17/09/2021·4 mins to read
Climate disclosure regime for financial sector one step closer
New Zealand’s financial sector climate reporting regime is one step closer, with the release of the Select Committee report on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. This gives us a clearer indication of what the climate disclosure regime will look like for New Zealand businesses.
We have outlined below what the regime (if enacted in its current form) will involve. Crucially, climate-related disclosures will impact many businesses, and not just those with the primary reporting obligations. This is arguably the main point of the regime.
What you need to know
The Select Committee has recommended some changes to the regime, including removing the “comply or explain” requirement - making compliance mandatory.
The External Reporting Board (XRB) plans to start consultation on aspects of the climate reporting standards in October 2021, with a view to releasing the final standards in late 2022.
The disclosure regime will not only impact climate reporting entities. Customers of banks and insurers, and companies funds invest in, must be prepared to be asked about their own climate-related risks.
- Corporate governance practices must adapt to meet these disclosure requirements, not only for climate reporting entities but also their customers - and particularly those customers in emission-intensive sectors.
Main changes to the Bill
The Select Committee has made several changes to the Bill, including:
- exempting smaller entities from the regime, such as:
- issuers with a market capitalisation of less than NZ$60 million or who are listed on a growth market (ie Catalist); and
- banks, insurers, fund-managers, building societies and credit unions whose total assets are less than NZ$1 billion (and in the case of insurers, whose gross premiums are also less than $250 million);
deferring the requirement that reported Greenhouse Gas Emissions be independently audited until three years after the Bill is enacted;
removing the licensing regime for assurance practitioners;
removing the “comply or explain” option, meaning climate reporting entities must now disclose all relevant information; and
- removing the requirement to explain why “immaterial” information has been excluded.
XRB’s progress with climate standards
The XRB is currently developing the climate standards, which will outline the specific disclosure requirements. These standards are expected to align with the framework already provided by the Task Force on Climate-related Financial Disclosures (TCFD). The first consultation paper on Governance and Risk Management disclosures is due to be released on 20 October this year. The final climate standards are expected at the end of 2022, with reporting to start in FY22-23.
What the disclosure regime will likely mean in practice
We now have a pretty good idea of what the disclosure regime will look like. There is still opportunity for the Bill to change further, but material changes are unlikely.
All Climate reporting entities
Climate reporting entities will need to prepare annual climate reporting statements and lodge them with the Registrar of Financial Service Providers. The statements must also be included in businesses’ annual reports (either in full or through an internet link where the statements can be accessed).
Likely disclosure requirements for a climate reporting entity include:
climate-related risks and opportunities facing the business over the short, medium and long term, including climate-related risks the business is exposed to in their value or supply chain;
the impact of climate-related risks and opportunities on the business’ strategy and financial planning;
the resilience of the business’ strategy, taking into account different climate scenarios (such as a 2°C increase);
the business’ direct Greenhouse Gas emissions (known as Scope 1 emissions), as well as indirect emissions from its electricity consumption (Scope 2 emissions) and supply chain (Scope 3 emissions);
the processes used to identify, assess and manage climate-related risks, and a description of how these processes are incorporated into the business’ overall risk management;
the metrics and targets used to assess and manage climate-related risks and opportunities; and
- the business’ governance around climate-related risks and opportunities, such as board oversight and managerial responsibility.
The TCFD has also recommended that fund managers (that are climate reporting entities) should provide, where data is available or can be reasonably estimated, a weighted average carbon intensity metric (being the amount of Carbon emissions per million NZD of revenue) for each fund or investment strategy – effectively outing any carbon heavy investments.
Customers of Banks and Insurance companies
Much of the climate-related risks facing banks and insurers (and fund managers) will be their financial exposure to their customers’ (or, in the case of fund managers, their investments’) climate-related risks - ie their exposure to businesses being unable to meet loan obligations, drops in value of secured assets or increasing likelihood of insurance claims due to climate-related risks. This is the element that captures many other parts of the economy, beyond the climate reporting entities themselves.
Those in emission-intensive industry sectors (energy, transportation, materials, building , agriculture, food and forest products) who are likely to face the greatest climate-related risks, whether physical or transitional, will be a particular focus for banks and insurers.
Corporate Governance practices must adapt
The requirements of the climate-related disclosure regime will be a challenge for most, and corporate governance practices will need to adapt to meet that challenge - ready for reporting in FY2022-2023.
While some businesses have already started voluntarily reporting their climate-related risks, for many the disclosure obligations will be wholly new, requiring time, expertise and energy to deal with (ie identify, assess, verify and report).
Climate-related disclosures are further complicated by being inherently forward looking (where other forms of disclosures concern historical matters about which there is more certainty) and calculating likely emissions can be complex.
Directors will need to be confident that the information ultimately disclosed is as complete and accurate as possible. Companies, and their directors, will therefore need to have comprehensive risk management systems in place to ensure that reliable information is identified internally and reported to the Board.
Customers of banks and insurers, and companies funds invest in, must stand ready to comply with the disclosure regime - albeit indirectly. All these businesses, particularly those that are emissions-intensive, must be prepared to be asked about their climate-related risks, and will need to have processes in place to provide the information on time and accurately.