The last week saw a flurry of activity in the climate change space, as New Zealand continues to pave the way towards legal, regulatory and policy changes to address climate change and its impact. This included:
the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (the CRD Bill) passing its third reading and receiving royal assent;
the External Reporting Board (XRB) commencing its consultation on the proposed climate reporting standards; and
the Financial Markets Authority (FMA), who will be the supervisor of the new Climate-related disclosures regime, providing an update on its intended supervision and enforcement approach.
Interestingly, at the end of last week, the Court of Appeal also released its judgment in Smith v Fonterra Co-operative Group. The case concerns a claim brought by Mr Smith against seven corporate defendants across a range of industries and advancing three tort-based causes of action. A key soundbite from the judgment is the Court's statement that it considers tort claims are an unsuitable vehicle for addressing climate change. Rather, climate change is "quintessentially a matter that calls for a sophisticated regulatory response at a national level supported by international co-ordination".
The CRD Bill and XRB play a part in that regulatory response, together with the framework under the Climate Change Response Act 2002. That framework includes the Government's Emissions Reductions Plan. The Government is currently consulting on policy options that might be included in the Plan, which follow the finalisation of the Climate Change Commission's report "Ināia tonu nei: a low emissions future for Aotearoa" in June 2021. See our earlier update on the consultation here.
The remainder of this update addresses the CRD Bill and XRB consultation.
Update on CRD Bill
The CRD Bill, which will require climate reporting entities (CREs) to prepare annual climate statements that disclose information about the effects of climate change on their business or the funds they manage, passed its third reading last week. The Bill then received royal assent on 27 October 2021, and so is now an Act.
Our previous updates on the introduction of the Bill can be found here, and the outcome of the Select Committee report here. The Committee of the whole House stage occurred on 19 October 2021, with only minor amendments made:
to the definition of "market capitalisation",
to the test for a listed debt issuer, and
in relation to assurance practitioner's reports.
The CRD Bill tasks the XRB with responsibility for developing climate reporting standards for the new regime.
Update on XRB climate reporting standards
Last week also saw the XRB launch a consultation on the first two sections of the proposed climate reporting standards that address two thematic areas: (i) Governance and (ii) Risk Management. The consultation document can be found here.
Overall, the consultation document bears few surprises for CREs, particularly given the XRB's approach is substantially aligned with the recommendations of the Task Force on Climate-related Financial Disclosure.
Governance: disclose the organisation's governance around climate-related risks and opportunities
The consultation document describes the objective of the proposed Governance disclosures as being to enable primary users (that is, existing and potential investors, lenders and insurance underwriters) to understand both the role a CRE's board plays in overseeing climate-related issues, and the role management plays in assessing and managing those issues.
At this stage, "management" is defined in the consultation document as "those positions an entity views as executive or senior management positions and that are generally separate from the board". This differs from the definition of "senior management" in the Financial Markets Conduct Act 2003, which considers the influence a person has. This difference may ultimately be of little consequence for entities, but it is a worthwhile reminder to check that aspects of the XRB's climate reporting standards fit with the underlying statutory framework.
Risk Management: disclose how the organisation identifies, assesses and manages climate- related risks
The consultation document describes the objective of the proposed Risk Management disclosures as enabling primary users to understand how a CRE's climate-related risks are identified, assessed and managed, and how those processes are integrated into existing risk management processes. Together with Strategy disclosures, the Risk Management disclosures aim to support evaluations by primary users of the CRE's overall risk profile and the quality and robustness of the CRE's risk management activities.
The proposed disclosures will require descriptions of the following for both transition risks and physical risks:
the CRE's processes for identifying, assessing and managing climate-related risks; and
how its processes for identifying, assessing, and managing climate-related risks are integrated into its overall risk management.
Specific types of transition risks and physical risks are not prescribed by the consultation document, with the XRB noting that it wants to avoid any such list being seen as a comprehensive checklist of risks to consider.
XRB next steps
Submissions on the consultation document are due by 22 November 2021. The XRB intends to release a consultation document on the final two sections of the proposed climate reporting standards in March 2022 (addressing the thematic areas of (iii) Strategy and (iv) Metrics and Targets).
The full draft standards are to be released in July 2022, with a three-month consultation period to follow. The full and final standards are expected to be issued in December 2022. The XRB has indicated this will comprise at least two standards and one authoritative notice (which will contain climate-related disclosure concepts).
The CRD Bill will apply to CREs for accounting periods starting on or after the date on which the XRB issues the final standards. The current XRB timeline means that CREs in New Zealand are likely to need to comply with these legal obligations for accounting periods starting in 2023, with the first reporting to occur in 2024.
Supervision and Enforcement
The FMA, as the entity responsible for monitoring and enforcing the climate disclosure regime, has said that it intends to issue high level guidance on compliance expectations by December 2022, with more detailed guidance following throughout 2023.
In terms of its overall approach, last week Sarah Vrede, FMA Director of Capital Markets, said that the FMA's initial regulatory approach will be focused on supporting climate reporting entities and other relevant stakeholders as they prepare for the new regime and that:
"In the early stages of the new regime, enforcement action is likely to be focused only on serious misconduct, such as failure to produce climate statements or where climate statements are false or misleading."
Contact the team
Get in touch with one of our experts if you would like to understand more about these developments or the legal obligations imposed by the mandatory disclosure regime.
 See the media release here: https://www.fma.govt.nz/news-and-resources/media-releases/climate-related-disclosure-fma-responsibilities/