Mandatory Climate Disclosures

In a world first, the government has introduced the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, which mandates climate-related disclosures by certain financial market conduct (FMC) reporting entities. The specific purposes of the Bill are to:

• ensure that the effects of climate change are routinely considered in business, investment, lending, and insurance underwriting decisions
• help reporting entities better demonstrate responsibility and foresight in their consideration of climate issues
• lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-emissions economy.

Institute of Directors view

The Institute of Directors (IoD) has made a submission and presented to the Economic Development, Science and Innovation committee arguing for a realistic approach to climate action governance.

Their position is that climate-related disclosures are necessary, and that the Task Force on Climate-related Financial Disclosures (TCFD) framework, plus any new standards developed by the External Reporting Board (XRB), are a good reporting starting point.

However, the resourcing constraints on smaller entities needs to be considered and an exemption for them may be appropriate. So long as proving an organisation meets the requirements of any such exemption end up requiring undue reporting (and thereby defeat the purpose of the exemption).

More broadly, allowing a longer period for implementing the reporting regime, including phasing in assurance requirements, would provide time for the development of both reporting and assurance professional capability, experience and expertise – which would help organisations get it right.

In addition, they suggest the government reassess the level of penalties and defer the introduction of penalties while the new regime beds in. Instead, a focus on education and continuous improvement as reporting evolves and matures would be appropriate.

They strongly opposed the Bill’s inclusion of imprisonment for directors of an entity that fails to comply with the climate standards on the basis that individual criminal liability and the penalty of imprisonment are not appropriate in the circumstances and are inconsistent with the purposes of the Bill.

Overview of the Bill

The Bill introduces mandatory climaterelated disclosure requirements (on a “comply or explain” basis) for entities (defined in the Bill as “climate reporting entities”). These include:

• all equity and debt issuers listed on the NZX
• all registered banks, credit unions and building societies with total assets of more than $1b
• all managers of registered investment schemes with greater than $1b in total assets under management
• all licensed insurers with greater than $1b in total assets under management or annual premium income greater than $250 million.

The Bill requires climate reporting entities to:

• prepare climate statements in accordance with climate standards currently being developed by the XRB (to be completed within four months after the balance date of the entity and signed by two directors)
• obtain an assurance engagement from a qualified climate-related disclosure assurance practitioner in relation to those statements (but only to the extent those statements are required to disclose greenhouse gas emissions)
• lodge the statements with the Registrar of Financial Service Providers
• keep proper climate-related disclosure records, for at least seven years
• provide access (eg cross reference) in the annual report to where the climate statements and assurance practitioner’s report can be found.

An exception is allowed for climate reporting entities that have reasonably determined they are not materially affected by climate change, although they need to obtain independent assurance of their determination from a qualified assurance practitioner.

The disclosures are to be aligned with the TCFD framework and in accordance with the standards currently being developed by the XRB. The XRB can also issue guidance on a wider range of ESG and other non-financial matters that can be applied on a voluntary basis.

The XRB has indicated that it is expecting to publish its climate standards by the end of 2022, which means the first disclosures may be required in 2023. Consultation on the draft standard is expected to occur from July-September 2022.

There are a number of enforcement provisions for failure to comply with the Bill, including:

• infringement fines of up to $50,000 for any entity which fails to keep proper records, fails to have the records available for inspection, or fails to lodge statements with the Registrar
• proposed civil pecuniary penalties of up to $5m where an entity (or $1m for individuals) fails to keep relevant records, fails to prepare or lodge climate statements at all, or fails to satisfy the relevant assurance requirements
• significant penalties for directors including up to five years in prison and/or a fine of up to $500,000 for every director who knowingly fails to comply with the climate standards (and up to $2.5m for every entity).