Yesterday, Parliament took the first step towards implementing mandatory climate-related disclosures for New Zealand entities by tabling the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (Bill) for its first reading. The Bill amends the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Public Audit Act 2001 to require certain qualifying entities (defined as "Climate Reporting Entities" in the Bill) to make climate-related disclosures part of their mandatory reporting obligations.
Who and what?
The Bill broadly adopts the position previously agreed by Cabinet, which we outlined in our earlier update (available here). In brief, the Bill requires "Climate Reporting Entities" (described below) to:
- collect and retain climate-related information;
- disclose certain climate-related matters in their reporting, including by preparing "climate statements" in line with applicable climate standards; and
- to the extent required by the Bill, have a qualified climate assurance practitioner verify any reporting of greenhouse gas emissions.
Climate statements and assurance reports must be lodged with the Registrar of Financial Service Providers and Climate Reporting Entities must also link to those climate statements in their annual reports.
The Bill defines "Climate Reporting Entities" to broadly include:
- registered banks, credit unions, and building societies with total assets of more than $1 billion for each of the two preceding accounting periods;
- managers of registered investment schemes with greater than $1 billion in total assets under management for each of the manager's two preceding accounting periods;
- licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million for each of the two preceding accounting periods; and
- equity and debt issuers listed on the NZX.
In line with international practice and the Government's previous communications on climate-related disclosures, the regime will operate on a comply or explain basis. As such, if an entity cannot comply with its obligation(s), it must explain why not and set out a pathway via which it will be able to comply, including by setting a date for such compliance.
While Crown Financial Institutions with greater than $1 billion in total assets are not mentioned in the Bill, the Minister of Finance has issued letters of expectation to those institutions which state the Minister's expectation that they report climate-related matters in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
Standards and guidance
As noted above, the Bill empowers the External Report Board (XRB) to prepare "climate standards", which will set out the reporting standards that Climate Reporting Entities must follow in their disclosures. The XRB provided an update last week on the preparation of this standard.
In line with previous statements, XRB noted that the climate standard will build on and align with the recommendations of the Task Force on Climate-Related Financial Disclosures, while also taking account of international developments. In particular, the XRB mentions that the United Kingdom, the European Commission and the Climate Measurement Standards Initiative or CMSI (which is an Australian collaboration of climate-affected industry stakeholders) are all developing important thought leadership on climate-related disclosures which it will consider in the development of its own climate standard.
The XRB will begin consultation on the draft standard in February 2022. Importantly, if the Bill successfully progresses through Parliament and is passed into legislation, the mandatory climate-related disclosure regime will only come into force once the XRB's climate reporting standard is finalised.
Failure to meet the requirements of the Bill can have significant implications for individuals and businesses. The current proposed penalties (which will apply under the Financial Markets Conduct Act 2013) include:
- Civil fines of up to $50,000 for certain low-level infringements, including failures to lodge climate statements within the prescribed timeframe (4 months from balance date).
- For organisations, criminal penalties of up to $2.5 million for failures to comply with an applicable climate standard. For individual directors, these penalties are up to $500,000 or up to five years' imprisonment.
Civil fines of up to $5 million (for organisations) or $1 million for failures to keep proper records, to prepare and lodge climate statements and to obtain assurance for certain parts of climate statements.
For many Climate Reporting Entities, there is less than one year until the beginning of FY23 (being 1 April 2022 for many New Zealand entities). As the XRB has indicated that it is aiming to have the mandatory climate-related reporting regime effective from 2023, there is a real chance that Climate Reporting Entities will be required to collect relevant climate-related data to enable them to meet their reporting obligations from early 2022.
As such, while Climate Reporting Entities' reporting obligations will not appear in their reporting as a matter of regulatory compliance until the FY23 reporting season, much of the information and data underlying the required climate-related disclosures may need to be collected from early 2022.
As with all law reform processes, engagement by affected parties will be integral in ensuring that the legislation and climate standards are fit for purpose. Get in touch with one of our experts if you wish to understand more about climate-related disclosures and next steps, both in terms of the legislation and/or for your business. Once the Bill passes its first reading, we understand that it will proceed to Select Committee where parties outside of Government will be able to make submissions and contribute to the legislative development process.
Stay tuned for further discussion from our team of climate experts on the proposed climate-related disclosure regimes.