New Zealand has become the first country in the world to introduce legislation requiring mandatory climate-risk reporting for the financial sector, in line with the Government's guidance in September 2020.
The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill passed its first reading in Parliament yesterday. If approved by Parliament, financial reporting entities may need to maintain records of the information required to be disclosed under the Bill from early next year.
The Bill will amend the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013 and the Public Audit Act 2013 to require and support the making of climate-related disclosure by financial entities.
As the Honourable Dr David Clark stated in the first reading of the Bill yesterday, the main aim of the new law is to “move to a position where the effects of climate change become routinely considered as a part of business investment decisions". The legislation will achieve this aim by requiring businesses participating in New Zealand's financial markets to “disclose clear, comparable, and consistent information about the risks and opportunities presented by climate change".
Climate reporting entities to make mandatory climate-related disclosures
The financial entities caught by the Bill, described as “climate reporting entities", cover the majority of assets under management in New Zealand, including:
All registered banks, credit unions, and building societies with total assets of more than NZ$1 billion,
All managers of registered investment schemes with greater than NZ$1 billion in total assets under management,
All licensed insurers with greater than NZ$1 billion in total assets under management or annual premium income greater than NZ$250 million, and
All equity and debt issuers listed on the NZX.
In summary, there are four key parts to the Bill:
Climate-related disclosures will be mandatory for all “climate reporting entities".
Disclosures must be made in accordance with climate standards issued by the External Reporting Board (XRB).
The Financial Markets Authority (FMA) will be responsible for enforcing compliance, which it will do under its existing statutory powers, including monitoring the disclosures.
The XRB is empowered to issue guidance material on environmental, social and governance reporting and wider aspects of non-financial reporting.
Disclosures relating to greenhouse gas emissions will need to be verified by a qualified climate-related disclosure assurance practitioner.
Reporting standards and requirements
Reporting will be against the reporting standards issued by the XRB, which will align with the recommendations made by the Taskforce on Climate Related Financial Disclosures (TCFD), which are widely accepted as international best practice for climate-related financial reporting. In line with the TCFD's recommendations, the mandatory climate-related disclosures are likely to focus on four core areas of business operations for climate reporting entities:
the organisation's governance,
risk management, and
metrics and targets used to monitor and assess climate-related risks and opportunities.
If the Bill is passed by Parliament, financial entities would be required to make disclosures for the financial years commencing in 2022, with the first disclosures expected to be delivered in 2023. Climate reporting entities may therefore need to maintain records of the information required to be disclosed under the Bill from early next year.
The Bill takes a comply-or-explain approach to disclosures, meaning that climate reporting entities must either comply with the applicable reporting standards, or if not, explain why. Failure to comply could attract a range of penalties, ranging from fines of up to NZ$50,000 for infringement offices, to NZ$500,000 for individuals or NZ$2.5 million for reporting entities for more serious breaches.
Climate-related disclosure to support the shift to a low-emissions economy
While the new legislation is framed as a disclosure regime, its ultimate purpose is to promote a more efficient allocation of capital in light of the potential impacts of climate change, help with the transition to a sustainable and low-emissions economy, and to ensure that companies consider and understand the financial impacts of climate-related risks and opportunities. This reflects the TCFD 's view that climate-related disclosures will promote a greater understanding of the financial implications associated with climate change and potential climate-resilient solutions, opportunities and business models for companies.
The new mandatory climate-related disclosure regime, taken alongside the draft advice issued by the Climate Change Commission stating that the Government must pick up the pace to comply with the Zero Carbon Act's target of achieving net zero emissions by 2050, and the proposed changes to the resource management legislation (which would involve the introduction of a new Climate Change Adaptation Act), are expected to drive real change towards a low-emissions economy.
The Bill has been referred to the Economic Development, Science and Innovation Committee, which will give the public and affected financial institutions an opportunity to make submissions on the proposed changes.
Bell Gully is closely monitoring the reforms and will provide further updates. If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.