The External Reporting Board (XRB) has released its final climate standards.
These are the standards that climate reporting entities (CREs) will need to report against under the 2021 amendments to the Financial Markets Conduct Act 2013 and related legislation.
The final standards are to a large extent consistent with the exposure drafts the XRB consulted on earlier in the year, although some relatively minor tweaks have been made. The final standards are in three parts, which are available at the links below:
With the final standards now in place, CREs have greater certainty as to the framework they will need to report under commencing 1 January 2023. The XRB will be running workshops and issuing further guidance for CREs throughout 2023.
In this update, we set out some practical tips for those CREs that are working towards their first reports (and any other organisations looking to report on a voluntary basis) and summarise key changes made in the final standards as against prior exposure drafts. Background information on the regime is available on the Ministry for the Environment's website here.
Practical tips for reporting entities
Many CREs will be well underway in their preparations for the commencement of the disclosure regime, while others may be grappling with how to allocate capital to build their capability to report. Many organisations are finding that the process of preparing to report is much more time-consuming than initially envisaged. In our view, CREs that do the following will be setting themselves up to meet the requirements of the regime when it comes time to report:
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More than just a compliance exercise: While the emphasis of the regime is on disclosure, CREs that:
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undertake a comprehensive review of their organisation across the four themes of governance, strategy, risk management and metrics and targets;
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work to build their supporting processes and capability; and
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develop a resilient and adaptive strategy in response, will be best placed to meet the disclosure requirements, manage climate risk and take advantage of the opportunities arising from the transition to a low-emissions future.
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Don't expect to get it right the first time: CREs are likely to find that their capability, and therefore the quality of their disclosures, improves over time. For example, over time CREs are likely to get a better handle on how to report scope 3 (value chain) emissions where they do not hold complete data internally. XRB acknowledges this by the inclusion of climate standard NZ CS 2 Adoption of Aotearoa New Zealand Climate Standards, which includes a limited number of exemptions that CREs can rely on for their first, and in some cases subsequent, disclosures. In relation to scope 3 emissions, NZ CS 2 provides an exemption from the requirement to disclose scope 3 emissions in an entity's first reporting period (although earlier disclosure is encouraged).
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Use exemplars: Although mandatory disclosures are new to Aotearoa New Zealand (NZ), many entities have been reporting on a voluntary basis for some time, both in NZ and overseas. When considering how to report and the type of narrative that might be relevant or appropriate, look at examples from those that have gone before. One of the principles of reporting is "comparability", so it may also be important to consider what others in your sector are doing.
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Think about your message: When preparing to report, it is important to think about the message that your organisation wishes to send to stakeholders about how the organisation is responding to climate risks and opportunities. Does your organisation wish to be a leader in your sector? What is your level of ambition?
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Give a cohesive message across your report: Users of climate-related disclosures will expect CREs to report against each discrete theme, and the supporting points. They will, however, also want to see a narrative that illustrates that CREs have, or are developing, a cohesive and holistic approach to climate risks and opportunities. This message is something that you can build over time as your organisation improves its capacity to report, but it is worth starting to think now about how your overarching message will be received by primary users.
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Get your contracts in order: While the focus of the regime is on disclosure rather than requiring entities to reduce their scope 3 emissions, some CREs (and other entities) are starting to take steps to manage their scope 3 emissions by agreement with their customers and/or suppliers. Where an entity wishes to take that approach, care should be taken to put in place appropriate contractual provisions – for example, an entity may wish to consider including a provision that gives it the ability to terminate the relationship with the contractual counterparty should the counterparty not meet certain emissions-reduction criteria.
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Understand investor sentiment: CREs should consider investor and other stakeholder expectations (eg, lenders and creditors) prior to developing their climate strategy and transition plan, and consider how they would expect the organisation to position itself in respect of climate change.
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Invest in data systems: Accessing good quality data can be a challenge for many CREs, and in their first report CREs may end up using a predominantly qualitative narrative. Often it is not until organisations want to use data that they find that it is not easily collated, or able to be digested in a way that provides information that is useful for disclosure purposes. Many CREs are likely to find that a significant investment of time, money and resources is required to bring data systems up to scratch.
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Take a "whole team" approach: While managing climate risks and opportunities has historically been the domain of the sustainability team, gearing up for reporting and getting to grips with the impact of the climate across the four themes will take a team effort, involving the Board, senior management and stakeholders across different areas of the business.
Summary of changes in the final climate standards
The XRB has published a summary of the main changes it has made in the final climate standards as against the exposure drafts it consulted on earlier this year. Unsurprisingly, given the extent of prior consultation, the changes do not significantly alter the substance of the regime. By way of example, these changes include:
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Amending the requirements for disclosure of GHG emissions targets to require an explanation of how a target contributes to limiting global warming to 1.5 degrees Celsius (reflecting the language from the purpose section of the Climate Change Response Act 2002). The exposure draft of NZ CS 1 had instead required disclosure of whether a target was "aligned with science", which some submitters argued was too vague.
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Reworking the requirements in relation to disclosures of methods and assumptions, and data and estimation uncertainty. The standards now explicitly acknowledge that:
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the use of uncertain data (along with reasonable estimates) is an essential part of preparing climate-related disclosures and there may also be disclosures for which the methods available to CREs are relatively novel or uncertain; and
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the usefulness of the information is not undermined provided that the methods, assumptions, data and estimation are adequately explained.
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Reinstating the requirement for CREs to disclose the source of greenhouse gas emission factors and the global warming potential rates used. This was in response to feedback that the information is both useful and unlikely to require any additional work by CREs.
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Clarifying the circumstances in which entities can apply the adoption provisions (some can be applied only the first time an entity enters the regime, while others can be used each time the entity enters the regime).
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Amending the definition of "materiality" by removing the reference to "enterprise value". This change was made in response to feedback that "enterprise value" was not an appropriate measure for some entities, and to align the definition of materiality more closely with other international and domestic definitions.
Should you wish to discuss the application of the climate standards to your organisation, please get in touch with a member of the Russell McVeagh or Te Whakahaere team.
Contributors (Te Whakahaere): Mark Baker-Jones and Melanie Baker-Jones
Contributors (Russell McVeagh): Hannah Bain and Sarah DeSourdy Hastings
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.