This article summarises the background of the climate-related disclosure regime, details of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021, the final Climate Standards, relevant guidance and the next steps for the regime.
We will regularly update this page with developments.
On 15 September 2020, the Government announced that Cabinet had agreed to introduce a mandatory climate-related disclosure regime that would require captured financial entities to report against a standard developed by the External Reporting Board (XRB). XRB is an independent Crown Entity responsible for accounting, auditing and assurance standards in New Zealand.
The disclosure regime has been implemented by way of an amendment to the Financial Markets Conduct Act 2013. The Financial Markets Authority (FMA) will be responsible for the independent monitoring, reporting and enforcement of the regime.
On 13 April 2021, the Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill ("Bill") was introduced to Parliament, with its first reading in the same week. Under the Bill the XRB has the mandate to create and issue a climate-related disclosure framework. The XRB has released three different public consultation documents, throughout 2021 and 2022, on the proposed Aotearoa New Zealand Climate Standards (Climate Standards) which together will comprise the climate-related disclosure framework.
On 27 October 2021 the Bill received its royal assent, becoming the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 ("Act"). The Act initially came into force on 27 October 2022, however the requirements for "climate reporting entities" to prepare and lodge climate statements and keep records will largely only apply from April 2024.
On 15 December 2022, the XRB released the final Climate Standards, which include the Climate-related Disclosures (CS 1), Adoption of Aotearoa New Zealand Climate Standards (CS 2) and General Requirements for Climate-related Disclosures (CS 3).
On 1 May 2023, the XRB released the final version of the Climate-related Disclosures Staff Guidance for all sectors, which provides guidance for climate reporting entities on compliance with the three Climate Standards, including a range of illustrative examples. In July 2022, the XRB released a draft version of staff guidance for managed investment scheme managers titled "NZ CS 1: Guidance for managed investment scheme managers". As managers of investment schemes become more familiar with the climate-related disclosures regime, the XRB intends to provide opportunities for feedback and development of this guidance.
On 21 June 2023, the Ministry of Business, Innovation and Employment (MBIE) published a consultation paper and an exposure draft of the Financial Markets Conduct (Climate-related Disclosures) Amendment Regulations 2023 ("Draft Regulations"), which includes additional record keeping requirements, transitional provisions and sets infringement fees for minor offences under the climate-related disclosure regime. MBIE is currently seeking feedback on the Draft Regulations, and this consultation closes at 5pm on 12 July 2023.
On 23 June 2023, the FMA published three documents to support climate reporting entities in meeting their reporting obligations:
- The Climate-related Disclosures Monitoring Plan, which summarises the FMA's approach to monitoring compliance of climate reporting entities with their climate reporting obligations under Part 7A of the Financial Markets Conduct Act 2013
- Final guidance on the use of third party providers to deliver services in relation to the climate-related disclosure regime
- Draft guidance on keeping climate-related disclosures records. Consultation on this closes at 5pm on 4 August 2023.
Productivity Commission inquiry
On 26 April 2017, the Government released a Terms of Reference addressed to the Productivity Commission, requesting an inquiry into how New Zealand could transition into a lower net emissions economy.
This inquiry followed New Zealand ratifying the Paris Agreement and submitting its first Nationally Determined Contribution (NDC) on 4 October 2016. On 31 October 2021, the NDC was updated (New NDC) to cover the period 2021 to 2030. The New NDC sets a headline target to reduce greenhouse gas emissions by 50 percent below New Zealand's gross 2005 level by 2030, accompanied by information to facilitate clarity, transparency, and understanding required by all countries under the Paris Agreement.
In 2018, the incoming Minister for Climate Change requested that the Productivity Commission include a target of net zero emissions by 2050 in its analysis.
The Productivity Commission published its 'Low-emissions economy' final report in August 2018 (Low Emissions Report), as well as other materials produced during the inquiry. The Low Emissions Report identified information barriers relating to climate change as one of the drivers of a "systemic overvaluation of emission intensive activities" and one of the key barriers to low emissions investment.
The Low Emissions Report recommended the introduction of a mandatory climate-related disclosure regime to overcome this information barrier and encourage investment that supports the transition to a low emissions economy.
Government's Climate Action Plan
On 3 August 2019, the Government announced its Climate Action Plan in response to the Productivity Commission’s inquiry. As part of this announcement, the Government also published its response to the Low Emissions Report as well as other supporting materials outlining the steps it intended to take to implement the recommendations in the report.
The Government response agreed with the Low Emissions Report's recommendation that material risks and opportunities associated with climate change should be disclosed. The response stated that high quality disclosures will help investors, lenders and insurers make decisions and incentivise reporting entities to manage risks and pursue opportunities that arise due to climate change.
The response identified that certain details such as the class of entities the disclosure requirements should apply to and the nature of information that should be disclosed would require stakeholder consultation.
On 31 October 2019, the Government opened public consultation and released a discussion paper, 'Climate-Related Financial Disclosures: Understanding Your Business Risks And Opportunities Related To Climate Change' that sought feedback on its proposals from potential reporting entities, amongst others. The discussion paper specifically requested submissions on issues such as the suitability of a disclosure regime, the class of entities, nature of information, exemption criteria and commencement dates.
As part of the consultation process, the Ministry for the Environment (MFE) and MBIE also held four public events and hosted a public webinar.
Summary of submissions
Following the closure of the consultation period on 13 December 2019, MFE and MBIE released a document containing a summary of the submissions on the proposals.
The summary found that most submissions (77 percent) supported the proposals, favouring a new mandatory, principles based (comply or explain) disclosure requirement which aligned with the recommendations made by the Task Force on Climate-related Financial Disclosures.
The summary document concluded that it would use the submissions to inform its final decision on the disclosure regime and seek cabinet approval to make any necessary changes and begin the process of introducing new legislation.
Details about the disclosure regime
Task Force on Climate-related Financial Disclosure's recommendations
The Task Force on Climate-related Financial Disclosures (TCFD) is an industry led taskforce created in 2015 by the G20's Financial Stability Board to develop consistent climate-related financial disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders and to allow reporting entities to understand their climate-related risk.
In June 2017, the TCFD presented its recommendations report (TCFD Recommendations) setting out a disclosure framework. The TCFD Recommendations are structured around four thematic areas that represent core elements of how organisations operate (governance, strategy, risk management, and metrics and targets). The TCFD Recommendations are considered international best practice for climate-related financial reporting and are already being used in New Zealand and other countries on a voluntary basis.
Scenario analysis is a key element of the TCFD Recommendations. This is a requirement that reporting entities describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario (ie a pathway consistent with holding the increase in the global average temperature to 2°C above pre-industrial levels).
Reporting and disclosure requirements
Under the proposed climate-related disclosure regime, reporting would be against a standard that is to be developed in accordance with the TCFD Recommendations. The XRB will develop, consult on and issue new reporting standards and implementation guidance material to assist businesses required to disclose. XRB is an independent Crown Entity responsible for accounting and auditing & assurance standards in New Zealand. The XRB published, on 15 December 2022, the final Climate Standards which comprise the climate-related disclosure framework.
MFE will work with regulated parties on how to undertake the scenario analysis component of the disclosures.
Disclosures by required entities will be made on a "comply or explain" basis. Effectively this means that where the required information is not available or the relevant disclosures cannot be made following best endeavours, the entities can explain rather than disclosing.
Scope and implementation of the regime
The FMA will be responsible for independent monitoring, reporting and enforcement of the new climate-related disclosure regime.
The organisations that would be required to make disclosures under the Act are "climate reporting entities" (CREs), which include:
- All listed issuers who are "large" (has either quoted debt or equity securities that, along with unquoted securities as relevant, exceed $60 million)
- All registered banks, credit unions, and building societies that are "large" (with total assets of more than $1 billion)
- All managers of registered investment schemes that are "large" (with greater than $1 billion in total assets under management)
- All licensed insurers that are "large" (with greater than $1 billion in total assets under management or annual premium income greater than $250 million).
The $1 billion threshold has been set in order to ensure approximately 90 percent of assets under management in New Zealand are captured within the disclosure regime.
Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021
The Bill was introduced to Parliament on 12 April 2021 and had its first reading two days later. On 27 October 2022 the Bill received royal assent and became the Act. The Act amends the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and (to a lesser extent) the Public Audit Act 2001. We outline below the key parts of the Act.
Climate reporting entity
The Act applies to CREs. A CRE will have disclosure, record keeping and reporting obligations.
Disclosure and record keeping
The Act inserts a new Part 7A into the Financial Markets Conduct Act 2013, which sets out the disclosure obligations of a CRE. These disclosure obligations include preparing and maintaining records of certain climate-related disclosures (CRD), for example climate statements. CRD records must be retained for a period of at least seven years and must be available for inspection at all reasonable times.
In guidance published on its website, MBIE estimates that around 200 CREs will be caught by the CRD requirement. The proposed penalties for knowingly failing to comply with climate standard obligations are significant, including, for an individual, a term of imprisonment for a maximum of five years or a fine not exceeding $500,000 (or both), and in any other case, a fine not exceeding $2.5 million. These are currently outlined in clause 461ZG of the Act.
The Act inserts new provisions into the Financial Reporting Act 2013, which impose additional reporting requirements on an entity. Note that this definition of "entity" as currently contained in the Financial Reporting Act 2013 is wider than a CRE; it includes (among other things) a company, a trust, a retirement village, and the Crown.
One of the key changes is the introduction of a concept of "climate standards", which is essentially the amendment of the existing definition of "standard" to extend it to require an entity to give consideration to the risks and opportunities climate change presents.
Public Audit Act 2001
The Act inserts new provisions into the Public Audit Act 2001, which give the Auditor General responsibility to act as an assurance practitioner for the CRD assurances of public entities pursuant to the Financial Markets Conduct Act 2013.
Climate Standards - public consultation
The Climate Standards together comprise the CRD framework that CREs must comply with in the preparation of climate statements and holding of CRD records. The XRB has published three different consultation papers from October 2021 to July 2022, the details of which are set out below.
October 2021 consultation
The first consultation paper was released in October 2021 and sought public submissions in relation to the proposed governance and risk management sections of CS 1. Public submissions closed on 22 November 2021.
This consultation paper proposed a governance section to be included within CS 1, which outlines the role of a CRE board and management in "overseeing, assessing and managing climate-related issues". This proposed section includes what information a CRE is required to disclose in their climate statements when describing their board's oversight of climate-related issues.
This consultation paper additionally proposed a risk management section to be included within CS 1. The proposed risk management has the purpose of showing how a CRE identifies, assesses and manages climate-related risks as well as how this is integrated into the CRE's overall risk management processes. This section includes the information a CRE is required to disclose in their climate statements in relation to identifying, assessing and managing climate risks and how these fit into the CRE's overall risk management processes.
March 2022 consultation
The second consultation paper was released in March 2022, and sought public submissions in relation to proposed strategy, and metrics and targets sections in CS 1. This consultation paper further sought public submissions in relation to assurance engagements required under the Act and a third climate standard, CS 3. Public submissions closed on 13 April 2022.
The consultation paper proposed a strategy section to be included within CS 1, which outlines how a business's strategy and planning are impacted by climate-related risks and opportunities. A CRE must disclose, as a part of their climate statements, the climate-related risks and opportunities identified over the short, medium and long term, the impact of these risks and opportunities on the CRE's business model, strategy and financial planning and the resilience of the CRE's business model and strategy to different climate-related scenarios, including the methodology and assumptions underlying the scenarios.
The consultation paper additionally proposed a metrics and targets section to be included within CS 1. It proposes a CRE must disclose, as a part of their climate statements, how climate-related risks are measured and managed, targets used to manage climate-related risks and opportunities (including performance against targets) and the methodology for how metrics and targets are created. The MFE has stated that they do not propose any industry specific metrics at this time, and that CRE should disclose the actual metrics used to manage climate-related risks and opportunities.
The consultation proposed a third climate standard, CS 3, which would contain "general requirements". The MFE proposed CS 3 to have eight sections:
- Reporting entity and reporting period
- Comparation information and consistency of reporting
- Presentation/cross referencing
- Fair presentation
- Reporting framework
- Statement of compliance
- Qualitative characteristics and useful information.
July 2022 consultation
The third, and final, consultation paper was released in July 2022, and the XRB sought public submissions on the entire CRD framework. The consultation paper contains full exposure drafts of CS 1, CS 2 and CS 3, as well as draft guidance in relation CS 1. In this consultation paper the XRB states that they do not plan on releasing separate guidance for CS 2 and CS 3
As a part of the exposure draft for CS 1, the consultation paper includes a table of "main changes" between the October 2021 consultation and March 2022 consultation and the exposure draft. There have been no significant changes in relation to the governance or risk management sections. There have been a number of updates to the strategy section, including a clarification of the differences between current impacts of climate change and anticipated impacts of climate change.
Final Climate Standards (CS 1, CS 2, and CS 3)
On 14 December 2022, the XRB published the final versions of CS 1, CS 2 and CS 3, intended to be read in the context of each other.
CS 1 Climate-related disclosures
The purpose of this Standard is to enable primary users (ie existing and potential investors, lenders and other creditors) to assess the merits of how CREs are considering climate-related risks and climate-related opportunities, and then make decisions based on those assessments.
CS 1 contains the CRD requirements for the four thematic areas (Governance, Strategy, Risk Management and Metrics and Targets) and the assurance requirements for greenhouse gas emissions disclosures.
For governance disclosure, CREs must disclose the identity of and a description of the governance body (eg a board or an investment committee) responsible for overseeing climate-related risks and opportunities and management’s role in assessing and managing climate-related risks and opportunities.
For strategy disclosure, CREs must disclose their current climate-related impacts, the scenario analysis they have undertaken (see the XRB's "Scenario analysis: getting started at the sector level" guidance dated June 2022 on how to develop consistent and comparable sectoral scenarios for scenario analysis), climate-related risks and opportunities over the short, medium, and long term and the anticipated impacts of these. CREs must also disclose how they will position themselves as the global and domestic economy transitions towards a low emissions, climate resilient future state.
For risk management disclosure, CREs must disclose their processes for identifying, assessing, and managing climate-related risks and how these are integrated into their overall risk management processes.
For metrics and targets disclosure, CREs must disclose their metrics relevant to all CREs regardless of industry and business model and industry based metrics relevant to their industry or business model used to measure and manage climate-related risks and opportunities. CREs must also disclose any other key performance indicators or targets used to measure and manage climate-related risks and opportunities, and performance against those targets, and metrics for greenhouse gas (GHG) emissions (see the XRB's "Getting started on measuring GHG emissions" guide released in April 2022), which are subject to an assurance engagement.
CS 2 Adoption of Climate Standards
CS 2 provides optional adoption provisions. CREs may use one or more of the adoption provisions in CS 2, some of which exempt certain disclosures, while other adoption provisions require alternative information to be disclosed. If a CRE uses any of the adoption provisions in CS 2, they must include a description of the adoption provision(s) used along with its statement of compliance with the Climate Standards.
CS 3 General requirements for CRDs
CS 3 contains the principles, the underlying concepts such as materiality, and the general requirements.
CREs must fairly present their CRDs. Fair presentation requires information consistent with disclosure objectives and requirements in the Climate Standards and disclosure of information consistent with CS 3's principles.
The principles are provided in table one and table two of CS 3 and must be applied when preparing and presenting CRDs.
Occasionally there may be some conflict between principles or within a single principle, so CREs must consider their primary users' needs and the objectives of CRDs when deciding trade-offs between principles.
Table one describes principles that make information in CRDs useful to primary users. These principles state that the information should be relevant, accurate, verifiable, comparable, consistent, and timely.
Table two describes principles that makes the presentation of CRDs useful. These principles state that the information is free from bias, clear, concise, complete, and coherent.
Materiality also applies to all disclosure requirements in the Climate Standards.
Guidance from the XRB
The XRB has released four guidance documents, including:
- "Scenario analysis: getting started at the sector level" CS 1 guidance dated June 2022, as described above
- "Getting started on measuring GHG emissions" CS 1 guidance released in April 2022, as described above
- "Climate-related Disclosures Staff Guidance" for all sectors released on 1 May 2023, as described below
- "NZ CS 1: Guidance for managed investment scheme managers", released in July 2022, as described below.
On 1 May 2023, the XRB released the Climate-related Disclosures Staff Guidance (Staff Guidance), which is guidance on the CRD regime and the Climate Standards for all sectors. The Staff Guidance provides relevant guidance and contextual information on each of the Climate Standards, and the individual disclosure requirements within each Climate Standard. The Staff Guidance is the finalised version of the previous draft "all sectors guidance" released in July 2022, with the major difference being that the Staff Guidance considers CS 2 and CS 3 alongside CS 1.
The Staff Guidance is not mandatory or binding on CREs and observance of the Staff Guidance by CREs does not necessarily ensure that a CRE is complying with their obligations under the Climate Standards (ie observance or compliance with the Staff Guidance does not create a 'safe harbour' for a CRE's obligations under the Climate Standards).
The Staff Guidance contains a range of illustrative examples to assist CREs with their disclosure requirements, however, the XRB makes it clear that these examples are not endorsements or necessarily 'best' practices.
The Staff Guidance is made up of seven main sections:
- Section 1 provides an introduction on how to read and utilise the Staff Guidance
- Section 2 provides an overview of the Act and the CRD regime
- Section 3 discusses the broad requirements of CS 1, CS 2 and CS 3
- Sections 4 and 5 provide guidance on the principles and general requirements of CS 3
- Sections 6 to 9 provide specific guidance on the four thematic areas of CS 1 (which are governance, strategy, risk management and metrics and targets)
- Section 10 provides guidance on how CRD and information can be coherently represented in a CRE's statements
- Section 11 provides guidance on how a CRE can "fairly present its CRDs".
The Staff Guidance is a comprehensive tool that CREs should review thoroughly to be in the best place to understand what specific obligations they have in relation to the Climate Standards and what steps they will need to take to be able to comply with these obligations.
In July 2022, the XRB released a draft version of staff guidance for managed investment scheme managers (MIS) titled "NZ CS 1: Guidance for MIS managers". The XRB has noted that the process of disclosure for MIS managers will be sufficiently different from other types of CREs. "NZ CS 1: Guidance for MIS managers" provides general guidance for compliance with the disclosure obligations in CS 1, including examples and expectations. As MIS managers become more familiar with the CRD regime, the XRB intends to provide opportunities for feedback and development of this guidance.
Financial Markets Conduct (Climate-related Disclosures) Amendment Regulations 2023
On 21 June 2023, MBIE published the Draft Regulations. The Draft Regulations include additional record keeping requirements, transitional provisions and set infringement fees for minor offences under the CRD regime. MBIE intends to finalise the Draft Regulations before September 2023, but has noted the tight timeframe. MBIE also published an accompanying consultation paper, seeking feedback on the Draft Regulations and whether the Draft Regulations should include a regulation prescribing where CRD records are to be kept. Feedback on the Draft Regulations close at 5pm on 12 July 2023.
Once the Draft Regulations come into force, they will amend the Financial Markets Conduct Regulations 2014 (FMC Regulations) in three ways:
1. Inserting a new part 7A in the FMC Regulations on record keeping and inspection obligations
CRD records must be readily identifiable, comprehensible, kept in English or te reo Māori and made available upon request.
If CRD records are kept by a third party, the CRE must ensure that the third party keeps the records in accordance with the CRE's obligations under the Financial Markets Conduct Act 2013.
2. Inserting a new part 9 into Schedule 1 covering transitional provisions
This part relates to where a CRE's records are kept by a third party (Regulation 252D). Regulation 252D does not apply to a third party arrangement entered into before the commencement of the Draft Regulations.
CREs have up to two years to change their arrangements to comply with Regulation 252D. If arrangements are amended or renewed within the two years, CREs must be compliant from the date of renewal or amendment.
3. Amending Schedule 22 of the FMC Regulations to set out new infringement fees
The Draft Regulations set infringement fees for a series of minor infringements, primarily in relation to record keeping and lodgement of climate statements, at the same level as similar reporting offences under Schedule 22 of the FMC Regulations.
Guidance from the FMA
On 23 June 2023, the FMA published three documents to support CREs in meeting their reporting obligations:
1. The Climate-related Disclosures Monitoring Plan 2023-2026
This Climate-related Disclosures Monitoring Plan (Plan) summarises the FMA's approach to monitoring the compliance of CREs with their climate reporting obligations under Part 7A of the Financial Markets Conduct Act 2013. This Plan is written for CREs, their directors, other authorised bodies and assurance practitioners.
2. The Climate-related Disclosure record keeping draft guidance for consultation
CREs will be required to produce annual climate statements under Part 7A of the Financial Markets Conduct Act 2013. These climate statements must be supported by keeping CRD records under section 461V of the Financial Markets Conduct Act 2013.
This record keeping draft guidance is intended for CREs, their directors, other authorised bodies and assurance practitioners in complying with sections 461V – 461Y of the Financial Markets Conduct Act 2013, where every CRE must keep CRD records and make CRD records available in the prescribed manner at all reasonable times for inspection to relevant persons.
This guidance covers the following:
- The responsibilities of a CRE's governance body and senior management in overseeing climate risks and opportunities
- The responsibility of CREs to identify climate-change impacts and how the CRE intends to overcome these challenges in the future
- CRE processes for identifying, assessing, and managing climate-related risks
- How CREs should disclose their metrics for greenhouse gas emissions and their targets in CS 1.
The guidance also explains how CREs should apply MBIE's proposed Draft Regulations and other principles CREs should consider when preparing climate statements and keeping CRD records.
Consultation on this proposed record keeping draft guidance closes on 4 August 2023.
3. The CRD regime and the use of third party providers information sheet
This use of third party providers information sheet helps CREs understand what to consider before engaging a third party provider to deliver services in relation to the CRD regime. For example, CREs should consider their purpose in engaging a third party provider and what are the skills, knowledge and experiences of the third party provider.
The information sheet also covers due diligence requirements, the importance of following a proper process, and questions to ask before engaging a third party provider.
The XRB is continuing to work on finalising guidance at a sector level, in particular for managers of registered managed investment schemes. The XRB plans to continue to work on increasing awareness around CRDs.
The FMA is continuing to work on finalising record keeping guidance, and MBIE is working on finalising the Draft Regulations.
The first climate statements for CREs will need to be prepared as either part of the CREs 31 December 2023 reporting, if the CRE has a reporting period beginning 1 January 2023, or prepared as a part of the CREs 30 June 2024 reporting, if the CRE has a reporting period beginning 1 July 2023.
We will update this page when further guidance and any other developments on the regime are released.