Director lens on disclosures
The May Chapter Zero NZ webinar provided directors with a deeper look into the development of Aotearoa New Zealand’s Climate-related disclosures with Chair of the External Reporting Board (XRB) Michele Embling and Director Climate Standards Dr Amelia Sharman. The session also featured insights from leading director and experienced Audit and Risk Chair Jonathan Mason.
Watch the session on demand or read below for key highlights.
Why does climate reporting matter?
Climate change will significantly impact the performance and risk profile of businesses with inevitable consequences for corporate strategy, financial performance and shareholder value. The combined consequences will affect most sectors and industries with potential impact to products, services, supply chains, the value of assets.
Undertaking climate reporting will galvanize boards and management teams to imagine how different futures may influence the creation and maintenance of enterprise value. It will prompt more informed decision making for capital allocation and, at a strategic level, encourage entities to think about their strategic choices in light of the risks and opportunities of climate change.
Overview of the disclosure framework
NZ Climate Standard (CS) 1 sets out the disclosure requirements relating to the four thematic sections, governance, risk management, strategy, metrics and targets in line with the Task Force on Climate-Related Financial Disclosures (TCFD). NZ CS 2 outlines the first time adoption provisions available to climate reporting entities the first time they disclose. Finally, NZ CS 3 articulates the principles and the general requirements preparers should follow when making disclosures including important information for materiality judgements.
Each of the standards will have mandatory status, but alongside the standards, the XRB will issue non-mandatory guidance for entities to refer to when making their disclosures. The XRB hope these will help lead to consistent application of the standard and therefore result in useful and comparable information for users.
For a summary of the standards, please refer to the Directors Preparation Guide developed by the XRB and FMA. This includes guidance around reporting entities, terminology, timeframes and an overview of the draft standards.
Advice for directors
- Engage with the disclosures to understand and improve your organisation’s governance, risk management and strategic foresight.
- Look beyond the disclosures as a compliance exercise as this will only limit what you and your entity can achieve under the disclosures.
- Harness diversity. Think creatively about who in your entity can be involved and involve different areas of your organisation instead of delegating to one person or team.
- Start measuring emissions now, but recognise that over time there will be more precision and better measurement.
- Get to grips with scenario analysis as a tool to test the resilience of the entity's strategy.
- Read and learn from existing voluntary reporters in New Zealand and internationally.
There is a wide spectrum of understanding and capability with the disclosures. The Financial Markets Authority (FMA) has already told reporting entities that they do not expect perfection on day one. Therefore, don't be paralyzed in the pursuit of perfection, just “crack on”.
How does New Zealand compare to other countries?
The XRB standards are intended to be internationally aligned through conversations with the and other jurisdictions. There is a lot of interest in what's happening in New Zealand and a strong desire to ensure disclosures and requirements are consistent.
There are also some good examples of sector-level scenarios being developed in New Zealand such as in the marine sector. Other sectors such as banking, insurance, tourism, agriculture are now also starting this process which is of interest to entities in other countries.
What might engagement around the board table look like?
Add climate disclosures to the board agenda. Management teams of our for profit, NFP and public entities are perhaps more than ever focused on the ‘now’ especially as we emerge from Covid-19 and reopen to the world. As governors, it is our role to be looking up and out and bringing the more strategic conversations to the board – such as climate action
Are there any practical guides for directors, especially private or smaller companies?
The Ministry for the Environment has great resources for measuring emissions .While smaller entities, aren’t going to be captured in the regime directly, you may be inadvertently captured. Your bank or a supplier might ask you for an emissions’ report for example.
Look at your sector, both overseas and in New Zealand, for entities who have already started on disclosures. This will provide a sense of what reporting might look like at a practical level.
Lastly check in on the XRB website as they will be publishing further guidance documents in July.
Case Study with Jonathan Mason
How is the banking sector viewing the new reporting requirements
Banks are critical to a country’s economic health, and as a result will be an important sector in our response to climate change. At Westpac, the strategy has been very upfront on reporting. We became carbon zero certified in 2019, and produced our first climate change risk report in 2020.
The bank's immediate footprint is actually quite modest and most banks can probably achieve net carbon zero within the next decade. The challenge for banks is the scope three emissions which includes the carbon footprint for all companies that they lend to.
How our business is going to change in response to climate change
As a bank, we can't risk default on loans so we consider transition risks such as the use of fossil fuels, and physical risks such as the impact to costal properties from sea level change or storms (eg Air NZ carpark in the Wynyard Quarter); or the impact to agriculture (eg Zespri kiwifruit production) due to temperature increases. You can see the risks in every sector.
One dilemma for New Zealand and for banks is how to do decarbonisation affordably. For example, as a country is we know EVs work, but we have to make them affordable to the average New Zealander. Banks can be a critical partner here, but we're going to have to earn a commercial return doing it.
The session included extensive Q&A. For the responses, please refer to the on-demand recording.
Download Jonathan Mason’s slides
These insights are intended as a broad summary of the topics discussed in the webinar and not direct quotes from the panellists.
