The Law, Policy, and Economics of Climate-related Financial Disclosures
Climate-related Financial Disclosures (CFD) legislation, introduced in New Zealand in 2023, aims to improve transparency around climate risks and help stakeholders understand how climate change affects companies' operations, finances, and long-term sustainability.
This research examined two key areas:
- How to strengthen the legal framework for disclosures
- Learning from voluntary reporting.
Key recommendations include clearer guidelines, standardised templates, and mandatory climate scenario analysis to make disclosures more understandable, comparable, and useful for all stakeholders including consumers, taxpayers, and communities.
The research explored why voluntary disclosures often lack credibility and how this can be improved. Green innovation – such as developing renewable energy technologies – acts as a strong signal of a company's environmental commitment. Patents are often the tangible outcome of green innovation, making them a credible indicator for investors. Innovation also reduces the cost of cutting emissions, lowering incentives for misreporting.
The research showed that firms with more green innovation are more likely to disclose climate risks, and these disclosures are seen as more trustworthy. Credible disclosures can reduce a company's cost of capital, making sustainability financially advantageous.
The report highlights that while mandatory disclosure regimes are essential, they must include clear rules, readability standards, and periodic reviews to ensure transparency and comparability.
Ultimately, well-designed disclosures can drive climate-friendly strategies and support a smoother transition to a resilient, low-carbon economy.