Consultation kicks off next month for the first tranche of regulatory measures to support the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill set to place new compliance obligations on a raft of institutions including most licensed fund managers.
April Mackenzie, head of the External Reporting Board (XRB), said the standard-setting government body would publish a draft for comment on the ‘governance and risk management’ aspects of mooted climate reporting obligations on October 20.
Mackenzie said the first round consultation was likely the easiest for the financial industry to digest given governance and risk management should be familiar concepts.
“Fund managers shouldn’t struggle with this,” she said.
Most of the nitty-gritty will come in the second consultation stage slated for March next year as the XRB lays out plans for how entities caught by the law must report on climate ‘strategy’ and ‘metrics and targets’.
The four XRB consultation subjects follow the template set by the Taskforce on Climate-related Financial Disclosures (TCFD) that established a voluntary reporting framework for corporates and others.
However, Mackenzie said converting the voluntary TCFD structure into the mandatory reporting standards required by the proposed law (queued up for a second reading in parliament) presented a few challenges.
While NZ is the first country to introduce mandatory climate-reporting legislation for financial institutions she said other jurisdictions – notably the UK, Europe and US – are not far behind, and, in fact, lead the way in some of the technical developments.
The XRB would draw heavily on the international experience – currently contained in a myriad of global organisations – in drafting the NZ standards, targeted to come into force for the 2023 financial year.
Fund managers – specifically, licensed firms with over $1 billion under management – and other entities (such as banks, insurers and most NZX-listed firms) caught by the climate-reporting proposals are naturally anxious about the practical details and costs the in-production XRB standards will impose.
Under the draft law, fund managers will have to report to the standards for every product they offer in annual updates. The form and content of the climate-reporting, of course, remains up in the air for now but early concerns around data access and quality, scenario-modeling and cost are already emerging.
Mackenzie admits many of the worries are justified but said the climate-reporting regulation was a “journey” for all parties.
From a fund perspective, she said investors should expect to see product disclosure materials that provide enough information to show the expected impact of (and on) climate change of the investment strategy in question.
Based on the disclosures investors should be able to decide “do I want to put my money here”, Mackenzie said.
The XRB has already begun engaging with the industry on climate-reporting including a recent presentation to the Financial Services Council (FSC) on the matter.
In the FSC presentation, the XRB led with the climate-reporting ‘vision’ of creating a NZ that “prospers through effective decision making informed by high-quality, credible, integrated reporting”.
Mackenzie said while journey’s-end was some distance away (with the formal XRB ‘exposure draft’ due next July), fund managers et al could take the first steps now by researching the TCFD, for example, and considering the “risks and opportunities” of climate change on their portfolios and businesses.
If the financial industry needs to crank up its “capability building” around climate change, Mackenzie said the XRB has too.
As reported in June, the XRB has received a significant budgetary boost to fund its expanded climate-reporting role.
And the XRB growth is in kind as well as scale. Mackenzie said the climate-reporting venture marks a substantial change in direction for the decade-old under-the-radar government agency that until now spent its time quietly tinkering with accounting standards.
“The key difference is that most accounting standards are about financial reporting on historical events – what has been,” she said. “Climate-related reporting is forward-looking and over much longer time periods than we’re used to.”
Previously, almost all XRB staff were accountants or auditors but the climate-reporting team of about half-a-dozen includes “four non-accountants”, Mackenzie said.
“We need to have the technical expertise to have an understanding of climate change,” she said. “It’s a significant enhancement of our mandate.”
The XRB powers will extend further to broader environmental, social and governance (ESG) issues under the climate-reporting legislation.
Mackenzie said the XRB would be charged with producing ‘guidance’ rather than mandatory standards around ESG – or so-called ‘integrated reporting’.
“The ESG reporting guides will be non-binding but I expect the quality of our product will mean people will use them as a tool,” she said.
According to Mackenzie, the XRB has already begun dialogue with “Māori colleagues” on how integrated reporting could play out.
Māori groups tend to have a “more intergenerational, whole story” approach to business that goes beyond just financials, she said.