Climate-related reporting requirements are about to hit the road for fund managers and 200 other entities after supporting legislation passed into law last week.
Opposed only by the Act Party, the passage of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill through its third reading last Thursday followed the first tranche of draft disclosure regulations released the previous day.
The External Reporting Board (XRB) draft standards will closely track the global Taskforce on Climate-related Financial Disclosures (TCFD) model.
“We intend to include the TCFD’s four thematic areas, and each of the 11 recommended disclosures, in the standard in some format,” the XRB consultation paper says.
Round one covers the relatively simple governance and risk management TCFD themes while the XRB will tackle the trickier strategy and ‘metrics and targets’ requirements in a consultation next March.
The XRB plans to bundle all four of the overarching TCFD categories into a single standard (due in exposure draft form by next July) followed by Climate Standard 2 – that lays out ‘adoption standards’ – and an ‘authoritative notice’ to define underlying concepts.
While the proposed standards mimic most of the TCFD structures, the first draft shows the XRB deviates slightly from the global approach in places with several gray areas to clarify. For example, the XRB notes: “TCFD refers to primary users as Investors, lenders, and insurance underwriters. We have clarified that investors include existing and potential investors.” As well, the climate law, now awaiting royal assent, also empowers the XRB to deliver non-binding ‘guidance’ on wider environmental, social and governance (ESG) issues.
“The XRB recognises that, as well as climate change, wider environmental, social, and cultural issues are increasingly part of the rapidly evolving reporting landscape. This includes disclosure requirements, and investor and other stakeholder expectations,” the consultation says.
“… As part of our work in this area, we have initiated a project considering Te Ao Māori in the context of reporting in Aotearoa New Zealand as a whole.”
During the third reading of the climate-reporting legislation, Commerce Minister David Clark said the add-on ESG guidance would be “incredibly important as we transition to this becoming standard practice for businesses”.
“And I expect to see wider take-up beyond those 200 who will be mandated, as investors start to demand clearer reporting, more consistent reporting,” he said.
Submissions close on the XRB proposals on November 22.
The climate legislation itself – touted as a world-first by Clark – emerged largely as per the August select committee recommendations that included some relief on greenhouse-gas formal auditing requirements, axing a proposed licensing regime for ‘assurance practitioners’ and excluding listed companies with a market cap under $60 million from the law.
Under the legislation all large financial institutions, NZX-listed companies and fund managers (with $1 billion plus in assets under management) must include the mandated climate information in annual reports once the XRB standards are in place.
The final XRB rules should be completed by the end of next year with formal climate-reporting expected to kick-off in the 2023/24 financial period.
During the parliamentary debate last week, Clark said while Crown-owned investment entities were exempted from the law, the government would require them to report along to TCFD standards.
“Approximately 15 public entities are climate-related entities. Four Crown financial institutions including ACC and the New Zealand Superannuation Fund [NZS], with more than $1 billion under management, will be required to make climate-related disclosures, and that will be done through the letters of expectation process,” Clark said in the house committee stage debate. “The Minister of Finance will write to those entities in the usual process, stating that they must prepare climate statements in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures…”
Both the ACC and NZS now include TCFD compliance in their respective annual reports while the Government Superannuation Fund and National Provident Fund will follow suit.
Clark also gave an “undertaking that if the Earthquake Commission fund reaches a billion dollars, it too will be required through the letter of expectation process to do the same thing”.
“This is the direction of travel,” he said.