto was published in 1973 and Closes: 14 February
ACTION ENGINEERING LTD
Role: Board members (2)
Closes: 17 February
Climate tops global risks TE WHARE POUNAMU DUNEDIN
WOMEN’S REFUGE
The WEF’s Global Risks Report 2020 reveals the top five risks in terms of likelihood Role: Board member
and impact. Ten years ago no environmental risks made the top five in terms of Closes: 31 March
likelihood – in 2020 all five are environmental:
TRUST TAIRĀWHITI
Likelihood 2020 Likelihood 2019 Impact 2020 Impact 2019 Role: Director
Closes: 31 March
1 Extreme weather Extreme weather Climate action Weapons of mass
failure destruction
2 Climate action Climate action Weapons of Climate action
3
failure
Natural disasters
failure mass destruction failure
Natural disasters Biodiversity loss Extreme weather
Be prepared
As the economic impact of COVID-19
4 Biodiversity loss Data fraud Extreme weather Water crises becomes clearer, and bushfires continue
or theft to threaten Australia, businesses around
the world and in New Zealand are
5 Human-made Cyberattacks Water crises Natural disasters increasingly considering potential effects
environmental on their organisations, including people,
disasters services and supply chains.
Our article “Preparing for the unexpected”
This 15th edition of the report warns that “The world cannot wait for the fog of provides information for directors to help
geopolitical and geo-economic uncertainty to lift’ and that quick action is needed prepare for challenging times. Read it at
“on key issues such as the economy, the environment, technology and public health.” iod.org.nz
4 BOARDROOM
UPFRONT
New Year Honours 2020
The Institute of Directors congratulates the following members who have received honours
in recognition of the contribution made in their respective fields.
COMPANIONS OF THE NEW ZEALAND Suzanne Mary Sinclair, of Auckland.
ORDER OF MERIT (CNZM) For services to the community and governance.
Robert James Campbell, of Auckland.
For services to governance and business. Stephen John Tew, of Wellington.
For services to rugby and sports administration.
Anthony John Carter, of Auckland.
For services to business governance. MEMBERS OF THE NEW ZEALAND
ORDER OF MERIT (MNZM)
OFFICERS OF THE NEW ZEALAND Donald William Scarlet, of Hamilton.
ORDER OF MERIT (ONZM) For services to conservation.
Susan Jane Kedgley, of Wellington.
For services to women and governance. COMPANIONS OF THE QUEEN’S
SERVICE ORDER (QSO)
Annette Margaret Milligan, of Nelson. John Morgan Williams, of Richmond.
For services to health, particularly nursing. For services to the State and the environment.
For further information visit dpmc.govt.nz
Consumer credit contract reform
In 2019, the Credit Contracts Legislation Amendment Bill received Royal assent making significant changes to the Credit
Contracts and Consumer Finance Act 2003 (the Act). New provisions are intended to address issues in the credit market including
strengthening requirements to lend responsibly and address harm to vulnerable customers. Directors of creditors (lenders) subject
to the Act need to be aware of their new responsibilities and potential liability.
From 1 June 2020, there will be a duty “Due diligence” includes taking There are new pecuniary penalties of
on directors and senior managers of reasonable steps to ensure that up to $200,000 for an individual and
a creditor to exercise due diligence to the creditor: $600,000 in any other case. There
ensure that the creditor complies with are also restrictions on indemnities
its duties and obligations under the Act requires its employees and agents to and insurance in relation to pecuniary
and associated regulations. They will be follow procedures, or has implemented penalties including for directors and
required to exercise the care, diligence, automated procedures, that are senior managers.
and skill that a reasonable director or designed to ensure compliance with
senior manager would exercise in the the Act and regulations Directors and senior managers of a
same circumstances, taking into account: has in place methods for creditor (or a mobile trader) offering
systematically identifying deficiencies consumer credit contracts will also have
the nature of the business to meet a “fit and proper person” test
(for example, its size and the nature in the effectiveness of the procedures
for compliance in order for the creditor to register on
of the credit provided) the Financial Service Providers Register.
the position of the director or senior promptly remedies any deficiencies There are exemptions including if
manager and the nature of the discovered. creditors are already licenced (eg banks
responsibilities undertaken by the and non-bank deposit takers).
director or senior manager.
Feb/Mar 2020 5
A fundamental Question: Under which duty in
reshaping of finance the Companies Act 1993 would
you expect directors to have
regard to climate change in
In his annual letter to CEOs around the world, Larry Fink (Chair and CEO of the making decisions?
world’s largest investment company, BlackRock) says that climate change will cause
a transformational reallocation of capital towards sustainable investments and A. D
uty to act in good faith and in
bring about a fundamental reshaping of finance – ultimately helping achieve a more the best interests of the company
sustainable and inclusive capitalism for greater longer-term prosperity. Key points in B. D uty to act for a proper purpose
Fink’s letter include:
C. D uty to comply with
Equating climate risk to investment risk Giving notice that if companies don’t the Companies Act and
and announcing that BlackRock would effectively address material issues it constitution
place sustainability at the centre of will hold directors and management D. D
uty to exercise
its investment approach, for example accountable (by voting against them). reasonable care
exiting investments in coal production.
Fink concludes that the climate crisis is
Re-iterating the importance of fundamentally different to the various
stakeholder interests and embracing financial crises and challenges of the
purpose as ‘the engine of long-term past 50 years and that ‘companies,
profitability.’ investors and governments must prepare
Asking that companies it invests in for a significant reallocation of capital’ ANSWER
improve disclosures and report: including in response to the increasing D. The Aotearoa Circle’s 2019
demands of the next generation for legal opinion on directors’
sustainability information in line more transparency and action in order duties and climate change
with the Sustainability Accounting to achieve a more sustainable and available at aotearoacircle.nz
Standards Boards (SASB) inclusive capitalism. states that “directors of New
guidelines; and Zealand companies are
Larry Fink’s letter is available at generally permitted, and will
climate related risks in line with blackrock.com in many contexts be required,
Taskforce on Climate-related to take climate change into
Financial Disclosures (TCFD) account when making business
recommendations. decisions. The requirement
stems principally from the
directors’ duty to act with
The trust paradox reasonable care”.
The Edelman Trust Barometer 2020 report, launched at Davos, shows a growing
sense of inequality is undermining trust in institutions. Now in its 20th year, the survey Empowering
measures trust in four institutions around the world; business, government, media and
NGOs. Global highlights from the 2020 report include: small business
The Small Business Council delivered its
Despite strong economic performance 56% said capitalism as it exists
small business strategy to the government
and near full employment no institution today does more harm than good
in 2019 with key recommendations to
is trusted - a trust paradox. in the world.
improve access to finance, build capability
For the first time business is seen 83% of employees fear losing and skills, and shift from compliance
as the most trusted institution on their jobs. to enablement. In December, the
key issues. government announced its support for
92% expect CEOs to speak up about the recommendations and agreed
73% believe companies can both issues such as future of work, to implement initiatives to support small
increase profits and improve conditions income inequality, climate change business owners. The IoD endorsed
in communities. and diversity. the importance of good governance
Ethics is three times more important to small business and backs the move
to company trust than competence. to build capability and reduce the
compliance burden.
6 BOARDROOM
UPFRONT
Five questions with…
Leeson Baldey, Associate
NELSON BRANCH COMMITTEE
2. How did you find yourself on 4. If you had one tip for a person
a branch committee? interested in a governance career,
what would it be?
I was inspired by my early experiences
with the IoD and wanted to share this with Get connected. There is a wealth of
my colleagues, clients and professional knowledge and experience in our member
network. As such, I arranged a “Meet the base which is there to be leveraged and
IoD” evening at work where we invited learned from. This will give you insights
30-odd guests along to learn about how that cannot be read in books.
the organisation can help with personal/
professional development. The night was 5. What’s the one gadget you find
a hit. Not long after that I was co-opted indispensable?
onto the local committee.
Leeson and Julia Baldey.
My Thoren’s turntable. I believe it is
3. Why do you feel it is important important to be able to switch off and
1. Why did you join the IoD? to give back to the IoD? make time for yourself and family.
I have had an interest in governance for People development and governance
some time and was looking for a way to education are important to me. My role
connect with like-minded people. A friend in the IoD allows me the opportunity to
recommended I attend an IoD luncheon promote, and inform others as to, what
to see if the organisation was something is available through the organisation.
for me. Five years later here we are.
New governance Our policy and advocacy
resources for 2019 was another busy year for the IoD in and Training Bill, the Financial Markets
SMEs advocating on issues relevant to directors
and governance. We advocate through
formal submissions on a range of policy
(Conduct of Institutions) Amendment Bill
and the Public Service Legislation Bill.
The IoD, working with the business. and legislative matters and promoting our A continuing key area of focus for
govt.nz and the Companies Office, views through the media. the IoD in 2020 will be on laws and
helped produce a new suite of online regulations seeking to increase director
governance resources to enable and The first half of 2020 is set to be the same responsibilities and personal liability.
equip directors of SMEs with the tools as the government priorities policy and For more on this see our article “Balance
they need to succeed. These resources legislative changes before the country of responsibilities” in the Aug/Sept issue
include modules that look at why good goes to the polls. A number of bills with of Boardroom 2019.
governance is important and how it can governance implications are still making
help businesses to run smoothly, achieve their way through the legislative process
goals and maintain a good reputation. including the Privacy Bill, the Education
The resources are available at
business.govt.nz
Feb/Mar 2020 7
Improving conduct Individual accountability
of financial in financial services signalled
institutions Following a global trend, New Zealand is eyeing an “executive accountability regime”
to hold individuals to account in financial institutions. The United Kingdom led the way
Reforms aimed at improving the conduct several years ago in enacting a “senior manager regime” to improve behaviour and
of financial institutions and their culture in organisations after a number of high profile scandals. Australia and Hong
intermediaries in providing services and Kong have implemented similar regimes, and Singapore and Ireland are also exploring
products to consumers are included in the options to increase individual accountability.
Financial Markets (Conduct of Institutions)
Amendment Bill. This introduces a The government announced in December that the accountability of directors and
licencing regime for banks, insurers and senior managers of deposit takers will be strengthened under Reserve Bank reforms,
non-bank deposit takers and includes including by:
requirements for:
financial institutions and intermediaries imposing duties to ensure that a enforcing obligations largely under
to comply with a ‘fair conduct principle’ deposit taker is run in a prudent a civil liability framework rather than
to treat consumers fairly including by manner, acts with honesty and a criminal framework (although there
having regard to their interests integrity, and deals with the Reserve will still be criminal sanctions for cases
Bank in an open and transparent of clear intent or recklessness on the
financial institutions to establish, manner and part of directors).
implement, and maintain an effective
‘fair conduct programme’ which
operationalises the fair conduct Consultation is expected in February 2020.
principle through policies, processes,
systems, and controls throughout At this stage, it is not clear how the accountability regimes will work together.
the business (from the governance The IoD will continue to engage with policymakers and stakeholders on the design
level to day-to-day interactions and scope of the accountability regimes including to ensure that any proposed
with consumers) responsibilities and liability of directors are proportionate and appropriate.
financial institutions and Accountability requirements for directors and senior managers of deposit takers
intermediaries to comply with the and insurers in respect of conduct are expected to supplement provisions in the
fair conduct programme (and that Financial Markets (Conduct of Institutions) Amendment Bill. These requirements
financial institutions ensure that will be under the remit of the Financial Markets Authority.
intermediaries comply)
financial institutions and intermediaries
to comply with regulations in relation KEY IN-PRINCIPLE DECISIONS BY CABINET ON THE FUTURE
to incentives based on volume or value OF THE RESERVE BANK:
sale targets.
Responsibility for prudential The two separate regulatory regimes
In addition to the requirements for regulation will remain with the for banks and non-bank deposit
institutions described above, new Reserve Bank. takers will be united into a single
accountability requirements for directors “licensed deposit taker” framework.
The Reserve Bank will have a
and senior managers of deposit takers high level objective to protect A deposit insurance scheme will be
and insurers in respect of conduct are and promote the stability of established (insuring deposits up to
expected to be introduced at some stage New Zealand’s financial system. $50,000 per person, per institution).
to supplement the reforms in the Bill.
A governance board will be
established for the Reserve Bank.
This will have statutory responsibility
for all the Reserve Bank’s functions,
except those reserved for the
Monetary Policy Committee.
8 BOARDROOMUPFRONT
New
APPOINTMENTS
Chartered Fellows
Pania Gray Congratulations to our members who became Chartered Fellows in 2019.
Chartered Member, has been This is the highest award in the IoD’s Chartered pathway and is bestowed
appointed to the board of the New on members whose knowledge, character and experience makes them a role
Zealand Film Commission. model for other members, their organisations and the community.
Peter Batcheler, Bob Major,
Olivia Hall Auckland Bay of Plenty
Member, has been appointed to
the Nelson Marlborough District
Jenny Black, Jonathan Mason,
Health Board.
Nelson Marlborough Auckland
Anita Killeen Mary-Jane Daly, Ian McInnes,
Associate Member, has been Auckland Canterbury
appointed an independent
director of the Domain Name
Commission Ltd. Mark Darrow, Giselle McLachlan,
Auckland Otago Southland
Lady Tureiti Moxon Bev Edlin, Bay of Rosanne Meo,
Chartered Fellow, has been Plenty Auckland
appointed to a new panel of Māori
advisers to the Chief Ombudsman.
Abby Foote, James Miller,
Canterbury Auckland
Samantha Sharif
Chartered Member, has been John Gallaher, Otago Joe O’Connell,
appointed to the Board of MOTAT, Southland Otago Southland
the Museum of Transport and
Technology.
Alison Gerry, Otago Neil Paviour-Smith,
Southland Wellington
David Wright
Member, has been appointed Catherine Harland, Deryck Shaw,
to the board of the New Zealand Auckland Bay of Plenty
Film Commission.
Douglas Hill, Otago Aaron Snodgrass,
Southland Auckland
Peter Hughes, Roger Sowry,
Wellington Wellington
Don Huse, Paul Steere Nelson,
Auckland Marlborough
Clare Kearney, Craig Stobo,
Otago Southland Auckland
Tim Loan,
Otago Southland
Feb/Mar 2020 9NEW MEMBERS
Welcome Welcome and congratulations
to the newest members of the
institute of Directors.
New Members December-January
AUCKLAND CANTERBURY
Tim Boyle Glen McLatchie Stuart Anderson
Jon Brough Andrea McLeod Katrina Azer
Nicole Buisson Bryce Moffat Nathan Breckell
Terence Burns Stephanie Poole David Broderick
Phil Cameron Jun Qi Qi Jenn Chowaniec
Ryan Campbell Jarrod Renall Lesley Crichton
Rhys Clark Faiz Salim Kara Edwards
Jan Clark Sooz Sawbridge Cam Finlayson
Tracey Cross Andy Schmidt Richard Fitzgerald
Mark Denvir Ana Sever Mark Ginnever
Andrew Eagles Greg Stone Carol Glover
Simon Edgar Pam Tregonning Anthony Honeybone
Paul Evans Alan Van der Nagel Warren Ladbrook
Anson Gao Helen van Orton Keith Land
Stephen Glading John Wadsworth David Lindsay
Tabetha Gorrie Michelle Walsh Latham Martin
James Grieve Gill Webb Craig Palmer
Dee Hackett Katrina Winn Rob Reid
Wendie Hall Chloe Xue Andy Rowden
Angela Henderson Benita Wakefield
Paul Herrod BAY OF PLENTY Tristan Williams
Jason Hill Ngarangi Bidois
Anna Howard Colin Boggiss
Andrew Hunter NELSON
Phillip Claydon MARLBOROUGH
John Hunter Sally Cooke John Armstrong
Mark Hutchinson Hinemaua Rikirangi Otago Southland
Dylan Hutt Stacey Rose Catherine Bone
Robert Khan Jess Rule Keri Bryan
Lisa Kingi-Bon Will Samuel Fiona Clarkson
Donald Lawrie Hingatu Thompson James Heath
Andrew Lazootin Geoffrey Thorpe Maria Larcombe
Xingyao Li Li
Julie Scott
Angela Lim
Laura Warren
Ana-Marie Lockyer
Sarah Longbottom
Steve Main
Donald Mann
10 BOARDROOMTARANAKI WELLINGTON Hayley Horan
Sam Bennett Raewyn Bleakley James Hudson
Bali Haque Mark Carver Candice Johanson
Liam O'Sullivan Will Chaney Matire Kupenga-Wanoa
Eddie Christian Kaleb Leeming
Michael Finlayson Anna Moodie
WAIKATO Mark Ford Simon Norrie
Dean Gittings Debbie Gee Vanessa Powell
Adam Lynch Simon George Moe Robinson
Corne Mackie Sumati Govind Simon Taylor
Rena Schuster René Hattingh Ayesha Verrall
Kate Taylor Renee Hogg John Witkowski
For further information on how TwoBlackLabs can assist you with your privacy or training requirements please email us
on info@twoblacklabs.co.nz or visit our website www.twoblacklabs.co.nz
Feb/Mar 2020 11Climate
science
Human activity Heat Sea level
GLOBAL GLOBAL GLOBAL
Climate change is a consequence of The UN Emissions Gap Report 2019 says The seas are rising (on average) due to
increased greenhouse gases in the global temperatures have risen by 1.1% an influx of water from melting ice and
atmosphere, which trap heat. (versus a baseline temperature in the 150 volume expansion due to being warmer.
years before 1900). In 2014, the average was 2.6cm above the
Our extraction from the ground and 1993 average.
consumption of fossil fuels such as oil, Scientists fear that a rise of more than
petroleum and coal has contributed to 1.5% could trigger severe impacts. Under It is projected to rise one metre by 2100
a 52% increase in carbon dioxide levels the Paris Agreement of 2016, the global if global greenhouse gas emissions are
(a key greenhouse gas) in the temperature is expected to rise 3.2% not curtailed.
atmosphere between 1990 and 2016. by 2100.
Six million people live in areas vulnerable
We need to reduce greenhouse gas The average global temperature has been to projected sea level rises this century,
emissions 7.6% per year up to 2030 to higher each decade since 1980 than in all even if the temperature rise is curtailed
limit the global temperature rise by 2100 records back to 1850. at 1.5%.
to 1.5%, considered a tipping point for
extreme climate impacts. Glaciers, permafrost and the continental NEW ZEALAND
ice in the Arctic and Antarctica is melting
More than 11,000 scientists signed a letter – which contributes to rising seas. The The sea level has been rising at around
published in the BioScience journal in Arctic has seen a 13% decrease in sea ice 3mm per year for the past 25 years.
November 2019 warning that “the climate since 1979.
crisis has arrived”. The seas around New Zealand are
NEW ZEALAND expected to rise 5-10% more than the
NEW ZEALAND global average rise.
Three of the past five years have been
New Zealand’s greenhouse gas emissions among the hottest on record.
have risen by 20% since 1990.
November 2019 was the hottest
November on record.
The ice volume of the Southern Alps
has been reduced by a third over the
past 40 years.
12 BOARDROOMFEATURE
TEMPERATURE –
What is climate action?
ANNUAL CHANGE
1995-2090 (C)
24 Most common models
2.9% increase
How four businesses around the
globe are integrating “climate
action” in their operations.
2.8% increase
The number one priority in our “Top Five Issues for Directors in 2020”
(Boardroom, December/January) was climate action.
But what does climate action mean? Here, we review some of the recent
2.7% increase examples of businesses around the globe finding ways to incorporate it
2.5% increase into their activities. Each of these initiatives was announced in January.
2.4% increase Expect to see more as 2020 progresses.
2.3% increase
2.2% increase
BLACKROCK EXITS THE BLACK WESTPAC NZ MAKES CONTACT
(OR BROWNISH) ROCK ENERGY A SUSTAINABILITY-
LINKED LOAN
The world’s biggest fund manager
has announced it will divest itself of In a New Zealand first (with a small “f”)
Weather shares in thermal coal (the kind used
in electricity generation).
Westpac NZ has extended Contact
Energy a NZ$50m sustainability-linked
loan facility.
GLOBAL BlackRock got good press for the
announcement, which was made as Contact receives a lower interest
Global weather patterns are becoming part of CEO Larry Fink’s annual letter rate if it meets targets linked to its
more extreme – extreme heat, more to chief executives. It shows the US$7 environmental, social and governance
powerful storms than expected and trillion investment manager accepts the (ESG) rating (as determined by
a heightened risk of droughts and, risk that climate change poses to its RobecoSAM).
concomitantly, floods. business and the planet and is seeking
to mitigate this. It’s an interesting example of industries
NEW ZEALAND working together to find was to take
It will continue at this point to maintain action that will benefit the climate, the
Storm damage has cost $800m over the stakes in major oil companies including planet and the businesses themselves.
past five years. NIWA predicts extreme BP, Shell and ExxonMobil.
rainfall and intense thunderstorms will MICROSOFT GOES FOR
continue to become more common. TIFFANY SAYS CLIMATE NEGATIVE CARBON
CHANGE IS FOREVER
Microsoft wants to remove from the
As Australia swelters and fires rage, environment all the carbon it has
Tiffany & Co ran newspaper ads urging emitted since 1975. To do this, it plans
Prime Minister Scott Morrison to take to begin removing more carbon from
Global data is drawn from the climate action seriously. the environment than it emits.
UN Emissions Gap Report 2019.
Data for New Zealand is drawn from It’s another sign of climate change Chief Executive Satya Nadella says
the National Institute of Water and being seen as good marketing for Microsoft could be carbon negative by
Atmospheric Research (NIWA – global organisations, but also reflects 2030 and to have balanced its carbon
Taihoro Nukurangi). an awareness that businesses and ledger since founding by 2050.
politicians must find ways to work
together if the worst risks of climate “When it comes to carbon, neutrality is
change are to be avoided. not enough,” said Microsoft president
Brad Smith.
As Tiffany’s advertisements said:
“The disaster of climate change is too
real, and the threat to our planet and
to our children is too great.”
Feb/Mar 2020 13Reporting
climate
impacts
Mandatory climate- AUTHOR:
SELWYN EATHORNE,
related financial SENIOR GOVERNANCE
ADVISOR AT THE IOD
disclosure is coming
14 BOARDROOMFEATURE
T he Productivity Commission’s 2018
Low Emissions Economy report noted
that climate-related financial disclosures
can be a powerful mechanism to focus
reporting entities on the impacts of
climate change on their own activities,
and that disclosure can enable investors
to make decisions across investment
opportunities that accurately reflect the
climate risk of those choices.
Some organisations in New Zealand are
already expected to disclose climate-
related financial information and others
are reporting voluntarily in a rapidly
evolving space. Following early adopters
overseas, the government has signalled
that it intends to implement a mandatory
disclosure regime.
The Ministry for the Environment and
the Ministry of Business, Innovation and
Employment consulted in December 2019
on introducing a mandatory, principles-
based climate-related financial disclosure
regime (on a “comply or explain” basis)
for listed issuers, banks, general insurers,
asset owners and asset managers.
It has been proposed that the Task Force
on Climate-related Financial Disclosures
(TCFD) reporting framework could be
used as a default framework. Other
suitable frameworks such as Integrated
Reporting and the Global Reporting
Initiative could also be used.
The TCFD is mainly concerned with the
impacts of climate change on companies
rather than impacts of the companies on
the environment.
Photography - Daria Shetsova from Pexels.
Feb/Mar 2020 15What is
the TCFD? ADAPTATION REPORTING
UNDER THE ZERO CARBON ACT
The Climate Change Response (Zero
Carbon) Amendment Act 2019 enables
the Climate Change Minister and the
new Climate Change Commission
In 2015, the Financial Stability Board The TCFD recommends 11 areas of to request certain organisations (eg
established the Task Force on Climate- disclosure within four thematic areas: public service organisations, Local
related Financial Disclosures and Authorities, SOEs, Crown Entities
asked it to develop a set of voluntary Governance – disclosing the (excluding school boards) and Lifeline
climate-related financial disclosures that organisation’s governance and Utilities) to provide information on
companies could use when providing management around climate-related climate change adaptation, which is
information to stakeholders. risks and opportunities. relevant to National Adaptation Plans
Strategy – disclosing the actual produced by the government.
The TCFD identified two types of and potential impacts of climate-
climate-related risks: related risks and opportunities on the
organisation’s businesses, strategy, For further information on how
Transition risks (policy risk, litigation organisations can approach climate-
risk, technology risk, market risk and and financial planning where such
information is material. related disclosures see:
reputational risk).
Risk management – disclosing how the TCFD Implementation Guide
Physical risks (both event driven (eg
extreme weather) and driven by long- organisation identifies, assesses, and TCFD Good Practice Handbook
term shifts in climate patterns). manages climate-related risks.
UK Financial Reporting Lab’s Climate-
Metrics and targets – disclosing the related Corporate Reporting resource
metrics and targets used to assess
and manage relevant climate-related McGuiness Institute’s The Climate
risks and opportunities where such reporting emergency: A New Zealand
information is material. Case Study
16 BOARDROOMFEATURE
OUR VIEW
In our submission on the proposed (eg assets/revenue) given the existing is cohesive for organisations intent on
new regime, we agreed that the TCFD disclosure burden (particularly for developing more holistic reporting and
framework would be appropriate for listed companies) and costs associated aligns with other common reporting
climate-related financial disclosures with complying frameworks (eg integrated reporting)
in New Zealand. We note that the agreed that mandatory assurance
proposed “comply or explain” approach aligns (and can be integrated) with
obligations should not be imposed any other reporting obligations
to implementing the TCFD framework at this stage
can support good governance and that organisations may have to the
provides flexibility and proportionality encouraged government guidance, government (for example under the
for organisations to report in a way that education and support to help Climate Change Response (Zero
is appropriate and meaningful relevant organisations report effectively. Carbon) Amendment Act 2019) and
to their circumstances. We also: the frameworks and requirements of
Corporate reporting is continuing to other agencies such as the External
raised questions about how the change and there are many different Reporting Board. This will also be
proposed mandatory requirements will reporting frameworks in place globally. important if mandatory assurance
fit with the principles-based nature It is important that any mandatory is introduced at a later date
of the TCFD framework, and how it is climate-related financial disclosure regime can be incorporated into companies’
intended to be implemented, monitored in New Zealand provides a foundation annual reports in a cohesive way that
and enforced framework that: avoids unnecessary repetition
agreed that disclosure should apply to is flexible enough to allow ensures there is alignment with the
listed issuers, banks, general insurers, organisations to evolve their reporting roles and responsibilities of existing
asset owners and asset managers as needs and demands in this area reporting and regulatory bodies (such
but we consider that there should change, including if other entities are as the Financial Markets Authority).
be exemptions for some smaller included in the regime at a later date
organisations below a certain size
Feb/Mar 2020 17FEATURE
Thoughts from outgoing
External Reporting Board Chief
Executive Warren Allen
“There is a big shift from short- in the long term? Thank goodness report on, citing environmental
termism when we talk about listed that is the new thinking. damage, modern slavery issues,
companies – the profit for the next gender, diversity and remuneration.
three months, six months or year. “Directors cannot just look at the
Investors are very much more immediate impact of climate change “If these issues are significant to
interested in how they can be sure the on this year’s results. For example, an entity, have an impact on the
business will still be there in ten years. future flooding of a coastal plant would sustainability of an entity, have
That’s been a real revolution in the be considered in the valuation of that an impact on the valuation and
past five or six years,” Allen says. plant. It doesn’t have the same valuation profitability of an entity, then
of a plant up the hill that in ten years directors need to make sure they
“The big funds and investor groups is not going to be flooded. Even if the are identified, managed and
want to know that, if they are impact is ten years out, it may well have reported on,” he says.
investing in you, that the value will be an impact on your valuations now.
maintained and enhanced for five to “The Companies Act and the
ten years. They are less interested in Allen notes that climate change is responsibilities of directors require
the outlook for six months. What are just one of many issues that directors them, already, to be managing and
you doing to create and maintain value today should ensure their organisations reporting on these types of issues.”
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2017 & 2018Adapting to
climate-related
financial risks
and opportunities
Successful climate action requires businesses
to focus on adaptation, not just emmissions.
AUTHOR
DR CHARLES EHRHART,
DIRECTOR, CLIMATE CHANGE AND
SUSTAINABILITY SERVICES, KPMG
O pening the United Nations annual
climate talks (COP25) in Madrid
this past December, Secretary-General
latter focused almost exclusively on
reducing greenhouse gas emissions.
transition to a low-emissions economy and
accelerated adaptation to a range of risks.
António Guterres said: “The point of no While necessary, ambitious emissions “Adaptation” is the process of anticipating,
return is no longer over the horizon.” reductions by business are no longer absorbing, accommodating and building
sufficient. Indeed, global mean long-term resilience to climate-related risks
During the following two weeks, temperatures have already risen more while capturing opportunities. According
representatives from almost 200 countries than 1 degree Celsius above pre-industrial to Mark Carney, outgoing governor of the
worked to negotiate a collective response levels, with greater than expected Bank of England: “Companies that don’t
to the climate crisis. Meanwhile, many consequences. adapt will go bankrupt, without question.”
corporate collaboratives – including Nonetheless, few businesses are giving
New Zealand’s Climate Leaders Coalition In order to avoid potentially catastrophic adaptation the same level of attention
(CLC) – used the event as backdrop to impacts, signatories to the 2016 allocated to emissions reduction. This
announce lofty goals. Paris Agreement have committed to failure is contrary to principles of the
keep total warming below 2 degrees Paris Agreement and places investors,
The contrast between government and Celsius this century. As a result of past employees, their communities and the
corporate discourse was stark, with the procrastination, this will require abrupt planet in jeopardy.
20 BOARDROOMFEATURE
IDENTIFYING YOUR COMPANY’S
CLIMATE-RELATED RISKS
To enhance the robustness, consistency, express themselves as losses in share (TCFD, 2017), the Intergovernmental
comparability, and utility of climate value or diminished access to equity and Panel on Climate Change (IPCC, 2014)
risk analyses, KPMG has developed an capital debt markets. and International Standards Organisation
analytical framework distinguishing (ISO, 2019). However, it differs from
between physical, transition, legal and KPMG’s framework builds upon models typical descriptions by treating avoidable
capital “pathways.” developed by the Task Force on liabilities and capital as distinct
Climate-related Financial Disclosure categories/pathways of risk.
Physical risks include long-term climatic
changes (eg higher temperatures and
shifting seasons) as well as their impacts RISK PATHWAYS
and implications (eg sea level rise and
increasing intensity and/or frequency
of extreme weather events). Unless Climate risks
counter-measures are taken, these Rising temperatures Sea Level Rise
changes can damage assets and affect
Changing rainfall patterns Changing frequency/intensity
production, operation, supply chains of extreme events
and employee safety. Physical
Environmental Regulation
Transition risks arise from the necessary
shift to a low-emissions, climate- Carbon price Climate litigation
resilient economy. Examples include Disruptive technologies Regulatory
new regulations that spike the cost of Consumer preferences Transition Legal
non-compliance
carbon; the development and deployment
of green technologies that affect
organisational competitiveness; changes Share value Access to capital
in supply and demand for certain goods
(eg imported foods), products (including Capital
insurance) and services (eg long-haul air
travel) as well as stakeholder perceptions
of a business’ positive or negative
contribution to climate change.
OPPORTUNITIES
Legal risks are avoidable liabilities that
stem, for example, from a company’s Early action can mitigate many physical business-benefit’ (aka. when life gives
failure to comply with rapidly evolving and legal risks. It can also transform you lemons, make lemonade) mindset.
regulations, fulfil increasingly complex some transition and capital risks into
fiduciary duties (including climate compelling opportunities. The Three Horizons (3H) framework
risk assessment and disclosure), can help. The 3H framework accepts
properly account for carbon assets/ The International Framework Standard that change is constant, competition
liabilities or address impairment in on Climate Change Adaptation (ISO restless and markets always evolving.
annual financial reports. 14090:2019) sets out principles, Within the context of adapting to
requirement, and guidelines for managing climate change, its value lies in
Capital risks accumulate as a result of climate risks. However, capturing climate- prompting organisations to challenge
unresolved physical, transition and legal related financial opportunities requires current practices, identify emerging
risks, crystalize around systemic changes shifting from a risk-reduction to a niches and question their core
occurring in the finance sector, and business model.
Feb/Mar 2020 21FEATURE
Horizon one asks: Three Horizons framework and adaptation to climate change
“What should we Value
do differently?”
Ideas may include reducing sensitivity Horizon 3
to the cost of carbon by cutting energy What should we become?
consumption (eg through investment in
LED lighting technology), adopting low-
emissions energy sources/providers, or Horizon 2
What should we do that’s new?
improving the efficiency of production
and distribution processes.
Horizon 1
Horizon two asks: What should we do differently?
“What should we do Time
that’s new?”
Regardless of whether an organisation it can use the 3H framework to support
Ideas could include developing low- already has a sophisticated methodology improved decision making and enhance
emissions products or services based for managing climate risks and market resilience.
on current assets/areas of expertise, opportunities or is just getting started,
accessing new markets through
collaboration with governments and
development banks supporting the shift to
a lower-carbon economy, and tapping new Steps to effective climate action
green financial products (eg sustainability-
linked loans) or services. Grounding Ensuring sound governance and climate risk management
processes. Good practice includes assigning oversight to
Horizon three asks: relevant board committees/sub-committees (eg audit and
“What should we risk committees) and identifying which internal and external
stakeholders to involve (as well as when and how).
become?”
Analysing Conducting a first-pass materiality assessment of climate-related
Some businesses will become marginal, or risks and opportunities. This assessment should consider direct
simply fail to fit, within the low-emissions and indirect (eg supply chain) risks stemming from the physical
economy of our future. Therefore, this is impacts of climate change, the transition to a low-emissions
about questioning core assumptions and economy, avoidable liabilities and access to capital.
pivoting from a sunset to sunrise business
model. It is about blending foresight and eveloping a range of plausible, distinctive, consistent
D
insight to avoid a Kodak-outcome. and relevant scenarios. These scenarios should challenge
conventional wisdom and simplistic assumptions about the
BOTTOM LINE future. Businesses may want to start with simple, yet robust,
qualitative scenarios. As they gain experience, businesses
Climate-related risks are no longer over at significant risk should consider building progressively
the horizon. Indeed, they pose a material, quantitative scenarios.
immediate and escalating threat to the valuating potential effects under each scenario. The United
E
short-term operations and long-term Nations Intergovernmental Panel on Climate Change advises
viability of many businesses. taking a “whole-systems approach” that considers how climate-
related risks may impact key upstream and downstream
Early action can substantially mitigate stakeholders, the natural and built environment, and how climate-
some risks while transforming others into related risks might interact with existing and/or emerging risks.
opportunity. The scope, scale and urgency
of the challenge requires board leadership. Planning Identifying and prioritising potential responses. The results of a
robust scenario analysis should be used to identify and prioritise
Now is the time. options for managing climate-related risks and opportunities
through adjustments to strategic and financial plans.
Sharing Documenting and disclosing. Good practice includes
documenting climate risk identification and management
processes, plans to address climate risks/capture opportunities
and progress made against those plans.
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Challenging
audit AUTHOR
AARON WATSON
24 BOARDROOMFEATURE
The fallout from financial
company collapses has “ You are fiddling with a model that is
not fit for purpose, really.”
“Directors have a very important role to
play in ensuring audit quality,” Allen says.
yet to impact fully on the It’s a challenging comment on the “The directors have a responsibility to
audit industry, coming as it does ensure that good work is done and they
audit profession, and the from the outgoing External Reporting can’t just say our work has been signed
directors who rely on it. Board Chief Executive Warren Allen, off by a major accounting firm. They
a former president of the International need to be comfortable themselves that
Federation of Accountants and chartered management has done a good job. They
accountant with extensive professional have a responsibility in the really difficult
experience of audit. areas, the high-judgement areas, such
as the accounting estimates and the
Allen says the way financial statements are valuation of assets and liabilities, the
prepared and audited no longer meets the valuation of unlisted equities...”
needs of major stakeholders. Accounting
firms themselves are moving into more According to the Financial Markets
profitable – and less pressured – lines of Authority (FMA), this responsibility to
work. And that a lack of faith in the audit explain the judgements behind accounting
model among legislators since the global treatments is an area New Zealand
financial crisis (GFC) and recent company directors could focus on more.
collapses – led by the UK and Australia –
has taken the initiative off audit firms and “In some financial statements, being able
professional bodies. to see that process whereby judgments
were made that are central to the financial
“There is definitely going to be some statements, and to the health of the
change made. Over the next 18 months or company, is really difficult,” says FMA CEO
two years, it is going to be very interesting Rob Everett. “And that’s not the way it
to see what that change is,” Allen says. should be.”
“There is a lot of talk about independence, The FMA releases an annual Audit Quality
there is a lot of talk about audit-only firms, Report. In 2019, it concluded audit quality
and there is a lot of talk about the process had “broadly improved” but also enjoined
of setting audit fees. Change will come and, directors to work with management to
with audit being an international process, ensure auditors receive high-quality
that will filter through to New Zealand.” information on key business judgements.
DIRECTING AUDIT “The financial statements belong to
the company, they belong to the board.
New Zealand’s largest companies (based Outsourcing the responsibility for key
on assets and revenue) must file audited decisions, the key judgments, that are
financial reports signed off by directors. made is not the way it is supposed to work.
Many entities that do not have a statutory We know that makes it harder for the audit
responsibility produce audited financial firm to do a good and efficient audit –
statements for the information of their within their fee estimate – if in fact they are
stakeholders. having to recreate, or to create for the first
time, accounting records,” Everett says.
“ Change will come and, with
Directors’ legal duties under the
Companies Act 1993 include exercising
powers for a proper purpose, not to trade
recklessly and a duty of care. These audit being an international
duties all come to the fore in audited process, that will filter
financial statements.
through to New Zealand. ”
Feb/Mar 2020 25FEATURE
“We have encouraged audit firms to be “Independence is also a state of mind. potential lack of choice for big,
blunt in their feedback to companies The auditor has to have that independent, complex audits.”
where the accounting records or the challenging, professional sceptic state
process whereby judgments have been of mind and to be prepared, if they see “If you look at the business model of
made – audit and risk committee, board, something, to call it out and discuss it the big accounting firms now, audit is
potentially CFO – don’t lay a clear trail to with the directors. It can be very difficult such a small part. They are out there
those quite often difficult judgments.” in some of these valuation exercises or doing advisory and consulting work.
around going concern discussions.” Internationally, the financial statements
INDEPENDENCE AND audit as a percentage of revenues is down
FORECASTING Everett notes that one of the “more around 15%,” Allen says
extreme proposals” out of the UK is to
”The audit process was developed well take the selection of the audit firm out of “Is the economic and business model
over a century ago for what were called the hands of the company and put it in the sustainable? I don’t think the idea of audit-
joint-stock companies. They had what hands of a government entity. only firms is sustainable. If that service
we might refer to as retail – or mum line is causing you a lot of grief, a lot of
and pop – investors that were distinct “That is likely unworkable. However, the reputation exposure and huge issues
from management; they didn’t have any extreme nature of that proposal, and getting capable staff to come in, how long
collective power. They wanted assurance the fact it is being seriously considered, with audit continue as a major service line?
that the financial statements they were reflects the unease as to whether audit I will be a very interested bystander.”
getting were true and fair,” Allen says. firms in the current set up really have the
freedom to say it how it is.
“Today, the entities that have investments
are very wide ranging. In the past ten years Everett notes that “going concern has
we have seen a big shift into wholesale been lightning-rod issue in the UK, “not
investors – managed funds, sovereign more so than where within 12 months of
wealth funds – so you have big collectives
of investors that wield a lot of power.
the going concern statement the company
ceases to be a going concern”. What skills
They have the ability to get information.”
“To be fair to boards, it is very difficult to does a board
The discussions going on at the moment
may be a catalyst for us to look at who the
users of audit are today and ask what they
forecast ahead, particularly in complex
businesses. It’s very difficult for the audit
firm to do work in that space.
need?
need from an audit, he adds.
“But I do worry that, even during what has Rob Everett has a clear view on the
Proposals coming out of the UK and been a quite benign economic period, if skills mix needed for a board to
Australia aim to strengthen auditor we get into some difficulties in financial oversee an audit effectively.
independence from company management markets and companies fall over, it has the
in order to boost the forward-looking risk of convincing a lot of investors that “You want some people with financial
aspects of an audit – the going-concern the audit is a bit of a rubber stamp and skillsets on your board so that you are
assumption – in order to avoid a repeat doesn’t help you form any confident view not completely dependent on your
of the company collapses seen globally about the immediate risks to a company’s CFO or auditor. You really do want a
during the GFC. business model. Confidence in what the couple of people who are able to go
audit does is absolutely essential outside toe to toe with the auditor or the CFO.
These include setting up audit-only the building and inside the building.”
firms, potentially splitting audit off as For the rest of the directors, I’ve
a profession apart from accountancy, DECREASING NUMBER OF FIRMS done the IoD’s Company Directors
or enabling a regulator to match up Course and there was a very good
companies with auditors in order to The FMA’s audit monitoring show piece on this, you can’t be completely
ensure that relationship is maintained the number of licensed auditors and oblivious. You can’t be a good director
at arm’s length. registered audit firms in New Zealand and not be aware of the key issues
has been gradually declining over recent that are in your audited statement,
Allen sees room for increased professional years. This is a risk at the big end of town. financial statements, you accounting
scepticism by both auditors and directors. treatments.
“The worry you have about the absolute
“Directors need to apply a level of dominance of the Big 4 is what happens You don’t need to be an expert, but
scepticism to management,” notes Allen. if one of them falls over. What happens you need to know which are the
“If you take the governance lens applied if one of them has a conflict of interest? features that change it from a good
by directors then the auditors come along What if one of them is too busy? All of a year to a bad year, which are the
and apply their lens, which is when you are sudden you have one choice of auditor,” features where management might
most likely to get a positive outcome. says Everett. “We are concerned at the be slightly inclined to gild the lily.”
26 BOARDROOMYou can also read
