In May 2022, the External Reporting Board (XRB) and Financial Markets Authority (FMA) jointly published a guidance document 'Aotearoa New Zealand Climate-related Disclosures – Director Preparation Guide' (Director Guide) that is 'intended to provide directors with a quick reference for key things they need to know about Aotearoa New Zealand’s forthcoming climate-related disclosures regime'.
In short, the new regime will require large financial institutions to prepare 'climate statements' in accordance with 'applicable climate standards' created by the XRB. This disclosure regime is, in many ways, analogous to reporting and disclosure obligations entities currently have to prepare financial statements to disclose information to stakeholders.
This article provides relevant background on the regime (including an explanation of when the obligations under the new regime come into force, which entities will be affected by the regime, and a summary of the most important aspects of the Director Guide), and sets out the actions directors can immediately take to ensure their entity's readiness for the new obligations.
If you would like to know more about the new regime or would like specific advice on how to comply with your obligations under the new regime, please contact a member of our financial services regulation team.
When do the new obligations come into force?
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (Amendment Act), which amends the Financial Markets Conduct Act 2013 (FMC Act) and introduces the new climate-related disclosures regime, attained royal assent on 27 October 2021.
However, two of the core obligations introduced by this regime (preparing climate statements and keeping records) will realistically only apply from April 2024. Please see our 'Climate-related disclosures – seven months later and a clear direction' article for a more detailed discussion on the commencement of the obligations under the new regime and when your entity should start considering your obligations to ensure you are compliant with the new regime.
Which entities are required to comply with the new regime?
Under the new regime, certain FMC reporting entities called 'climate reporting entities' (CREs) will be required to prepare and publish climate statements that comply with applicable climate standards (and keep records of the information underpinning the climate statements). We set out which FMC reporting entities are designated as CREs in our 'Climate-related disclosures – seven months later and a clear direction' article.
Climate statements and climate standards
Climate statements must be prepared in accordance with climate standards. The XRB is the entity responsible for developing these climate standards. A cornerstone of the climate statements that CREs will have to prepare is the use of forward-looking scenario analysis. For a detailed discussion on scenario analysis please see our 'Climate related disclosure – the first step in the right direction?' article.
In its consultation paper released in March 2022, the XRB indicated its intention to publish three applicable climate standards:
- New Zealand Climate Standard one (NZ CS 1) will contain the disclosure requirements relating to the four thematic sections (as set out in the Taskforce for Climate-related Financial Disclosures (TCFD) recommendations), which are governance, risk management, strategy and metrics and targets)
- New Zealand Climate Standard two (NZ CS 2) will contain minimum disclosure standards for entities producing their first climate statement, offering entities options for phased adoption of some disclosure requirements or relief from providing certain types of comparative information. Entities that are more advanced in their understanding of climate-related issues that affect them may decide to not use any of these options and, instead, comply entirely with the disclosure requirements of NZ CS 1
- New Zealand Climate Standard three (NZ CS 3) will contain principles and general requirements for CREs to consider when providing disclosure under NZ CS 1 or NZ CS 2, including matters such as the definition of materiality, reporting period, comparative information, cross-referencing, fair presentation, statement of compliance and qualitative characteristics of useful information.
The XRB has advised that it is 'working towards issuing a formal exposure draft of NZ CS 1 in July 2022'. In its March 2022 consultation paper, the XRB stated that a draft copy of NZ CS 2 and NZ CS 3 will also be published 'when the full exposure draft of NZ CS 1 is issued for comment in July 2022'.
The XRB expects to publish the final versions of NZ CS 1, NZ CS 2 and NZ CS 3 in December 2022.
Overview of the Director Guide
The Director Guide is intended to assist directors to understand their role in preparing climate statements and in developing and overseeing the implementation of any changes to a CRE's governance framework, risk management framework, strategy, metrics and targets in order to:
- Comply with the climate standards
- As a result of risks and opportunities identified through the development of the climate statements.
The Director Guide provides that a CRE's board of directors (Board) has a direct role in the following aspects of the preparation of climate statements:
- Dating and signing climate statements on behalf of the CRE
- Ensuring that climate statements comply with the applicable climate standards
- Providing information and explanations to assurance practitioners relating to greenhouse gas (GHG) emissions.
Additionally, and as part of the Board's role in ensuring its climate statements are compliant with the new regime, directors will likely also have a role in overseeing and resourcing (including by training and upskilling, as required):
- The Board's continuous assessment of how climate statements will impact the wider context of the CRE's purpose, strategy, business model, operations and financial planning
- Management in its identification, assessment and management of climate-related risks and opportunities
- Any changes to management reporting, assessment tools, key performance indicators and remuneration policies to account for climate-related metrics and targets
- The development of the proposed two mandatory climate scenarios (currently proposed to be a 'less than' and 'greater than' two degrees Celsius of warming by 2100) - including the development of relevant short, medium and long term time horizons to assess the CRE's resilience to climate-related risks and opportunities over time and deciding whether to develop the scenarios in-house or join collaborative industry groups tasked with designing sector-level scenarios (we note the XRB published a 'two-pager' on scenario analysis in March 2022, a link to which can be found on page four of the Director Guide)
- The development of the proposed transition plan and adaptation plan
- The measuring of gross scope one, scope two and scope three (value chain) GHG emissions of the CRE (we note the XRB published a document showing how an entity can 'get started' on measuring GHG emissions in April 2022, a link to which can be found on page four of the Director Guide)
- The engagement of an assurance practitioner to verify the measured GHG emissions (from year three onwards)
- Any internal policies to give CRE-specific guidance on how to make judgments on what information to include in the CRE's climate statements and how to apply concepts such as materiality, fair representation, balance and accuracy to the CRE's specific business
- Reaching out to any related companies for information that may be required to prepare group climate statements (see our 'Group climate statements - What's involved?' article).
The Director Guide recommends that directors start taking some specific actions as soon as possible to ensure readiness for the new obligations contained in the Amendment Act, including:
- Familiarising directors and senior managers with core climate-related concepts such as hazard, vulnerability and exposure, and definitions such as materiality1
- Other training and upskilling required to enable directors, senior managers and supporting staff to identify, assess and manage climate-related risks and opportunities over the short, medium and long term and appropriately integrate short, medium and long term climate-related risks and opportunities into the CRE's governance, risk management, strategy and metrics and targets
- Deciding whether the CRE should adopt the optional and less onerous disclosure requirements under NZ CS 2 in its first climate statement or whether it is ready to adopt NZ CS 1 and NZ CS 3 in full at the outset.
We regularly publish updates on developments relating to the climate-related disclosures regime. Please subscribe to receive these updates.
1 As part of understanding materiality in the context of climate statements, it could be helpful for directors to familiarise themselves with the TCFD's definitions relating to climate-related risks and opportunities and understand how these risks and opportunities impact enterprise value through their impact on revenue, expenditure, assets, liabilities, capital and financing as set out in the CRE's income statement, cash flow statement and balance sheet.