Financial Law Insight: Climate-related disclosures are almost here – and there’s a lot of work to do



Once in force, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (‘Bill’) will make New Zealand the first country to introduce law specifically requiring participants in the financial sector to issue climate-related disclosure statements covering the effects of climate change on their business and funds they manage.

In this Financial Law Insight, we unpack the main themes arising out of the submissions made on the Bill at the Select Committee stage, and the Committee’s recommended changes to the Bill.

In brief:

  • 55 submissions were received by the Select Committee considering the Bill
  • Varying levels of enthusiasm and resistance to the proposed climate-related disclosure regime were expressed
  • It is clear that the majority of submitters agree the Bill is beneficial, in principle. However, a number of practical issues were raised
  • The Committee has worked its way through the submissions and released its report. Some issues identified by submitters have been addressed, and some have not
  • The Bill marks a significant step in the battle to identify and manage the effects of climate change. However, some concerns remain, particularly over the timeframe for its implementation.

The Bill in a nutshell

The Bill will require certain large entities (to be known as ‘climate reporting entities’) to disclose information about climate-related risks and opportunities to potential investors.

More specifically, the Bill will require climate reporting entities to:

  • Prepare an annual climate statement that discloses information about the effects of climate change on their business or any fund they manage
  • Prepare climate statements in accordance with standards issued by the independent External Reporting Board (‘XRB’)
  • Eventually, obtain independent assurance about the part of the climate statement that relates to the disclosure of greenhouse gas emissions
  • Make the climate statements available to the public, and collect and retain the records underpinning them.

The Bill extends to ‘large’ listed issuers (with some exceptions), banks, non-bank deposit takers, insurers, and managers of retail registered managed investment schemes. Although not formally part of the regime, separate ‘letters of expectation’ issued by the Minister of Finance will impose these requirements on Crown financial institutions with greater than NZ$1 billion in total assets under management.

The new regime is based on recommendations made by the Task Force on Climate-related Financial Disclosures (commonly referred to as TCFD), and the Bill gives the XRB a mandate to issue specific climate reporting standards and to issue guidance material on reporting. The XRB will also have the power to issue non-binding guidance on other non-financial matters. The Financial Markets Authority (‘FMA’) will be responsible for enforcing compliance and monitoring disclosures.

According to the Ministry for the Environment, current practice sees the majority of large New Zealand entities provide little to no information on climate change considerations, and any reporting released is done inconsistently.

In light of this, the stated purposes of the Bill include to:

  • Ensure the effects of climate change are routinely considered in business, investment, lending, and insurance underwriting decisions
  • Help climate reporting entities better demonstrate responsibility and foresight in their consideration of climate issues
  • Lead to a more efficient allocation of capital, and help smooth the transition to a more sustainable, low-emissions economy.

Some key themes arising from submissions

Submitters identified a number of key areas of concern with the new regime, primarily relating to its workability. Based on a sampling of submissions, these included:

  • Concerns relating to the proposed timeline for implementing the regime
  • The need for flexibility regarding liability provisions
  • The lack of standardised data and consistent methodology
  • The costs and required resources associated with implementing the regime.

If the Bill had been passed in its original form, the first disclosures by climate reporting entities would need to be made for financial years commencing in 2023. While many submissions recognised the urgency of the need for a climate change response, the proposed timeline was the most common submission point. Key concerns included that:

  • The XRB will be pushed for time to develop effective and robust standards with genuine engagement and consultation from market participants
  • The short transition period means meaningful education for the sector will be near impossible.

Multiple submissions also raised concerns with the liability provisions in the Bill, and requested there be a formal transition period before those provisions kick in. Those submissions also called for greater flexibility in FMA enforcement, including by recognising that climate reporting entities may be reliant on third parties (such as investee companies) to provide information in the required form.

Other submissions predicted that the lack of standardised data will be a significant roadblock to the success of the regime, as investors will be unable to make well-informed decisions where disclosures are not able to be meaningfully compared. Some noted the non-prescriptive nature of the Bill regarding how disclosure statements should be published – in terms of content, form and the site of publication – but views were mixed over whether this was a good or bad thing.

The costs of disclosure – both in terms of money and time – were also significant concerns for submitters. Some submitted that the time and money required to access and assess data will be burdensome for all climate reporting entities, and further consideration must be given as to how the sector will be supported to meet all requirements. Others stated that climate reporting entities that lack the depth and technical expertise to set up accurate and sufficient data collection are being set up to fail under the Bill as originally tabled.

The Select Committee’s report

The Economic Development, Science and Innovation Committee’s report back on the Bill on 16 August 2021 addressed some, but not all, of the issues raised.

An immediate win for submitters raising compliance cost concerns was the new carve-out for:

  • Listed issuers with a market capitalisation of under NZ$60 million (measured as at the end of two consecutive financial years)
  • Issuers listed solely on a growth market (meaning those with a cap on issuer size or that are otherwise designed for SMEs)
  • Issuers with no quoted equity or debt securities.

The Committee noted that because listed issuers with market capitalisation under NZ$60 million account for only 0.68% of NZX’s total market capitalisation, making this change would mean that over 99% of market capitalisation remains covered by the regime.

The report did not respond to the widespread general concern regarding the timeline for implementing the regime.

However, it did recommend delaying, by an additional two years, the requirement to obtain independent assurance of disclosures regarding greenhouse gas emissions. This recognised the fact that climate reporting is a new process, and that it will take time to build and grow professional capacity for climate reporting – with civil and criminal liability applying to climate reporting entities and assurance practitioners for breach of those provisions. This was a key submission point for the XRB.

Contrary to the FMA’s suggestion that the proposed licensing and accreditation regime for assurance practitioners be beefed up to the standard of the Auditor Regulation Act regime, the Committee instead recommended removing it altogether. The Committee had concerns with the proposed regime’s effectiveness, and noted that the Bill would still require practitioners to comply with all applicable auditing and assurance standards – with new criminal liability for non-compliance by practitioners with assurance standards added when the Committee reported back. Many submissions opposed this final change (which is not surprising, in the case of those groups likely to act as assurance practitioners!).

Significantly, the ‘explain’ part of the ‘disclose or explain’ nature of the regime has been removed. The initial drafting would have allowed a climate reporting entity that determines it is not materially affected by climate change to avoid making disclosure, but it would have then been required to explain why and obtain an assurance engagement to support that determination. This flexibility has been removed, on the basis that the application of the standards set by XRB can allow for differential reporting.

One technical – but important – tweak for the trustees of restricted retirement schemes was to expressly carve out those entities from the Bill. This was the policy intent, and the original drafting achieved this same result, but a slightly convoluted analysis was required to come to that conclusion.

Notably, in the Committee’s report the National Party members made known their ‘differing view’ on the proposed changes to the Bill, and expressed continuing concern about increased regulation and the compliance cost the new regime will have on businesses. They took issue with the ‘disclose or explain’ change outlined above, as well as the timeline for implementing the regime, commenting that disclosure requirements should commence for the financial year beginning two years after the XRB finalises its standards (which it has not yet done). They also stated that all entities should be treated the same – and that public sector entities should be brought into the regime, rather than being separately regulated via letters of expectation.

Our view

The Committee has clearly tried to strike a balance between implementing the regime quickly, and ensuring the regime will be practical and effective.

The delay of the assurance provisions of the Bill should allow climate reporting entities time to focus on the first step of putting in place processes, procedures, and controls to provide the required reporting – with assurance to follow. However, to ensure the assurance piece can be implemented as smoothly as possible once in force, climate reporting entities should start thinking now, based on the somewhat limited information available, about what that aspect might look like. The XRB has released some helpful guidance on getting started on the new disclosures.

The removal of the ‘explain’ provisions of the Bill, and kicking the potential for exemptions into the XRB’s standards, also puts further pressure on the XRB to develop those standards. Although work is well underway and the XRB has been actively progressing things, its first discussion paper is not due for release until 20 October 2021, with a formal exposure draft slated for July 2022 and a final standard issued in December 2022. This will put some pressure on climate reporting entities to work through the standards and get ready for implementation – potentially increasing the likelihood of non-compliance for at least the first few years of the regime.

Given the compliance and implementation costs climate reporting entities will incur, we think the removal of the ‘explain’ option under the Bill as originally introduced creates unnecessary inflexibility and uncertainty for businesses. If a business is not materially impacted by climate change, with robust assurance hoops to jump through to verify that position, why remove choice and force them to incur the full compliance burden imposed by the new regime?

Kicking the can down the road to an accounting body to determine appropriate differential standards also risks accounting principles and ideology overriding commercial efficacy. Plus, climate reporting entities which would otherwise have had the ability to access the ‘explain’ option are left with ongoing uncertainty as to what any differential reporting relief might look like. While we have every confidence in the XRB, shouldn’t this scope issue be something for the legislature to determine?

On the enforcement side, it is not surprising that the FMA’s enforcement powers have been left untouched by the Committee. The Committee appears to have recognised the FMA has a well-developed enforcement approach (a key part of which notes the FMA ‘will apply the principles of fairness and proportionality to any decision on whether to pursue civil or criminal actions’), and may be relying on the FMA to communicate its approach in this regard.

Given the tight timeframe for compliance and potential liability under the Bill, we believe that a transitional ‘no action’ period of at least a year after release of the final XRB standards should be put in place. This would give climate reporting entities time to fully bed in the new regime – especially if the ‘explain’ part of the Bill is not reinstated. It would also be helpful if the FMA commented publicly on its intended approach to enforcement under the Bill, particularly during the initial reporting periods.

Regardless, having received a unanimous recommendation from the Select Committee that the Bill be passed (despite the National Party minority not approving all the changes made to the Bill as reported back) it is clear that the new regime is on its way. With no proposed timing relief for implementation, those captured as climate reporting entities will need to scramble to be ready to produce their first disclosure reports.

The amount of work involved should not be underestimated. Getting involved in the XRB’s consultation process will be critically important, particularly with the broadened scope of the standards the XRB will need to produce under the Bill as reported back by the Committee.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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