While the International Sustainability Standards Board (ISSB) is still finalising the standards that many countries are hoping will become their climate reporting framework, New Zealand has already done the hard thinking and is walking the talk.
Our new mandatory climate-related disclosure (CRD) regime, under Part 7A of the Financial Markets Conduct Act 2013 (FMCA), is in force, acting as a model for other countries and intergovernmental bodies wishing to develop their own climate reporting requirements and standards as part of their response to the climate crisis.
The CRD regime is expected to capture around 200 financial institutions and listed companies and applies to reporting periods from 1 January 2023.
The government intends using financial markets to drive change. In 2020, Climate Change Minister James Shaw said climate risk reporting would be introduced as part of New Zealand’s journey towards a low-carbon future to give businesses a good understanding of how climate change will impact them.
In October 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act amended the FMCA (inserting Part 7A), the Financial Reporting Act 2013, and the Public Audit Act 2001, making it mandatory for specified entities to prepare climate statements.
The intent was recorded in the explanatory note to the bill as introduced into Parliament: Financial markets globally can play a major part in shifting investment away from emission-intensive activities and towards low-emission, resilient development pathways. However, this unprecedented economic transformation will require the disclosure of consistent, comparable, reliable, and clear information about climate-related risks and opportunities that are, for the most part, not being made available to investors at present.
The bill went on to say New Zealand’s disclosures would be aligned with the framework provided by the Task Force on Climate-related Financial Disclosures (TCFD). This was created by the Financial Stability Board because of the need for better information to support investment, lending and insurance underwriting decisions and to improve analysis of climate-related risks and opportunities.
Importantly, while this is positioned as a disclosure regime, the analysis required to make the disclosures is expected to lead to significant changes in how business is conducted.
Climate reporting entities
The CRD regime applies to “climate reporting entities” (CREs), including:
- large NZX-listed issuers of quoted equity securities or quoted debt securities (ie, with a market capitalisation or nominal amount exceeding $60 million);
- large registered banks, licensed insurers, credit unions and building societies (ie, with total assets exceeding $1 billion or, in the case of licensed insurers, where premium income exceeds $250 million a year); and
- large licensed managers of registered managed investment schemes (ie, with total assets in registered schemes exceeding $1 billion).
Various governmental agencies are also expected to comply under Ministerial Letters of Expectation, even though they are not covered by the definitions in the legislation.
Impacts and emissions
Under Part 7A of the FMCA, CREs are required (for reporting periods beginning on or after 1 January 2023) to:
- prepare an annual climate statement in accordance with climate standards issued by the External Reporting Board (XRB);
- comply with record-keeping requirements in relation to the information used in the climate statement; and
- lodge and make the climate statement available to the public within four months after the CRE’s balance date (or, in the case of NZX-listed issuers, within three months of its balance date).
For reporting periods ending on or after 27 October 2024, CREs must obtain limited assurance on disclosures relating to greenhouse gas emissions. What will drive change is contained in the three climate standards, published by the XRB in December 2022. They are to be read as a package and consist of:
- NZ CS 1, which sets out the specific disclosure requirements, largely inspired by the TCFD framework and adjusted to take account of ISSB’s developing sustainability reporting standards;
- NZ CS 2, which provides relief provisions from specific disclosure requirements under NZ CS 1 for mainly the first reporting period because it will take time to develop good quality standards; and
- NZ CS 3, which sets out the principles and general considerations for the climate statements (eg, concepts of fair presentation, materiality, etc).
The stated objective of NZ CS 1 neatly encapsulates the intent: To enable primary users [ie, stakeholders] to understand how climate change is currently impacting [the CRE] and how it may do so in the future. This includes the scenario analysis [the CRE] has undertaken, the climate-related risks and opportunities [the CRE] has identified, the anticipated impacts and financial impacts of these, and how [the CRE] will position itself as the global and domestic economy transitions towards a lowemissions, climate-resilient future.
To achieve this, climate statements contain disclosures based on the TCFD’s four pillars on climate disclosures:
- Governance: enabling users to understand the role of the governing body (usually the board) in overseeing, and management in assessing and managing, climate-related risks and opportunities;
- Strategy: enabling users to understand how climate change is impacting an entity and how it may do so in the future;
- Risk management: enabling users to understand how an entity’s climate-related risks are identified, assessed and managed, and how those processes are integrated into existing risk management processes; and
- Metrics and targets: enabling users to understand how an entity measures and manages its climate-related risks and opportunities (including scopes 1-3 emissions).
Key to the approach is a scenario analysis requirement. NZ CS 1 requires the CRE to consider at a minimum three climate-related change scenarios since pre-industrial times:
- a 1.5 degrees Celsius scenario;
- a 3 degrees Celsius or greater scenario; and
- a third scenario chosen by the CRE
The outputs of scenario analysis will identify the climate-related impacts the governing bodies of CREs must then factor into their risk management and strategy disclosures. This is expected to drive both adaption and mitigation by the CREs.
Non-CREs, whether in New Zealand or overseas, will also benefit from voluntarily undertaking the analysis and understanding how their businesses are impacted by climate change.
The CRD should be viewed not as a compliance regime but as an analytical framework. As a senior executive from the XRB recently said at a Risk NZ forum, “if you undertake the analysis required by the CRD regime and conclude your existing business strategy does not need to change, you should be surprised and consider whether you need to do it again, given the magnitude of what is coming”.
Both the XRB as standard-setter and the Financial Markets Authority as regulator under the CRD regime have prepared, practical materials around scenario analysis and how a regulator might approach enforcing this type of regime.
The XRB is finalising guidance on how to approach climate statements for specific types of CREs, including fund managers, banks and insurers.
Lloyd Kavanagh is a partner and Shaanil Senarath-Dassanayake is a solicitor at MinterEllisonRuddWatts.
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