New Zealand Leads With Mandatory Climate-Related Disclosures

New Zealand’s new mandatory climate-related disclosure (CRD) regime, under Part 7A of the Financial Markets Conduct Act 2013 (FMCA), is already in force and acts 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 in New Zealand and applies in respect of reporting periods starting on and from 1 January 2023.

The government intends using financial markets to drive change.

In 2020 the Climate Change Minister Hon James Shaw announced climate risk reporting would be introduced as part of New Zealand’s journey towards a low carbon future and for businesses to have a good understanding of how climate change will impact them, both in terms of risks and opportunities. 

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 a mandatory requirement 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 that New Zealand’s disclosures would be aligned with the framework provided by the Task Force on Climate-related Financial Disclosures (TCFD), which was created by the Financial Stability Board out of a need for better information to support informed investment, lending and insurance underwriting decisions, and to improve analysis of climate-related risks and opportunities.

Importantly, while the regime is positioned as a disclosure regime, the required analysis to make the disclosures is expected to lead to significant changes in how business is conducted.

Large Financial Institutions and large NZX-listed issuers are climate reporting entities.

The CRD regime applies to “climate reporting entities” (CREs), which includes:

• large NZX-listed issuers of quoted equity securities or quoted debt securities (i.e. with a market capitalisation or nominal amount exceeding NZ$60 million);
• large registered banks, licensed insurers, credit unions and building societies (i.e. with total assets exceeding NZ$1 billion, or, in the case of licensed insurers, where premium income exceeds NZD$250 million p.a.); and
• large licensed managers of registered managed investment schemes (i.e. with total assets in registered schemes exceeding NZ$1 billion).

In addition, various governmental agencies are also expected to comply under Ministerial Letters of Expectation, even though they not covered by the definitions in the legislation.

CREs are required to analyse and disclose climate impacts and emissions, and their response.

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 will also be required to 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 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, in recognition that it will take time to develop good quality standards; and
• NZ CS 3, which sets out the principals and general considerations that the climate statements need to be prepared in accordance with (e.g., concepts of fair presentation, materiality, etc).

The stated objective of NZ CS 1 neatly encapsulates the intent:  

To enable primary users [i.e., 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 low-emissions, climate-resilient future.

To achieve this, climate statements contain disclosures based on the TCFD’s four pillars on climate disclosures, being:

• 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 currently 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 & 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 which the governing bodies of CREs must then factor into their risk management and strategy disclosures. That is what 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 business is impacted by climate change.

The CRD regime should be viewed not as a “compliance regime” but instead 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”.

The New Zealand climate statements that CREs publish will be an example of good bases for entities around the world to start their own climate change analysis and reporting journey. This includes because, with the XRB’s encouragement, whole industries have been collaborating to develop the required scenarios. The published climate statements will also provide a way for businesses to consider how different entities are adapting their businesses to respond to climate change impacts.

In the process, CREs and other businesses will build a bank of valuable data that will enable high comparable information in the future, and result in higher quality decision making. 

In addition, both the XRB as standard-setter, and the Financial Markets Authority as regulator under the CRD regime, have prepared, and are continuing to prepare, practical materials that entities can use to approach requirements under the climate standards (noting they are largely inspired by the TCFD) including around scenario analysis, and how a regulator may approach enforcing this type of regime.  Also, the XRB are currently finalising guidance on how to approach preparing climate statements for specific types of CREs including fund managers, banks and insurers. 

Lloyd Kavanagh
Lloyd is the founder of MinterEllisonRuddWatts’ highly acclaimed Financial Services Team and advises many of New Zealand’s top financial institutions and boutiques. He is also a sought-after advisor on investment funds, insurance, banking, fintech, financial services regulation, and corporate governance. He is highly ranked in major legal directories, including as Band 1 for Financial Services by Chambers Asia-Pacific and in the Hall of Fame for Investment Funds by The Legal 500 Asia Pacific. His qualifications include LLB (Otago), AMP (Wharton) and IDC (INSEAD). He is also a former member of the Securities Commission. A frequent thought leadership speaker and author, Lloyd’s articles on a wide range of topics, digital identity in the context of AML/CFT, conduct and culture for financial institutions, and trading in times of stress, are highly regarded. For his work on financial markets law reform, Lloyd was made a Fellow of the Institute of Finance Professionals New Zealand Inc (INFINZ). The implications of climate change for financial institutions is particular interest to him. In addition to publishing many articles on the topic, Lloyd has addressed conferences for INFINZ, The Banking and Financial Services Law Association (BFSLA), the UNEPFI, Risk NZ, and others. He is also a Board Member of Lawyers for Climate Action New Zealand Inc. (LCANZI) and has contributed to LCANZI’s submissions on the XRB’s consultation of the climate standards.

Shaanil Senarath-Dassanayake
Shaanil is a solicitor in the financial services team at MinterEllisonRuddWatts with experience and interest in financial services law and climate-related financial disclosures. Her primary clients are financial service providers including fintechs, startups, platforms engaged with digital assets and blockchain applications, fund managers, and banks. One of her strong interests is the implications of climate change on financial institutions and New Zealand’s climate-related disclosure (CRD) regime. She is a member of Lawyers for Climate Action New Zealand Inc. (LCANZI) and has contributed to LCANZI’s submissions on the XRB’s consultation of the climate standards. Shaanil has presented at numerous events on CRD and related issues like greenwashing for senior staff for INFINZ, BFSLA, Risk NZ and other industry events. She has also co-presented on, and delivered, training to banks and fund managers on this regime as well as the topic of climate change litigation to bring attention to the potential consequences of defective disclosure. With Lloyd Kavanagh, Shaanil has also advised various clients on the application of the CRD regime, prepared obligations sets, and conducted red flags reviews of a client’s TCFD style reporting.