Mandatory financial sector climate disclosure passes 3rd reading, consultation opens on standards

22 October 2021

New Zealand will become one of the first countries in the world to require mandatory climate-risk reporting in the financial sector after the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill passed its third reading in Parliament yesterday.

The new regime requires financial entities to assess and publicly disclose their responses to climate-related risks. This is intended to ensure that the effects of climate change become a routine part of decision-making and allow for more efficient allocation of capital.

The passing of the bill follows a number of changes made at the select committee and committee stages, and the release of the first of two consultation documents on the proposed standards by the External Reporting Board (XRB) yesterday.

In this update we outline what reporting entities need to know.

Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill

As we set out in our previous update on 16 April 2021, there are four key parts to the bill:

  1. Mandatory disclosures for all “climate reporting entities" which include:

    • All registered banks, credit unions, and building societies with total assets of more than NZ$1 billion.

    • All managers of registered investment schemes with more 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.

    • Equity and debt issuers listed on the NZX.

Although some submitters called for the bill to apply more widely, the Government decided not to expand the list. Public service departments may be subject to similar reporting obligations under the Carbon Neutral Government Programme, although this does not currently have legislative backing.

  1. Disclosures must be made in accordance with standards issued by the XRB.
  2. 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 FMA expects to release initial guidance on its compliance expectations in the later part of 2022.

  3. The XRB is empowered to issue guidance on environmental, social and governance reporting and wider aspects of non-financial reporting.

What are the key changes?

There were a number of key changes to the bill made at select committee and in the committee stage:

  • Growth markets (such as Catalist, a small-to-medium sized enterprise stock exchange) and small issuers (such as those with under NZ$60 million market capitalisation) are now exempt from the regime. This follows submissions suggesting that smaller businesses would struggle to meet the costs involved with climate-related disclosures.

  • The bill had originally provided a disclose-or-explain exemption, applicable where a climate reporting entity reasonably determined that it is not materially affected by climate change. Following a number of submissions, the exemption has been removed to avoid the risk of a “two-tier” reporting regime that would undermine a core goal of providing consistent and comparable reports.

  • There will now be a three-year transitional period before climate reporting entities are required to obtain external assurance of their greenhouse gas emission statements. The bill originally proposed a one-year period, but concern was raised about the need to develop capacity for climate reporting in the audit and assurance industry.

Consultation on standards under way now

The disclosure standards to be released by the XRB cover four pillars:

  • Governance.
  • Risk management.
  • Strategy.
  • Metrics and targets.

On Wednesday, the XRB released a consultation document on governance and risk management, and is seeking feedback until 22 November 2021. It is expected that consultation on the second two pillars – strategy, and metrics and targets – will open in March 2022. A formal exposure draft of the full standard will then be released later in 2022.

With release of the final standard expected in December 2022, mandatory disclosure is likely to come into effect for reporting periods starting from 1 January 2023. This means the first climate statements will need to be made in 2024.


In order to enable the public to understand the role that boards and management play in assessing and managing climate-related risks and opportunities, the XRB is proposing the following reporting standard:

An entity must include the following information when describing the board’s oversight of climate-related issues:

(a) Processes and frequency by which the board is informed about climate-related issues.
(b) How the board sets and monitors progress against targets for addressing climate-related issues.
(c) How the board holds management accountable for implementing climate-related policies, strategies, and targets, including whether and how performance metrics are incorporated into remuneration policies.
(d) Whether and how the board accesses expertise on climate-related issues (internal or external) in order to provide appropriate oversight.
(e) Whether and how climate-related issues are incorporated into governance processes and decision-making.

An entity must include the following information when describing management’s role in assessing and managing climate-related issues:

(a) Whether the board has assigned climate-related responsibilities to management-level positions or committees; and, if so, whether they report to the board or a board committee.
(b) A description of the organisational structure(s) showing where these positions / committees are.
(c) Processes by which management is informed about, makes decisions on, and monitors, climate-related issues.

The XRB considered (but ultimately rejected) calls to require disclosure of specific climate-related skills and competencies of individual board members. It was thought that such a requirement might inadvertently create an expectation that all boards should have specific climate expertise.

Risk management

In order to enable the public to understand how an entity identifies, assesses and manages climate-related risks, the XRB is proposing the following reporting standard:

An entity must include the following information when describing its processes for identifying and assessing climate-related risks:

(a) Tools and methods used to identify, and assess the scope, size, and impact of the climate-related risk.
(b) Short, medium, and long-term time horizons considered, including specifying the duration of each of these time horizons.
(c) Value chain stage(s) covered.
(d) Frequency of assessment.

An entity must include the following information when describing its processes for managing climate-related risks:

(a) How it determines the relative significance of identified climate-related risks.
(b) How it determines the relative significance of climate-related risks in relation to other risks.
(c) How it makes decisions to mitigate, transfer, accept, or control those climate-related risks.

The XRB standard calls for information to be disclosed in relation to both “transition risks” and “physical risks”.

The XRB proposes to provide further (and sector-specific) detail, in guidance to be issued at the same time as the final standard. It is expected that this guidance will provide explanations and examples rather than prescription. For example, in relation to risk management, the guidance is expected to cover an explanation of hazards and risks, and examples of common tools and processes to identify, assess and manage those risks.

Entities may also look to the Taskforce on Climate-related Financial Disclosures (TCFD) guidance when considering the relevant climate-related risks.

Other matters under consideration

A key area of interest for the XRB and entities is the use of scenarios (an aspect of the strategy pillar), i.e., “plausible descriptions” of the future that entities will be required to measure their resilience against. The XRB is currently considering how to make all relevant information available to entities to form these scenarios, and the role of sector-level construction of scenarios. We expect this to be a key area of focus for entities given the efficiencies gained in preparing scenarios on a sector-level. They are also likely to improve comparability of reporting within a sector.

Submissions on the consultation document are open until 22 November 2021.

Key dates
  • Submissions on this consultation document close on 22 November 2021.
  • The XRB’s next consultation document on strategy and metrics and targets is to be released in March 2022.
  • The final XRB consultation document will be released in July 2022.
  • The final standards are expected to be issued in December 2022.
  • The mandatory disclosure reporting period begins from 1 January 2023, with the first statements required in 2024.

Bell Gully is closely monitoring the reforms and will provide further updates. If you have any questions about the matters raised in this article, or would like assistance with preparing a submission to the XRB, please get in touch with the contacts listed or your usual Bell Gully advisor.

Disclaimer: 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.