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Navigating the Evolving Landscape of ESG: Key Changes and Insights for small businesses

Thanks to the Window and Glass Association of New Zealand, as they organised an important webinar presented by Francis, ASB's Industry Manager for commercial banking and property finance. A pretty big title with the mammoth task of trying to set ASB's policies in line with New Zealand's Paris Agreement commitments as a country and then implement those policies. This article looks at how environmental, social and governance changes in banking and other financial institutions can impact small businesses.

In 2015, in New Zealand signed up to the Paris Agreement, which is a target to reduce greenhouse gas emissions as a whole. From there, the United Nations Framework Convention on Climate Change was created, and a task force was established on climate-related financial disclosures.

The Task Force for Climate-related Financial Disclosures, also known as "TCFD", set up a framework for quantifying greenhouse gas as an industry, an organisation and as a country. And that set the scene for regulatory controls that are starting to be a part of our financial lending landscape worldwide. In New Zealand, we had the Financial Sector, Climate-related Disclosures and Other Matters Amendment Act 2021 (now that’s a big name!).

Due to the Disclosures Act and with the increasing importance of addressing climate change, New Zealand banks and financial lending institutions are now required to consider environmental, social, and governance ("ESG") factors when making decisions. The country's Climate Change Commission has highlighted the need to transition to a low-carbon economy, and banks and lending institutions play a critical role in supporting this transition. Disclosure requirements include operational emissions, purchases of power and electricity and supply chain submissions where possible.

By considering ESG factors, banks can ensure that they are investing in sustainable and responsible businesses aligned with the Paris Agreement's goals. By considering their investments' social and environmental impacts, banks can help mitigate the risks associated with climate change, such as extreme weather events and supply chain disruptions.

Then there is the Emissions Trading Scheme.

New Zealand's emissions trading scheme, or ETS, is a government-mandated program to reduce greenhouse gas emissions. The scheme puts a price on carbon emissions and allows businesses to trade emissions permits, incentivising them to reduce their emissions. The ETS covers a range of sectors, including agriculture, energy, and transport, and is part of the country's wider efforts to combat climate change. While the scheme has faced criticism for being too lenient on some industries and not doing enough to address emissions from agriculture, it is seen as an important step towards a low-carbon future.

I mentioned the climate change commission – what is it?

New Zealand's Climate Change Commission is an independent body established in 2019 to advise and guide the country's efforts to combat climate change. The Commission produces various reports and recommendations on emissions reduction targets, renewable energy, and transitioning to a low-carbon economy. Its work is guided by the principles of fairness, equity, and sustainability, and it seeks to engage with a wide range of stakeholders to ensure that its recommendations are practical and effective. The Commission's work is critical to New Zealand's efforts to meet its climate change obligations under the Paris Agreement and transition to a more sustainable and resilient future.

Why has this changed financing within the banks

Due to the change in industry drivers and domestic policy, there is hope that businesses will take action on climate change and reduce their emissions profile. Financial institutions must identify impacts and scenario analysis, risks and opportunities for timeframes such as 2030, 2040, and 2050, all milestone years for the climate impact reduction targets.

As part of the governance required in the Climate report, banks have had to identify how they interface with a governing body to oversee climate-related risks and opportunities. Banks and financial institutions need transition metrics and targets at an industry level to change and set targets to reduce operational emissions. Banks and lending institutions must disclose your emissions as part of their Scope 3 emissions reporting requirements.

What is scope 1, 2 and 3 emissions?

The Greenhouse Gas (“GHG”) Protocol organises emission sources into Scope 1, 2, and 3 activities.

Scope 1: Direct GHG emissions from sources owned or controlled by the company (ie, within the organisational boundary). For example, emissions from fuel combustion in vehicles owned or controlled by the organisation.

Scope 2: Indirect GHG emissions from the generation of purchased energy (in the form of electricity, heat or steam) that the organisation uses.

Scope 3: Other indirect GHG emissions which occur because of the organisation's activities but are generated from sources it does not own or control (eg, raw material mining and refining, manufacture before the organisation's processes).

So why think about ESG if I’m an SME?

There is a considerable sum of finance to become available for sustainability opportunities, with each bank setting its targets towards achieving a certain (large) percentage of their financing to be green initiatives by 2030. Currently, the regulations are sitting with the top 5 businesses operating in New Zealand.

But, if you are an SME over the next three to six years, prepping for this change in the lending environment will help your business's viability and value. Companies that consider ESG factors as part of their business practice are increasingly valued by investors (because of new ESG reporting requirements), customers (because we want a planet to live on in the future), and other stakeholders. This is because such businesses are perceived to be more sustainable, responsible, and ethical. By considering ESG factors, companies can enhance their reputation, reduce risks, and create long-term value.

Businesses that consider ESG factors are seen as more sustainable and responsible. This is because they consider the long-term impact of their decisions on the environment, society, and governance. By doing so, they can minimise adverse effects on stakeholders and maximise positive results. This can lead to enhanced reputation and loyalty from customers, investors, and other stakeholders.

Additionally, businesses that consider ESG factors can reduce risks. This is because they can better anticipate and manage environmental, social, and governance risks. For example, a company that considers the ecological impact of its operations can reduce the risk of environmental damage and associated regulatory fines. Similarly, a company that considers the social impact of its operations can reduce the risk of negative publicity and associated reputational damage.

And let's not forget that small businesses should consider ESG factors because they can create long-term value. This is because they can better identify and capitalise on opportunities associated with environmental, social, and governance issues. For example, a company that invests in renewable energy can capitalise on the growing demand for clean energy and reduce its exposure to fossil fuel price volatility. Similarly, a company that invests in employee training and development can benefit from a more engaged and productive workforce.

What are some ESG initiatives for an SME?

There are a variety of ESG (environmental, social, and governance) business initiatives that companies can undertake to demonstrate their commitment to sustainability and corporate responsibility. Here are some examples:

1. Implementing sustainable supply chain practices, such as sourcing materials from environmentally responsible suppliers and ensuring fair labour practices throughout the supply chain.

2. Reducing energy consumption and greenhouse gas emissions through renewable energy investments, energy-efficient building practices, and transportation management.

3. Investing in employee training and development to foster a culture of inclusivity, diversity, and accountability.

4. Supporting social and community initiatives and organisations.

5. Creating transparency and accountability through transparent ESG reporting, such as environmental impact assessments, social responsibility reports, and governance disclosures.

6. Incorporating diversity, equity, and inclusion (DEI) initiatives into all aspects of the business, from hiring practices to product development.

7. Developing sustainable products and services that promote environmental and social responsibility, such as eco-friendly packaging, fair trade products, and renewable energy solutions.

8. Engaging with stakeholders, such as investors, customers, and communities, to understand their concerns and priorities regarding ESG issues and to develop solutions that address them.

9. Incorporating ESG factors into investment decisions, such as investing in companies with strong ESG performance and divesting from companies with poor ESG performance.

10. Establishing strong governance practices, such as independent board oversight, executive compensation tied to ESG performance, and robust risk management protocols.

These are just a few examples of ESG business initiatives small businesses can undertake to demonstrate their commitment to sustainability and corporate responsibility.

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