Examining the Financial Impact of Climate Change on New Zealand Companies
- Subject Code :
ACTY9045ENR
EXAMINING FINANCIAL IMPACT OF CLIMATE CHANGE ON NEW ZEALAND COMPANIES
COURSE TITLE: ACTY9045ENR-S1-2024-Research Project-ENR
INSTITUTION: Unitec Institute of Technology.
Abstract
In the introductory chapter of the study, the researcher has highlighted the background of the research and has identified notable factors like temperature, infrastructure, investments, and costs as some of the primary factors affecting the financial impact of climate change in New Zealand. The researcher has detailed the purpose statement and rationale in this chapter. The study aims to evaluate the possible impacts of climate change on the companies selected for the Next 50 companies according to the market capitalization of New Zealand by analysing their annual reports and financial statements over the past five years (2019-2023). The literature review has discussed the various arguments presented by authors and ministry reports associated with the study. Notable discussions on the Zero Carbon Act and its initiatives and equitable resolution of shareholder, customer, and community interests about climate change are critically discussed in this portion. The researcher has also identified a gap in the literature, which they will explore further in the study.
Table of Contents
Chapter 1:Introduction
1.1Introduction
According to the studies of Lawrence et al. (2020), climate change is among the most critical and costly challenges corporations worldwide, including New Zealand, are tackling. An increasingly important factor in determining a company's worth is its climate exposure, which includes the financial risks and opportunities associated with climate change. This critical analysis will examine the financial impact of climate change on New Zealand companies. According to NIBA (2023) reports, policymakers and investors are concerned that the financial statements, which are the foundation of corporate reporting, mainly disregard climate exposure, even while companies discuss it elsewhere.
According to Zaman et al. (2021), damage to assets, interrupted supply chains, and increased insurance premiums are just a few of the recurring costs the researcher highlights when identifying and evaluating the overall financial risks some companies face due to climate change. The regulations to mitigate climate change must consider the rising expense of compliance and the massive investment in green technology. Frame (2020) notes that a shift in policy toward a low-carbon economy has several potential benefits, one of which is opening hitherto untapped markets. With an emphasis on the many adjustment tactics companies apply, this study delves into the diverse aspects of climate change risk and returns to New Zealand's companies and industries. Evaluating climate change impacts allows for creating plans to lessen susceptibility and lessen the impact on people, places, and nations while improving the prospects of businesses globally.
1.2 Background of the study
According to the reports of Mahaseth (2020), the agricultural and tourism sectors are two of New Zealand's most vulnerable economic pillars to the effects of climate change. According to the Ministry of Environment reports of 2023, the temperature of New Zealand has risen by 1.1 degrees Celsius since 1909, and predictions indicate that the temperature will increase by 3.5 degrees Celsius by 2090. According to the Government of Beehive (2024), several severe weather events, such as floods and droughts, have already caused substantial monetary damage; for example, the 2020 New Zealand drought, which impacted farming, resulted in almost NZD 720 million losses. With that, it is argued that towns and infrastructures are predicted to be much more vulnerable to the effects of sea-level rise, which is anticipated to cost approximately NZD 720 million yearly due to climate change and global warming. As stated in Figure 1, inspired by the studies of Corlett (2023), there is a significant threat to the coastal infrastructures and the surrounding properties because of the rise of the sea levels, which can eventually cost NZD 1.4 billion by 2050 if the current pattern of climate exploitation follows.
1.3 Purpose statement
According to the Ministry for the Environment (2022), with climate change, numerous risks are associated with the financial impact on the NZ companies. Some notable risks include physical risks like infrastructure damage or supply chain damage; regulatory risks like changes in policies and reporting mechanisms; market risks like shifts in consumer preferences and more. Furthermore, the country can also experience operational and financial risks like unsecured financing, availability and cost of capital, increased cost of resources, and scarcity and price volatility.
According to the WWF New Zealand (2023), to identify these issues better, the researcher will look into the companies selected as the Next 50 companies by the market capitalization of New Zealand and will analyse their annual reports to understand the issues more prominently. The researcher intends to generate a basic data set concerning the degree and character of climate-related disclosure risks to identify sectorial trends; it will also help the researcher understand how disclosure has advanced. This study will be supported by knowledge of the overall significance of financial climate change consequences to ensure they are apparent to a broader range of community members, such as policymakers, stakeholders, investors, and corporate decision-makers.
1.4 Research rationale
What is the issue?
This study's critical issues involve physical, operational, financial, and market risks due to changes in consumer preferences. With the change in temperature over the past decade, New Zealand has been investing a substantial amount to attain sustainability in its business practices. However, it is failing for some reasons.
How can the researcher shed light on this?
Through this study, the researcher will present a critical analysis of the factors responsible for climate change in NZ, will highlight the impact of climate change on the financial performance of the country, and the companies selected are the Next 50 companies according to market capitalization with the help of significant data so, that the policymakers and other stakeholders can take input from this study.
1.5 Aim
The study aims to evaluate the possible impacts of climate change as reflected in the fionancial statemetns on the companies selected for the Nextof small New Zelaland listed ccompanies mpaines 50 companies as per market capitalization of New Zealand by analyzing their annual reports andthe financial statements over the past five years (2019-2023).
1.6 Objectives
The objectives of the study include-
To understand the factors impacting climate change on the companies selected, the Next 50 companies as per market capitalization of New Zealand. To analyse and evaluate the financial impacts of climate change smallo listed companies.on the companies selected Next 50 companies, according to the market capitalization of New Zealand. and identify if there has been a notable change in the past five years (2019-2023).To cidentifyidentify ritically discuss the annual reports and areas of the financial statements of the companies selected as the Next 50 companies according to the market capitalization of New Zealand and identify if there has been a notable change in the past five years (2019-2023). where the impacts of climate change are disclosed To recommend further strategies for development so that the companies can tackle the factors responsible for the shift. 1.7 Research questions
The research questions of the study include-
What are the factors impacting climate change on the companies selected for the Next 50 companies as per the market capitalization of New Zealand?
What is the financial impact of climate change on the companies selected for the Next 50 companies as per the market capitalization of New Zealand?
What are the notable changes evident from the annual reports and financial statements of the companies selected for the Next 50 companies as per market capitalization of NZ in the past five years (2019-2023)?
What strategies can be recommended for the development of the companies?
1.8 Dissertation structure
The researcher has divided this study into five different chapters, as can be seen in Figure 2, namely-
Introduction: This chapter will introduce the study to the readers and highlight the aims, objectives, research question, and problem statement.
Literature review: This chapter will discuss the literature on the topic while identifying the gap in the study.
Research methodology: This chapter will discuss the tools and techniques used in this study.
Findings and analysis: This chapter will discuss the study's findings while presenting logical arguments.
Conclusion: This chapter will conclude the findings of the work, highlighting the recommendations and stating the road for future research.
Chapter 2: Literature Review
2.1 Introduction
Global businesses are increasingly concerned about the potential financial impacts of climate change. According to Climate Change Implications for New Zealand Royal Society (2023), this is particularly true for countries like New Zealand, where many industries have significant environmental links. This issue is attracting the attention of researchers and management worldwide. The primary goal of this research is to find the 50 most successful businesses in New Zealand and analyse how climate change has affected their operations. Globally, businesses are facing more and more challenges due to climate change. The agricultural, tourist, and natural resource sectors are particularly important to New Zealand's economy, making it vulnerable to these changes.
According to previous research by Frame (2021), financial management methods and disclosures have incorporated climate concerns. Several articles discussed by Climate Action Tracker (2023) imply that proactive measures, such as funding renewable energy and adopting sustainable business models that generate economic rewards, can mitigate the negative impacts. Further, one organization that provides a framework for businesses to report climate risks and possibilities is the Task Force on Climate-related Financial Disclosures (TCFD). This literature study will expertly expand our understanding of how climate change impacts huge businesses by focusing on the following fifty corporations in New Zealand.
2.2 Factors impacting climate change on the companies selected are the Next 50 companies according to market capitalization of New Zealand
According to the Climate and Clean Air Coalition (2023), looking at the motivations behind corporate innovation, we first established a distinction between strategic and substantive innovation. Political ties limit patent grants but have the opposite effect on utility model patents, leading to increased invention patents at the expense of strategic innovation. This phenomenon, known as the "innovation illusion," causes companies to focus less on strategic innovation and more on substantive innovation. Hence, politically linked corporations prioritize patent "quality" over patent "quantity." According to the studies of NIWA (2023), the mechanism analysis and political ties can discourage strategic innovation and encourage substantive innovation, all while better incentivizing firms to take on social responsibility. Additional research shows that the extent and strength of political ties have non-linear impacts on the degree to which corporations can innovate strategically and substantively.
Regulatory pressures
Figure 3, examining regulatory measures in depth, demonstrates their importance in shaping corporate responses to climate change. Following New Zealand's pledge to achieve net zero carbon by 2050, understood by the Ministry of Environment New Zealand Studies (2023), businesses are now legally obligated to do the same according to the Climate Change Response (Zero Carbon) Amendment Act 2019 of New Zealand. Ministry of Environment New Zealand mandates a 2% annual reduction in emissions for facility-owned cars and strictly enforces compliance monitoring.
According to CCPI (2023), there is much pressure on Fonterra, the most enormous dairy corporation in New Zealand, to significantly reduce the amount of greenhouse gases it releases into the atmosphere. The company's objective is to achieve net-zero emissions by 2050, which aligns with the Zero Carbon Act's goals, encouraging firms to cut their emissions. Among Fonterra's sustainability management plan's energy-related initiatives are measures to boost industrial sites' energy efficiency, lessen methane emissions during dairy farming, and increase investments in renewable energy.
Market expectations
From Figure 3, companies that impact investors and consumers are under increasing pressure to fulfill the growing number of duties associated with sustainable activities. According to the reports of Stats NZ (2023), the evolution of global Regional Trade Agreements (RTAs) towards networked development has been a trend since the 1990s. Evidence on the combined effects of numerous RTAs or their network is limited, in contrast to earlier research that focused on the impact of individual RTAs.
The studies of CCPI (2023) note several factors were identified as having a favorable impact on exports, including technological advancements that promote exports and help establish a comparative advantage, the number of trade agreements in a country, its proximity to its target nations, and the stability of its hub status. According to Pagnottoni et al. (2022), one of the giant New Zealand corporations by market capitalization, a long-term investment firm based in Auckland, has been under shareholder pressure to adopt sustainable practices at Auckland International Airport. At last, according to the studies of Yahoo Finance Editorial (2024), the airport's environmental policies aim to achieve complete carbon neutrality by the year 2050. Those in the market who care about doing their part for the environment through their investments and resource consumption should see this pledge as a reflection of their demands.
Environmental conditions
According to Lee and Hallak (2020), because ESG is not clearly defined, dishonest businesses can engage in greenwashing, claiming their activities are more environmentally friendly than they are. Using an empirical approach, we study how internal and external stakeholders perceive sustainability to uncover instances of greenwashing. We take on a well-known criticism in greenwashing studies: the voluntary CSR strategy unintentionally promotes the spread of greenwashing. According to Gulluscio et al. (2020), stakeholders do not automatically assume that a company is seriously committed to sustainability because it has CSR commitments. Establishing such committees does not necessarily translate into positive evaluations of a company's commitment to sustainability by stakeholders. Tangible sustainability activities are necessary for this to happen. Thus, according to the studies of Meridian Energy (2023), it is diversifying its energy mix by adding wind and solar to ensure better reliability in electricity production.
Technological advancements
From Figure 3, businesses rely heavily on technological progress to respond to and mitigate the effects of climate change. According to Sun and Higham (2021), technology determines the course of social evolution, and by extension, business tactics are central to technological determinism and related concepts. Management's primary goal is to purchase innovative technology with a minimized environmental impact.
According to Raihan and Tuspekova (2023), the New Zealand multinational healthcare corporation Fisher & Paykel Healthcare covers its sustainability policy through technological advancement. It has an obligation to society to reduce the adverse effects of its production processes on the environment by emphasizing energy efficiency and producing eco-friendly goods. These technological advancements are essential to creating new methods for controlling communication content and complying with existing regulations. Climate change is being confirmed by empirical data when looking at the top 50 organizations in New Zealand. According to the Ministry for the Environment's study (2023), the corporate sector is responsible for many of New Zealand's greenhouse gas emissions. Therefore, these emissions must be reduced for the country to fulfill its goal. Fonterra and Meridian Energy are just two corporations that have publicly disclosed their pollution numbers and the steps they should take to reduce them.
According to New Zealand's CDP statistics studies presented in (2023), more businesses are reporting on climate risks and possibilities. Good environmental standards are expected by stakeholders, including investors, and should be included in every organization. Pressures from regulations, markets, environmental factors, and technology related to climate change are apparent when one applies the business and environmental settings framework to New Zealand's leading firms. Fonterra, Auckland International Airport, Meridian Energy, and Fisher & Paykel Healthcare are some of the important New Zealand organizations whose strategic directions are affected by climate change.
2.3 Financial impact of climate change on the companies selected are the Next 50 companies as per market capitalization of New Zealand
According to Kuo et al. (2021), Fonterra-Co, New Zealand's largest dairy exporter, operates in an area prone to droughts and floods, which are bad for the company's supply chain and contribute to the growing number of challenges climate change poses. However, according to the Reserve Bank of New Zealand, severe climate conditions threaten New Zealand's biological production. They might reduce agricultural turnover by around 5% in the following decades.
According to Figure 4, inspired by BCG (2023) studies, because a low-carbon economy is widely accepted in New Zealand, firms operating there face the constraints of compacted limits. For instance, Air New Zealand must make specific strategic decisions to guarantee compliance with the Zero Carbon Act's criteria, which stipulate the accomplishment of net operational emissions by 2050. According to the Ministry for Primary Industries (2023), operating expenses will be more significant in the short term due to the commitment to use a substantial percentage of the funds to acquire fuel-efficient technologies and maintain and develop carbon offset activities. However, penalties and loss of access to the market are negative consequences that could arise if the company fails.
As stated in the studies of Meridian Energy (2023) contact Energy and Meridian Energy, two renewable energy companies based in New Zealand, stand to benefit from the growing demand for green power in developing nations, as indicated before. Investment prospects can be enhanced due to these companies' expansion in New Zealand, which aligns with the country's renewable energy ambitions and the growing need for clean energy. Revenue for these businesses will rise because of the Ministry of Business, Innovation, and Employment's projection of a 30% growth in renewable energy usage by 2030.
As per Choi et al. (2021), because of its proximity to the coast, Auckland International Airport is particularly vulnerable to the effects of climate change, including the possibility of seawater surges that damage property and the suspension of operations caused by cyclones and other natural catastrophes. These possibilities have enormous adaptation costs, but they are realistic and essential for maintaining shareholder value in the future. In contrast, Zhang (2022) notes that proactive actions to adapt to changing conditions might boost resilience, reduce insurance rates, and, who knows, maybe even improve reputation by making investors more ethically conscious of environmental issues. According to the stakeholder theory presented in the studies of Kouloukoui et al. (2021), New Zealand enterprises must prioritize consideration and equitable resolution of shareholder, customer, and community interests about climate change. Fletcher Building of Fiji, dedicated to green construction, is one example of a company that has made sustainability a core value and is now looking to gain an edge in the market.
2.4 Conceptual framework
2.5 Research Gap
There appears to be a lack of the study examining the impact of climate change on businesses connected to New Zealand despite the abundance of studies examining the implications of climate change on financial entities and corporate organizations globally. There have been many studies on climate change's global economic and environmental ramifications. Still, most of it has concentrated on the developed world, specifically the United States, the European Union, and China, and has discussed the broad macroeconomic implications of this transition. These analyses need to consider smaller developed nations' unique characteristics and vulnerabilities, such as New Zealand's economy.
Because it relies on agricultural exports, tourism, and seafood, New Zealand's economy is particularly susceptible to climate change's negative consequences. To learn how climate change affects the risk profile and financial performance of companies in these vital industries, there is a dearth of literature based on primary empirical research. In addition, while studies conducted abroad often examine how these changes impact substantial multinational corporations, very little is known about how these changes apply to New Zealand, especially among small and medium-sized enterprises (SMEs), although SMEs account for nearly half of the NZ GDP.
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