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Climate-related Financial Disclosures: Comply-or-Explain

Home Insights Climate-related Financial Disclosures: Comply-or-Explain

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Contributed by: Emmeline Rushbrook, Hannah Bain and Omar Shahin

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Published on: September 16, 2020

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The Government announced yesterday that it will introduce mandatory climate-related financial disclosure (CRFD) requirements for certain financial services entities. The intention is that legislation regarding the new regime will be introduced to Parliament in early 2021. If approved by Parliament, financial entities could be required to make disclosures in 2023 at the earliest.

What will be required?

The new disclosure regime will require annual disclosure of financially material climate-related risks and opportunities in mainstream financial reports, such as annual reports. The disclosure requirements will be aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD framework sets out of four key "elements" of disclosure, being:

  1. Governance around climate-related risks and opportunities. 

  2. The impact of climate-related risks on an organisation's strategy and financial planning. 

  3. The risk management processes used to identify, assess and manage climate-related risks. 

  4. The metrics and targets used to assess and manage climate-related impacts.

Who will the regime apply to?

The regime will apply to:

  • registered banks, credit unions, and building societies with total assets of more than $1 billion; 

  • all managers of registered investment schemes with greater than $1 billion in total assets under management; 

  • licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million;

  • equity and debt issuers listed on the NZX; and

  • Crown Financial Institutions with assets greater than $1 billion assets under management, such as ACC and the NZ Super Fund.

Under the regime, overseas incorporated organisations will be required to make the relevant disclosures in their New Zealand annual reporting.

In his statement announcing the Government's decision, Minister for Climate Change, James Shaw said that the planned regulatory perimeter would mean that in total, around 200 organisations will be required to disclose their exposure to climate risk and that the $1 billion threshold will make sure about 90 per cent of assets under management in New Zealand are included within the disclosure system.  At this stage, the Government has not announced that this scheme will apply more broadly to cover all large emitters, despite the Minister earlier indicating in a webinar with Mark Carney (UN Special Envoy for Climate Action & Finance) and Adrian Orr (Governor of the Reserve Bank of New Zealand) that such an expansion could be put forward.

Who else is involved?

The External Reporting Board (XRB) will develop reporting standards, which entities will have to either comply with or, if unable to comply, explain why not. This approach provides flexibility where entities cannot gather necessary information.

The Financial Markets Authority will be responsible for independent monitoring, reporting and enforcement.

Meanwhile, the Ministry for the Environment has expressed a desire to work closely with regulated parties on developing and using climate change scenarios to support risk analysis. 

Existing obligations

Separate from the proposed regime, we note that New Zealand companies (particularly listed companies) already have obligations to make certain disclosures in relation to climate change issues in some circumstances.  These obligations come from a range of sources, including the Financial Markets Conduct Act 2013, the NZX Listing Rules, directors' duties and continuous disclosure obligations. In addition, the Zero Carbon Act introduced additional reporting requirements for certain "reporting organisations" when requested by the Minister for Climate Change.

Keep involved

As with all law reform processes, early engagement by affected parties will be crucial to ensure fit for purpose legislation and standards. Get in touch with one of our experts if you wish to understand more about the Government's decision and next steps.

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