Compulsory climate-related financial disclosure a step closer for NZ business
Compulsory climate-related financial disclosure a step closer for NZ business
Tuesday 20 April, 2021
New Zealand is now a step closer to becoming the first country in the world to make climate-related risk reporting compulsory for the financial sector. On 15 April 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill passed its first reading in Parliament. The Bill will amend the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Public Audit Act 2001.
Overview
The Bill has 4 main parts:
- Climate-related disclosure will be compulsory for the entities listed below.
- Disclosures must be consistent with the climate standards that the External Reporting Board will issue.
- The Financial Markets Authority will monitor and enforce compliance with the new reporting standards.
- The Board can issue guidance on environmental, social and governance reporting and other wider aspects of non-financial reporting.
Who will it apply to?
Reporting requirements would apply to:
- NZX-listed equity and debt issuers,
- Registered banks, credit unions, and building societies if total assets are greater than NZ$1 billion,
- Licensed insurers with total assets greater than NZ$1 billion or
- Managers of registered investment schemes with more than NZ$1 billion total assets
The new reporting requirements are likely to affect around 200 organisations, however, in its discussion document, MBIE predicted that some businesses falling outside these categories would face pressure from insurance companies and capital-providers to identify and manage climate-based risks and opportunities.
Reporting requirements
The Board’s climate reporting standards will be consistent with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, which are considered internationally recognised best practice. There are likely to be four main areas for disclosure: governance, strategy, risk management, and metrics and targets. Compliance with the climate reporting regime is mandatory unless a reporting entity analyses and reports that it sees itself as not being materially affected by climate change, with an explanation as to why. Failure to comply with the regime will attract penalties ranging from $50,000 for recording-keeping failures through to $1 million for an individual or $5 million for a company for serious breaches of the climate-related disclosure provisions.
The TCFD states that, in determining whether to disclose climate-related information, organisations should take the same approach to determining materiality as with other non-climate related information disclosed in their annual report. Climate-related disclosure will be in a stand-alone TCFD report contained within the organisation’s annual financial reports in order to promote shareholder engagement, and to make such information more available to investors. Organisations which conclude that they are not required to make climate-related disclosure will have to disclose why they have not complied in their annual reports.
Purpose of the climate-reporting regime
Almost all sectors of the NZ economy face major disruption from climate impacts and climate transition in the near future. Risk areas that were once deemed ‘non-financial’ are now generally accepted to have financial consequences. A mandatory climate-related disclosure regime will inevitably highlight which businesses are responding to climate-related risks and is likely to influence investor behaviour. The Government is hoping that the regime will also help businesses identify, and move away from, high-emitting activities, and embrace new low-carbon technologies. The Government wants climate risks to influence business decision making in order to achieve its goal of net-zero carbon emissions by 2050.
The Bill has been referred to the Economic Development, Science and Innovation Committee which is due to report back by 16 August 2021.
