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Budget 2018 - Capturing inter-generational value with more than a financial lens.

Budget 2018 - Sustainability

New Zealand’s political and economic landscape is changing. The Government is signalling a new direction; one that places an emphasis on generating and protecting intergenerational value, and measuring that value through more than just a financial lens.

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Erica Miles – Director – Sustainable Value

KPMG in New Zealand

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Sustainability

The key takeout

New Zealand’s political and economic landscape is changing. The Government is signalling a new direction; one that places an emphasis on generating and protecting intergenerational value, and measuring that value through more than just a financial lens.

The Government has committed to bold and transformative steps that place sustainable development at its core. These measures include integration of the United Nation’s Sustainable Development Goals into Government Policy; measuring value more holistically through a refresh of the Treasury’s Living Standards Framework (LSF); and regulatory approaches to tackle the greatest challenge facing the world today (as the Prime Minister herself put it, the “nuclear issue of her generation”) – climate change.

The Zero Carbon Act will increase the pressure on business to consider their footprint, measure their greenhouse gas emissions, and implement reduction strategies. The Government’s initiatives, coupled with the investor-led Task Force on Climate-related Financial Disclosures will further encourage businesses to disclose the financial risks of climate change.

Reporting encompassing economic, social and environmental well-being is rapidly gaining traction in New Zealand. The refresh of the LSF, where value will be measured in more than financial terms will further endorse this. Budget 2019, with its explicit focus on well-being, will formalise the LSF measures/indicators and, most importantly, the reporting framework.

Through its supply chain, financial and regulatory levers, the Government is encouraging business to do the same.

The ability of a business to create, enhance and protect its intergenerational value requires a strategic and integrated response from business. Businesses now more than ever are encouraged, and in some cases, required to embed integrated thinking over financial and non-financial metrics within their strategic business decisions. Integrated thinking, leading to integrated reporting, is the key to success.

We summarise below some of the Budget 2018 (and 100 day plan) measures aimed at delivering long-term social, environmental and financial outcomes. Our detailed analysis, for those interested, follows.

 

Key measures

Living Standards Framework progress

  • Narrow measures of economic growth will be broadened and the scope and progress will be re-defined. The Government’s aim is that New Zealand’s economic strategy should focus on how we improve the wellbeing and living standards of all New Zealanders. 
  • The Treasury will work with its Living Standards Framework, to develop a comprehensive set of environmental, social and economic sustainability performance indicators. These indicators will better show how we are performing as a country. These are expected to be formalised by the end of 2018 so that they can be part of Budget 2019 processes. 
  • Budget 2019 will formalise these measures/indicators and the reporting framework to be adopted.    

The environment and climate change responses

  • Work is well under way to set up the independent Climate Commission and passing a Zero Carbon Act.
  • The Budget also contains capital funding of $100m for the Green Party’s Green Investment Fund (with further operating funding of $25m over 4 years) to reduce the long-term fiscal and economic risks of climate change.
  • Budget 2018 contains a $181m boost in funding for biodiversity protection and conservation.

Child welfare and poverty reduction

  • Budget 2018 allocates $270m of new operational funding for the new Ministry for Children (Oranga Tamariki). 
  • Funding of $143m is proposed for a new insulation support programme for lower income New Zealand households, with the aim of reducing hospitalisation of children and the elderly due to damp and mouldy homes.
  • A Child Poverty Reduction Bill will be introduced to require the Government to set and measure progress towards meeting child poverty reduction targets and to amend the Public Finance Act 1989 so that the Budget reports on progress to reduce child poverty. Budget 2018 provides funding of $25.7m for Statics NZ to improve measurement of child poverty. Being able to properly measure is a key to the success of meeting the targets.
  • Budget 2018 also allocates funding of $7.9m over four years for establishment of new Child Poverty and Child Wellbeing Units within the Department of the Prime Minister and Cabinet. 

Sustainable investment

  • The Government has previously indicated it will prioritise investments to address the long-term financial and sustainability challenges facing New Zealand. This includes re-starting contributions to the New Zealand Superannuation Fund (NZS Fund) worth $3.3b over that planned by the previous Government.
  • The Government has increased New Zealand’s overseas aid budget, to better meet our international commitments. Budget 2018 contains $714m of additional overseas development assistance over 5 years.
  • Finally, the Government has committed to invest in infrastructure to support our growing population and develop our regions. This is discussed in a separate Budget article. 

What’s behind the Government’s thinking?

Sustainable development is the key to inter-generational value

Sustainable development has been defined in many ways. Most commonly quoted is the 1987 Bruntland Report ‘Our Common Future’:

Sustainable development is ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’.

Sustainable development is at the heart of the leading global framework for international co-operation - the 2030 Agenda for Sustainable Development. This framework has 17 Sustainable Development Goals (SDGs), which are, in turn, supported by 169 targets. They are a call to action. They speak to the urgent environmental, political, social and economic challenges facing our world today. And they apply to all nations, including New Zealand. By supporting the SDGs, countries resolved to take the ‘bold and transformative steps urgently needed to shift the world onto a sustainable and resilient path.’

Bold and transformative steps?

Budget 2018 recognises that global sustainable development issues require local solutions. Pertinent issues for New Zealand include child poverty, a lack of affordable housing and the degree of infrastructure investment required.


Securing these local solutions is also integral to the Confidence and Supply Agreement between the Labour Party and the Green Party, which includes New Zealand’s commitment to implementing the SDGs. Commitments are focused on three pillars: a sustainable economy, a healthy environment, and a fair society. Addressing climate change forms the basis of the sustainable economy pillar, with measures such as the Zero Carbon Act, introducing an independent Climate Commission, and requiring all new legislation to undertake a climate impact assessment.

What is the Government’s action plan and what does it mean for business?

Cleaning up its act

Taking action against environmental challenges, including climate change, is a key theme. This recognises that climate change is the greatest challenge facing the world today, and that climate change has the potential to undermine our primary sector.

The Zero Carbon Act will be all encompassing and will increase the pressure on businesses to consider their footprint, measure their greenhouse gas emissions, and implement reduction strategies. The Government’s commitment to 100% clean and renewable energy will redefine the business model of multiple industries, particularly our primary industries. Disruptive technologies and rapid shifts in energy transformation pose both strategic and operational risk to businesses.

A price on carbon, if introduced, will further increase the pressure to act with projected downturns in profit should businesses not be proactive and forward thinking in their approach to climate change. Based on the five-year framework set out by the Paris 2 Degree Agreement, legally binding targets and carbon budgets will increase accountability for all businesses and bring greenhouse gas emissions to the forefront of business’ materiality and risk.

The focus on climate change will also require a meaningful shift in focus of New Zealand’s financial community. The Governments’ initiatives, coupled with the investor-led Task Force on Climate-related Financial Disclosures (TCFD) will further encourage, if not require, businesses to disclose the financial risks of climate change. The TCFD aims to ensure businesses provide consistent climate-related financial risk disclosures to investors, lenders, insurers, and other stakeholders. Furthermore, the ability to raise and maintain capital and business’ value will increasingly rely upon its ability to address climate risks; to innovate and transform energy consumption; and to move towards a zero carbon economy.

“Increasing transparency makes markets more efficient, and economies more stable and resilient.”

- Michael Bloomberg, Chair of the TCFD.

Measuring value with more than a financial lens

Coupled with its commitment to the SDGs, the Government is pursuing the Treasury’s Living Standards Framework (LSF). The LSF will ultimately align with the SDGs and was benchmarked against internationally recognised frameworks such as the OECD Better Life Index, Social Progress Index and BCG Sustainable Economic Development Assessment. Comparability and suitability for a New Zealand context were key considerations in its development.


Under the LSF, intergenerational well-being is defined by four interlinking capitals: natural, human, social and financial/physical. The LSF recognises the interrelatedness between all four capitals, in that one capital cannot exist in isolation and will have tangible impacts on the other capitals.


These capitals are supported by a range of performance indicators that will guide the Government in the capture of more in-depth information to understand and enhance the well-being of New Zealand’s environment, society and economy. The LSF will therefore afford the Government with a comprehensive rounded measure of success of how government policy is improving New Zealand’s environmental, social and economic performance. The LSF will also form a mechanism to enable New Zealand to track its progress towards achieving the SDGs.


The LSF, coupled with our commitment to the SDGs, will form the basis for driving integrated thinking by the Government. It’s a move to refresh the dimensions by which we measure economic, social and environmental well-being and will be key to securing intergenerational value. Budget 2019 will be the first that utilises the LSF’s broader indicators for measuring well-being. Through Government procurement, it is expected that the LSF will have cascading effects on businesses and their “social license” to operate.


Specifically, with a wider set of performance indicators, it is expected the Government will turn to business to provide more information on actions they are taking to address environmental and social issues and therefore the actions they are taking to secure inter-generational value.

Integrated thinking

In response to overseas capital markets, and to further encourage business leaders to apply an integrated thinking lens to capturing and measuring value, local regulatory drivers have already been introduced. Most notably the recent changes to the New Zealand Stock Exchange (NZX) Corporate Governance Code and the Financial Markets Authority both highlight the importance of integrated thinking and measuring performance in more than financial terms.

KPMG’s view

Integrated thinking is becoming the new normal

The LSF and the SDGs both encourage businesses to apply the principles of integrated thinking and look beyond the financial lens to capture and measure value. Understanding the Government’s direction and emphasis on using the LSF to measure overall well-being allows businesses to pre-empt political and regulatory risk and to reduce the uncertainty and consequences to business. The ability of a business to create, enhance and protect its intergenerational value requires a strategic and integrated response.

The SDGs can, and should, be used by businesses to formulate their vision, set objectives, take measures to address those objectives, and to finally report their performance. The SDGs can also be used as a lens to better assess business cases, to identify and assess strategic and operational risks, and to articulate investment decisions.

Coupled with the LSF, and the Coalition Government’s social and economic policy agenda, business now more than ever need to exercise integrated thinking and understand the impact their material environmental and social matters have on their operating model - and their ability to promote sustainable development. Monetising these material matters, notably the fiscal risk from climate change, will facilitate this thinking.

A push on transparent reporting beyond financial metrics

The role of reporting is not to provide statistics and stories to stakeholders. Rather its role is to encourage director-led integrated thinking whereby an organisation's ability to create and protect long-term value is subsequently articulated.

Reporting encompassing economic, social and environmental well-being is rapidly gaining traction in New Zealand. The new Government appears to be taking bold and transformative steps to address our global sustainable development commitments. Through its supply chain, financial and regulatory levers, the Government is also encouraging business to do the same.

Whilst regulatory compliance to the Zero Carbon Act will see increased requirements for businesses to produce emissions inventories and report progress to reduce their carbon footprint, the key to success is to apply this integrated thinking across all material environmental, social and economic issues. Reporting is an output of a more holistic response to addressing businesses’ environmental and social matters, and requires businesses to have their house in-order. Integrated thinking, leading to integrated reporting, is the key to success.


In doing so, the Government is encouraging businesses to adopt sustainable development principles – and to ensure our development meets the needs of the present without compromising the ability of future generations to meet their needs.

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