NZ fund managers, listed companies and other financial institutions now face the prospect of an extra climate standard under new proposals tabled by the External Reporting Board (XRB) last week.
In round two of consultation on regulations to support the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act, the XRB upgraded one set of proposals from ‘authoritative notice’ status to the tougher full-blown ‘standard’ quality.
“We have progressed our thinking in this area, and now propose for the climate-related disclosure framework to comprise three standards (collectively referred to as ‘Aotearoa New Zealand Climate Standards’),” the second-round XRB consultation document says.
The newly enhanced standard covers a range of general climate-reporting definitions including the key concept of ‘materiality’, which sets a threshold for disclosure.
But while the introduction of a third standard dials up the climate-reporting obligations a notch, the latest XRB consultation also lays out the meatier disclosure proposals covering strategy, metrics and targets, and assurance rules.
For instance, the mooted rules explain how those captured by the law should disclose the impact of various climate-change scenarios in reports and product documents.
Aside from mandating carbon-emission disclosures (including the downstream ‘scope 3’ measures), the XRB says it won’t “specify any industry-specific metrics”.
“Rather, we consider that entities should report those metrics which they actually use for the management of climate-related risks and opportunities,” the consultation says.
The XRB has also adopted a soft tone on the contentious assurance obligations that will require reporting entities to pay independent third-party experts to sign-off on any greenhouse gas (GHG) emission claims.
Under the proposal, GHG assurance will have to meet the ‘limited’ rather than the more onerous ‘reasonable’ standard of proof.
“We believe that, at this time, the cost is likely to outweigh the benefit of increasing the minimum level of assurance from limited to reasonable,” the XRB says.
Last September the government accounting standards-setting body launched the climate-reporting regulation dialogue on proposed governance and risk management disclosures.
The proposed Climate-reporting Standard 1 (CS1) will include the governance, risk management, strategy, and, metrics and targets – a structure based on the emerging global benchmark Taskforce on Climate-related Financial Disclosures (TCFD).
CS2 will establish “first-time adoption provisions” allowing some interim relief from the full climate-reporting obligations while CS3 covers the regime definitions.
The XRB plans to publish the final standards by the end of this December with the first reporting period set to kick off for the 2023/24 fiscal year.
Entities including most NZX-listed firms, banks, insurers, non-bank lenders and fund managers (with $1 billion plus in assets under management) will be caught under the climate-reporting law.
XRB chair, Michele Embling, and chief, April Mackenzie, note that the regulations “are likely to require new processes to be embedded within reporting entities, including understanding current risks, opportunities and financial implications, but also imagining how different futures may influence the creation and maintenance of enterprise value”.
“However, we are clear that reporting entities are embarking on a journey – no-one is expecting perfection on day one. The disclosures are intended to be ambitious and forward looking, and to provide a clear and consistent path for reporting entities to follow as they mature and improve their reporting over time.”
Submissions on the latest XRB consultation close on April 13.