Is your organisation ready for climate-related disclosures?

Who is required to report?

The Act requires ‘climate reporting entities’ (CRE’s) to prepare climate statements in accordance with XRB’s climate standards. CREs are defined in the Act and include:

• large listed equity and debt issuers with a market capitalisation exceeding $60m; and
• large financial organisations including banks, insurers, and managers of investment schemes with total assets of more than $1 billion.

Some Crown financial institutions (with greater than NZ$1 billion in total assets) will also be required to report through separate ‘letters of expectation’ from their relevant Minister.

The Financial Market Authority will be responsible for monitoring and enforcing the new regime, while the XRB is responsible for developing the climate reporting standards, and also has the power to issue non-binding guidance on other non-financial matters.

Development of climate-related disclosure standards

The XRB is proposing three mandatory standards:

• Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures (NZ CS 1). This will be the main disclosure standard and will be based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD framework). The disclosure requirements relate to the four thematic sections (Governance, Risk Management, Strategy, and Metrics and Targets).
• Aotearoa New Zealand Climate Standard 2: First-time Adoption of Aotearoa New Zealand Climate Standards (NZ CS 2). This will comprise adoption provisions available to CREs the first time that they are required to disclose.
• Aotearoa New Zealand Climate Standard 3: General Requirements for Climate-related Disclosures (NZ CS 3). This will cover general requirements for preparers to follow when making disclosures under the climate standards.

To date the XRB has released two consultation documents on the proposed NZ CS 1:

1. A consultation document released last year focusing on the proposed Governance and Risk Management sections. (The submissions and a summary of the feedback can be viewed here).
2. A consultation document released in March focusing on the proposed Strategy and Metrics and Targets sections.

The XRB aims to issue its first climate standard in December 2022, meaning CREs would be required to make disclosures from early 2024 (at the earliest) for annual reporting periods starting on or after 1 January 2023. Under the Act CREs will be required to get GHG emissions disclosures assured for any accounting period after 27 October 2024.

A formal exposure draft is expected in July 2022. This will comprise the entire climate-related disclosure framework.

What do directors need to consider?

Many of the CREs captured under the Act have been reporting the impacts of climate-related change on their organisations for some time. Directors of these entities will now need to consider what changes may need to be made to their current reporting, systems and processes in order to comply with the mandatory regime. Those entities that have not been reporting at all will need to begin assessing the systems, processes and data they will require in order to meet the standards and to urgently develop the necessary capability and resource within their organisations.

While there are approximately 200 CRE’s captured under the Act, the impact of the mandatory reporting will be felt on many more organisations, particularly because the standards require disclosure of all scope 3 greenhouse gas emissions (GHG emissions). These are indirect emissions, not covered in scope 2, that occur in a CRE’s value chain, including both upstream and downstream emissions.  As a result many of the smaller organisations in a CRE’s supply chain may be asked by a CRE to report on their emissions.

All directors will need to consider:

• Has the board put climate change on the agenda so it can be considered in the company’s wider strategy and risk management planning across the organisation?
• Do individual board members have an appropriate level of climate change knowledge so that they are able to provide the necessary oversight and understanding of climate-related risks and opportunities for the organisation? Is climate change appropriately reflected within the culture of the board and throughout the organisation?
• What are management’s capabilities in this regard? Does the organisation have adequate resource to address these issues?
• Does their organisation form part of a CRE’s supply chain and, if so, could it be required to disclose information to assist the CRE in their reporting?
• Does that organisation have the appropriate systems, processes and policies in place to capture the relevant data?

It is likely the reporting regime will be rolled out to a wider group of organisations over time so directors may want to think ahead and prepare for the possibility of mandatory reporting in the future.

Regardless of whether an organisation is required to report under the new Act, it is becoming clear that how an organisation manages climate risk is something banks, insurers, consumers and other stakeholders are becoming increasingly interested in. Many organisations are already addressing these issues and have comprehensive reporting in place. For all those organisations that do not, now is the time to address climate risk as they will likely be expected to have to report on their progress in the future.

The Institute of Directors (NZ) submissions on XRB’s consultation documents

The Institute of Directors (NZ) supports the introduction of climate related disclosures in New Zealand and the approach the XRB is taking to developing the disclosure standards. It has submitted on both the XRB’s consultations on climate related disclosures. The first submission can be found here and the second here. A summary of the second submission is set out below.

The key points of IoD’s second submission are:

• We continue to support the XRB in their development of the climate-related disclosure standards. It is important that the regime enables effective, meaningful reporting that helps drive strategic thinking and change. The Strategy and Metrics and Targets sections of the standard will provide climate reporting entities (CRE’s) with a greater understanding of the implications of climate change on their organisations, and will also assist boards in the wider governance considerations relating to the strategy, purpose and risk management of their organisations.
• We welcome XRB’s acknowledgement that some entities may only be able to initially disclose a limited understanding of the impacts of climate change.   While many CRE’s have already developed reporting frameworks, some are only just beginning.  It is important that the focus is initially on supporting and encouraging CRE’s to meet their reporting obligations and to provide guidance and education to help build capability and competence.
• While challenging, there are benefits for organisations from the broader reporting of greenhouse gas (GHG) emissions proposed. Requiring the disclosure of all scope 3 GHG emissions will be particularly challenging for some entities to start with and understanding will be required. A comprehensive approach to disclosing GHG emissions, however, will add value in the long run by contributing to a better understanding of an organisation’s value and supply chains.