ACC’s ClNmate CMange FramewTrk

Accident Compensation Corporation of 16

ACC’s Climate Change Framework 26 August 2020



Contents Purpose ....................................................................................................................................................... 3

Introduction ................................................................................................................................................. 3

Climate change framework ......................................................................................................................... 5

Pillars .......................................................................................................................................................... 7

Climate change policy requirements ......................................................................................................... 11

Next steps ................................................................................................................................................. 13



ACC’s Climate Change Framework

Purpose This paper outlines an overarching climate change framework, which sets out ACC’s leadership position on climate change and how this is going to be materialised through a set of actions. The framework will be used to develop climate change policies, ensuring that climate change actions are aligned with ACC’s vision on climate change.

This paper sets out:

• ACC’s long-term vision and approach for managing the impact of climate change in New Zealand;

• the principles that ACC will apply to manage climate change impacts of/on its business;

• three core pillars (Corporate, Investments, and Actuarial and Risk) that ACC can leverage to achieve its climate change vision now, and in the future, including the first steps we have already taken, and

• the key requirements that all underlying ACC climate change policies will need to consider.

Introduction The impact of climate change, such as higher temperatures, rising sea levels, more frequent extreme weather events and adverse health impacts1 present current and emerging risks to ACC. These risks include ACC’s financial sustainability and ability to fulfil core functions, as well ACC’s need to meet its legal obligations, respond to changing demands, and balance public and stakeholder expectations.

The impact of climate change may have direct implications for ACC’s claim rates due to increased rates of climate change related accidents and injuries. Climate change may also impact ACC in indirect ways through a greater strain on the overall health system. ACC needs to support the wider health system to prepare and adapt to climate change.

Climate change is also a significant issue of significance for many ACC clients and stakeholders. This includes the significant Māori perspective on climate change and ACC’s commitment to listen to and meet the needs of Māori. Therefore, ACC’s actions to manage climate change impacts will align with its commitment to uphold the principles of the Treaty of Waitangi2.

1 IPCC, 2012: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change [Field, C.B., V. Barros, T.F. Stocker, D. Qin, D.J. Dokken, K.L. Ebi, M.D. Mastrandrea, K.J. Mach, G.-K. Plattner, S.K. Allen, M. Tignor, and P.M. Midgley (eds.)]. Cambridge University Press, Cambridge, UK, and New York, NY, USA, 582 pp. 2 While the Crown is the Treaty partner (and not Crown entities), in 2017 the Board resolved to “uphold te Tiriti o Waitangi / the Treaty of Waitangi principles of Partnership, Participation and Protection”



ACC’s policies and actions must support the Government’s focus on strengthening the regulatory response to mitigate the impact of climate change and contribute to the global effort under the Paris Agreement3 to limit the global average temperature increase to 1.5°C above pre-industrial levels4. This is most clearly signalled with the Carbon Zero Amendment to the Climate Change Response Act 2019 (CZA 2019) which sets a framework for New Zealand to transition to net zero carbon emissions by 20505.

ACC will take a leadership role to support the Government’s commitment to limit global temperature increases and reduce emissions. When deciding on what actions to take, ACC needs to consider how different parts of the business will be affected, what will underpin these decisions and how ambitious ACC will be.

In managing its investments ACC must meet the dual objectives of maximising returns while investing in a way that is ethically acceptable to New Zealanders. The passing of the Climate Change Response (Zero Carbon) Act last year, with bi-partisan support, reflects that the ethical concerns of New Zealanders are evolving. The investment portfolio must evolve with this.

ACC has already started to address climate change under its climate change programme. The framework outlined in this paper will guide ACC’s future policies and actions on climate change.

3 Adopted 12 December 2015. 4 S4 of the Climate Change Response (Zero Carbon) Amendment Act 2019. 5 Net zero emissions means the greenhouse gases emitted globally must equal the emissions captured—through initiatives like adopting renewable energy and clean technologies, carbon sequestration, reducing deforestation and planting trees to create new forests.



Climate change framework The framework supports ACC’s decision-making on specific climate change policies to ensure that ACC’s climate change response is consistent and aligned with its aim. When deciding on what actions to take, ACC will consider how different parts of the business and customers will be affected.

Aim

ACC will be proactive in leading New Zealand’s commitment to net zero emissions by 2050, including supporting efforts to limit average temperature rise to less than

1.5 degrees above pre-industrial levels.

With the passing of the Carbon Zero Amendment to the Climate Change Response Act 2019 (CZA 2019) ACC will meet these new legal obligations by taking a leadership position to support New Zealand in reaching its commitments to:

• contribute to the global effort under the Paris Agreement to limit the global average temperature increase to 1.5° Celsius above pre-industrial levels.

• Reduce net emissions of all greenhouse gases (except biogenic methane6) to zero by 2050.7

To achieve this aim, ACC will adopt a dual pathway approach:

• Corporate - ACC will take a strong leadership role by reducing corporate emissions faster than required under the Zero Carbon Amendment Act. This will involve aiming for a 60 percent reduction in Scope 1, 2 and 3 emissions8 by 2025 from 2019 levels. Offsetting residual corporate emissions from 2021 will be explored, subject to Board endorsement.

• Investments - ACC will be aligned with the Climate Change Response (Zero Carbon) Amendment Act. This means reducing the carbon intensity of the investment’s global equity portfolio by at least 50 percent by 2030 compared to 2019 levels. This position will remain under active review as ACC moves towards net zero, and it may choose to alter the ambition of the approach as it gathers more evidence about the costs and opportunities. In particular, the position may be adjusted to at least be consistent with the five-year emissions budgets that will be set by the Climate Change Commission. ACC does not rule out taking a more ambitious path should progress exceed the targeted reductions.

ACC has fewer controls to impact emissions related to its equity investments. These are largely determined by the behaviour of investee companies, most of whom are located overseas, and over whom ACC has no direct control. The carbon intensity of the portfolio has been falling steadily over the past decade. Continuation of this trend is critical to reducing emissions to net zero. However, it will probably not be sufficient on its own. Stronger action will be needed, in the form of consciously altering the mix of investments to achieve this end goal. ACC will use its influence as a shareholder through

6 Reduce emissions of biogenic methane to 24–47 per cent below 2017 levels by 2050, including to 10 per cent below 2017 levels by 2030 7 Net zero emissions means the greenhouse gases emitted globally must equal the emissions captured—through initiatives like adopting renewable energy and clean technologies, carbon sequestration, reducing deforestation and planting trees to create new forests. 8 Scopes have yet to be formally defined



proactive engagement on climate change and adopt a range of measures to reduce carbon exposure in its portfolio. Further detail on this is provided in the ‘Investment fund considerations’ section.

Income from ACC’s investment portfolio is designed to ensure that it can meet all the future costs of injuries that have already happened, without the need for New Zealanders to pay more levies for these claims in the future. ACC’s investment approach needs to balance this objective with the objective to invest in a way that is ethically acceptable to New Zealanders.

ACC has committed to improve outcomes for Māori through its Māori strategy, Whāia Te Tika, as well as committing to apply the Treaty of Waitangi principles of Partnership, Participation and Protection. As part of this commitment, ACC will be informed by Māori perspectives on environmental, social and governance (ESG) matters, including climate change, via an external advisory Māori reference group for ESG matters.

Enduring principles ACC’s climate change policies will continue to adapt to new and emerging evidence, shifts in expectations, and future changes in government policy settings. In order to achieve its overarching aim ACC will be guided by the following enduring principles:

• Maintain a financially sustainable scheme – ACC will be part of the transition to a net zero emissions economy while continuing to deliver its core functions. This requires ACC to respond to the inherent tension between moving to a lower carbon footprint and adapting to the impacts of climate change, while minimising the cost to the Scheme.

• Equity and inclusion – ACC will set climate-related policies that deliver short, medium and long-term equitable outcomes for New Zealanders. ACC’s policy-settings should not lead to disproportionate and unfair impacts on groups of customers or providers or employees, and will provide for the fair and successful transition to lower emissions for stakeholders.

• Adaptive and flexible – Many climate-related opportunities and risks, such as policy, litigation, technology, investment, market and reputational may arise as New Zealand shifts over time towards a low-emissions, climate-resilient economy. ACC’s approach will be flexible enough to evolve as needs and demands change, enabling ACC to respond differently across the different roles of the business, yet in line with the framework.

• Whāia Te Tika and Kaitiakitanga – We recognise the environment is a taonga that must be managed carefully. We also recognise that Māori have a responsibility and obligation of care over their communities and environments. ACC will work to ensure that the views and responsibilities of Māori as kaitiaki in their environments inform ACC’s climate-related actions and decisions.

• Accountable and Transparent – ACC will provide accurate, timely and relevant information about its climate-related risks and opportunities. ACC will be transparent about how it is addressing climate related impacts across the business. ACC will commit to enduring progress on climate change committing to and locking in changes even as circumstances change.



Pillars ACC has identified the three core pillars it can leverage to meet its climate change aim: Corporate, Investments, and Actuarial and Risk. Short- to medium-term actions have already been identified under these three pillars and are outlined in greater detail in Appendix 1.

Corporate Reduce ACC corporate emissions

Actions so far • Reduction in ACC corporate emissions and improving ACC’s climate resilience, including new green

builds and transition to electric vehicles;

• Clarifying ACC’s legal obligations related to climate change that fall on ACC as a corporation, investor, and Crown entity, including both current and emerging legal and government obligations;

• Assessing how ACC currently performs when compared with some similar organisations, and

• implemented an emissions reporting tool across the business.

Key opportunities in the short/medium term ACC is moving to fully integrate climate considerations across the business and thereby improve ACC’s overall resilience to climate change. This includes:

• evaluating ACC’s corporate activities from a climate change perspective;

• establishing ACC’s governance structure for climate change oversight and decision-making;

• engaging with health and injury prevention providers on their climate change policies;

• engaging with Māori to integrate te ao Māori into the design and actions of ACC’s climate change approach and policies;

• ~$2b in health sector procurement and action for this

• exploring offsetting ACC’s remaining Corporate emissions, pending a decision by the Board

• Planning to engage with internal and external stakeholders on the climate change framework, in quarter three 2020, starting with ACC staff and expanding to a range of stakeholders including NGOs and the media.

ACC will take a long-term sustainable approach vested in its strategic direction. This approach will be tested through stakeholder engagement and a materiality assessment over the coming months and aligned with relevant Task Force on Climate-related Financial Disclosures (TCFD) reporting and an update of our Environmental, Social and Governance (ESG) policy if required.



TCFD reporting requires ACC to:

• measure and disclose its carbon footprint in annual reporting; and

• consider disclosing targets and performance for environmental metrics, the Board’s oversight of climate-related risks and opportunities, the impact of climate-related risks and opportunities on ACC’s business, strategy, and financial planning, and ACC’s processes for identifying and assessing climate-related risks.

Investments Reduce ACC’s carbon exposure in the investment fund

Actions so far • Reducing ACC’s carbon exposure in the investment fund by excluding businesses that generate more

than 30 percent of their revenue from thermal coal from our investment portfolio;

• Engaging Russell Investment Group (a leading global investment consultant) to consider how ACC can manage carbon within its investments; and

• Developing a range of tools for monitoring and reporting carbon metrics within ACC’s investment portfolio.

Key opportunities in the short/medium term A three-legged approach of Engagement, Tilting, and Reporting will form the basis of the Investments Climate Change ACC Policy meeting the dual objectives of maximising returns while investing in a way that is ethically acceptable to New Zealanders.

Engagement As a shareholder, ACC does and will continue to actively encourage investee companies to reduce greenhouse gas emissions, report and plan for climate change risks.

Comprehensively Reducing Carbon Exposure ACC will continue to actively “tilt” the mix of investments held within the portfolio further away from carbon. There are different ways to achieve this. Most involve lifting portfolio weights on investments that are carbon-light and lowering them on more carbon-intensive stocks (perhaps to zero). This is a well-trodden path for investors. ACC is currently examining which option would best suit ACC.

This decarbonisation or “tilting” approach offers advantages over simply expanding the exclusions list, although the two are not mutually exclusive. Carbon footprints of potential investments cover a continuous spectrum. The exclusion approach imposes an arbitrary “cut-off” point, with many investments potentially just falling either side. Decarbonising all portfolio weights based on carbon content avoids arbitrary cut-off points and gives a greater boost to genuinely low-carbon investments. Tilting the portfolio away from carbon will have an impact on returns, although the magnitude of that impact is hard to quantify.



Russell Investments has suggested that ACC could also consider an overall portfolio constraint to accompany the benchmark change (i.e. a ceiling on total carbon emissions). This would act as a “backstop” and impose a hard cap on carbon content.

Furthermore, consideration will also need to be given to how carbon equivalents, such as methane, are treated within the portfolio. It is suggested that this consideration follow decisions on managing carbon exposure.

Monitoring and Reporting ACC’s Investments climate change policy to reduce carbon exposure will include the reporting of key metrics. The intent is to demonstrate ACC’s commitment to the long run objective, and to make it reasonably clear how the portfolio is progressing. Two important questions to consider are:

a) Monitoring how ACC’s exposure compares with a default, “do nothing” portfolio?

b) How are portfolio metrics tracking over time? A regular ACC carbon report is most likely show portfolio metrics annually.

ACC can show its leadership position by publishing a brief scorecard of measures and show how they are trending over time.

Actuarial and Risk Assess possible financial impact of climate change on future claims

Actions so far • Assessed the possible financial impact of climate change under several possible scenarios based on

claims exposure.

Key opportunities in the short/medium term There is considerable evidence of the serious and immediate health impacts that climate change will have for New Zealanders.9 This includes direct effects of increased heat and exposure to extreme weather events indirect effects of increased exposure to microbial contamination, particulate air pollutants, carriers of new diseases, and potential disruption to health services.

ACC has started to consider the possible financial impact to the business as a result of climate change through:

• claims associated with activities which may be impacted by climate change (e.g. driving and, recreation or sporting activities);

• increased violence claims;

• potential increases in the number of drownings or water related claims; and

• increased claims from flooding events and wildfires.

9 Royal Society of New Zealand Te Aparangi. 2017. Human Health Impacts of Climate Change for New Zealand.



Initial estimates suggest a modest financial impact to ACC’s new year costs - estimated to be between $100m and $400m (which represents an increase of between two percent to eight percent of the current new year costs).

Climate change impacts to the wider health system will also impact ACC’s costs in less direct ways. An increase in the demand for health care would likely result in an increase in health-related costs. An increase in costs of two percent would lead to $80m increase in new year costs. An increase of 20 percent would lead to an estimated increase of $800m in new year costs. ACC may be called on to support the health system to a greater extent to adapt to the impact of climate change than previously thought or considered to date.

The First National Climate Change Risk Assessment (NCCRA) for New Zealand will be completed by mid-2020 and will provide a national overview of the risks New Zealand faces from the impacts of climate change. This will provide further evidence for ACC in making its assessments of the financial impacts of climate change, from both direct and secondary impacts, and inform future actions for the business.



Climate change policy requirements ACC needs to understand the opportunities and risks associated with specific climate change actions, and the associated costs. These will be addressed in specific policies aligned to the framework and enduring principles, and adequately assess the options available.

The climate change framework sets out the requirements that every climate change policy needs to address, in order to ensure that ACC meets its obligations. These were described in a Board paper dated 1 May 2020.

Leadership ACC is committed to demonstrating leadership in New Zealand to address the impacts of climate change. Climate change policies will need to assess the opportunities for ACC to be a leader across its corporate and investment activities. This may require assessing how ACC compares to other Crown Entities, insurance organisations, sovereign wealth funds and health sector organisations.

Whāia Te Tika ACC’s Māori strategy, Whāia Te Tika, commits ACC to a high standard of engagement and responsiveness to Māori. ACC needs to ensure that Māori environmental and climate change interests are heard, considered, and reflected in ACC’s climate change policies. As part of this commitment, ACC will be informed by Māori perspectives on environmental, social and governance (ESG) matters, including climate change, via an external advisory Māori reference group for ESG matters.

Stakeholder expectations Complying with legal obligations and signals from Government will not prevent ACC from potential reputational damage if it fails to meet societal and stakeholder expectations.

ACC stakeholders will have a range of views on what actions ACC should take in response to the challenge of climate change, depending on who they are and how they think about the Scheme, from health providers to iwi to levy payers. ACC is committed to respond to the interests of its stakeholders and have these inform ACC’s policies.

Alignment ACC’s climate change policies will be assessed in relation to wider Government, health sector, and peer action, and best practice. Policies will need to consider the impact on the health system, be it providers, patients or the public.

Risks and opportunities It is critical that ACC makes well-informed choices about its specific responses to climate change and its impacts on our customers and on scheme sustainability, taking account of the legislation that ACC operates under.

ACC’s climate change policies will identify and assess the specific risks and opportunities associated with them over the short, medium, and long term, the impact on the business, and any trade-offs that are required.



Accountability ACC is accountable to its stakeholders including the Government, clients, and levy and taxpayers. In order to be held to account, ACC’s climate change response is required to be visible. ACC will need to ensure that its climate change policies acknowledge that ACC will:

• publish its climate change policies and actions through core accountability documents including the Statement of Intent, Service Agreement (with the Minister for ACC), Ethical Investment Policy, and Annual Reports. This will include expanding on current Environmental, Social and Governance (ESG) reporting in the Annual Report;

• comply with relevant TCFD reporting. It is expected that there will be a greater requirement to align reporting with the TCFD) framework. This reporting may require ACC to report on the oversight and role of Board and Management on climate-related risks and opportunities;

• develop a range of tools for monitoring and reporting its climate related actions. This may include its carbon metrics within the Investment portfolio and within its corporate activities;

• continue to act in line with any directions issued by Ministers under the Crown Entities Act 2004 to Crown entities in relation to climate change obligations. For example, those included in Whole of Government directions on procurement; and

• continue to make its climate change initiatives and carbon exposure visible under the Official Information Act and select committee requests, and public analysis by the media and interest groups.



Next steps

Policy development In order to meet ACC’s long-term aim to position ACC as a climate change leader, as well as meet its commitments over the short- to medium-term, ACC will develop a suite of specific climate change related policies to ensure that climate change is actively managed as other corporate policies come up for renewal.

Actions Appendix 1 outlines the short- to medium-term actions that have been identified, and long-term objectives, that the Corporate, Investments, and Actuarial and Risk areas will take to support its climate change commitments.

Costs and targets The costs of specific actions will need to be addressed by each climate change policy. Costs will include potentially significant opportunity cost and the direct costs of offsetting emissions to meet targets. In setting targets, each policy will need to consider how realistic they are, the potential consequences for staff and the business, and the potential costs.



Appendix 1: Short- to medium-term actions for Corporate, Investments, and Actuarial and Risk

ACC’s ClNmate CMange FramewTrk

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