Legislation and liability: Striking the balance for effective climate disclosures
New Zealand’s climate disclosure standards appear to be hindering the very transparency they are meant to promote.
The urgency to address climate change has led New Zealand to adopt mandatory climate-related disclosure (CRD) requirements – a critical step in getting directors to consider the impacts of climate change in decision-making.
However, while legislation can be a powerful tool to drive behaviour change and incentivise sustainable outcomes, the current liability framework under New Zealand’s CRD regime is proving to be a double-edged sword.
Directors of Climate Reporting Entities (CREs) found themselves navigating a landscape where some are finding the fear of legal repercussions is stifling meaningful disclosures, ultimately hindering the very transparency the regulations are meant to promote.
The obligation that legislation imposes serves as a cornerstone for driving compliance and encouraging behavioural change. By mandating climate-related disclosures, the New Zealand government has taken a vital step toward ensuring businesses consider both the risks and opportunities climate change presents. The Financial Markets Conduct Act 2013 (FMCA), specifically under Part 7A, sets out the framework for these disclosures, intending to align corporate behaviour with long-term sustainability.
Liability settings are important in driving the much-needed changes, and there need to be consequences for knowingly failing to report or comply with the standards. Currently, for example, directors are deemed strictly liable if the CRE fails to comply with key obligations under the FMCA and the climate standards (regardless of a director’s personal involvement in CRD) where a CRE fails to prepare the disclosure in accordance with the standards. And somewhat perversely, directors cannot reasonably rely on other directors or employees as part of any defence. (Should director liability be reformed, the CRE itself will still remain primarily responsible for compliance and subject to civil and criminal liability including for misleading statements, record keeping and compliance with the standards.)
The current liability settings are having unintended consequences. Many directors are adopting conservative reporting strategies, fearing that comprehensive disclosures could expose them to litigation. This is a classic example of how regulatory and legal frameworks can inadvertently discourage the very outcomes they seek to achieve.
Feedback from directors indicates that the spectre of legal liability leads to a "say less" approach. This conservatism manifests in several ways:
- Limited contextual reporting: Directors avoid providing detailed case studies or illustrative examples that would otherwise make disclosures more engaging and informative. This deprives stakeholders of valuable context and undermines collaborative efforts.
- Excessive costs: The financial and operational burden of ensuring legally airtight disclosures often exceeds that of traditional financial reporting. Some companies treat climate disclosures with the same rigour as capital-raising exercises, leading to unsustainable costs.
- Reluctance to innovate: Fear of legal consequences discourages directors from disclosing potential opportunities or forward-looking strategies. Transparency about innovations and positive risks is muted, hindering progress and strategic development.
This chilling effect on disclosure underscores the need to balance accountability with the freedom to report fully and honestly. Without this balance, legislation designed to promote sustainability risks becoming a barrier to it.
Recognising these challenges, IoD and Chapter Zero NZ, supported by 35 directors, wrote to Ministers Bayly and Watts calling for reforms to the liability provisions of the FMCA. Our advocacy emphasised that while we are steadfast in our support of climate-related disclosures as a cornerstone of New Zealand's sustainability journey, liability settings must not deter transparency.
Legislation also has a role in fostering collaboration. The release of the Commerce Commission’s Collaboration and Sustainability Guidelines in 2023 demonstrates how regulatory frameworks can encourage cooperative efforts while maintaining compliance with competition laws. Collaboration across sectors is crucial for developing effective climate strategies, and legislation must support, not stifle, these partnerships.
The interconnected nature of climate and biodiversity further reinforces the need for balanced disclosure laws. As highlighted by the Kunming-Montreal Global Biodiversity Framework, businesses must also consider ecosystem dependencies such as freshwater, clean air and fertile soil. Legislation that supports transparent, collaborative, and innovative reporting will be key to addressing these intertwined challenges.
For New Zealand’s directors, climate-related disclosures are more than a compliance exercise; they represent a strategic imperative. To maintain a competitive advantage, global standing and drive meaningful climate action, New Zealand must evolve its legal frameworks to encourage honest, forward-thinking reporting. By reassessing liability provisions, policymakers can ensure that legislation remains a force for positive change – promoting transparency, innovation, and sustainability.
Ultimately, the goal of legislation should be to guide businesses toward a sustainable future, not to trap them in a cycle of fear and risk aversion. With thoughtful reform, New Zealand can achieve the right balance, ensuring that climate disclosures serve their intended purpose: to foster resilience, accountability and progress in the fight against climate change.
