Mandatory climate-related financial disclosures on the horizon

Thursday 14 November 2019

Author: Simon Watt

​​​A joint consultation by the Ministry of Business, Innovation and Employment and the Ministry for the Environment on the design of a climate-related financial disclosure regime is one of a number of opportunities for engagement around climate change, following last week's near-unanimous passing of the Climate Change Response (Zero Carbon) Amendment Bill.

Submissions were called for on the Climate Change Response (Emissions Trading Reform) Amendment Bill on 7 November and the Ministry for the Environment also opened a consultation on the technical rules for auctioning of New Zealand units​ in the New Zealand Emissions Trading Sc​heme on 12 November.

The climate-related financial disclosure regime consultation (the consultation) will apply to financial institutions and other entities that participate in New Zealand's financial markets. It follows the Government's decision in August this year to accept the Productivity Commission's recommendation to endorse the June 2017 recommendations by the Financial Stability Board Task Force on Climate-related Financial Disclosures (the TCFD) as an appropriate avenue for the disclosure of climate risk.

The consultation

The consultation addresses four key questions:

  1. What are the arguments for retaining the status quo, versus introducing new mandatory climate-related financial disclosures?

  2. What should be disclosed?

  3. Which entities should be disclosing?

  4. When should they start disclosing?

To inform the conversation, the discussion document includes commentary on why there is an international drive for financial market participants and financial institutions to make climate-related financial disclosures, the current situation in New Zealand, the links between directors' legal obligations and climate change risk, and the issues around designing a disclosure system.

Ultimately, the Government's objective is to move to a position where the effects of climate change become routinely considered in business and investment decisions in a way that contributes to a low-emissions, climate-resilient economy. There is now increasing recognition of the importance of disclosure of financial risk from climate change by financial market entities in meeting that objective. Better information gathering and analysis by entities for disclosure purposes facilitates better decision making, and provides reporting entities with incentives to manage risks and take advantage of opportunities. High quality disclosures also help investors, lenders and insurers to make more informed decisions.

The preferred option 

The Government's preferred option is to introduce legislation for new mandatory (comply-or-explain) disclosure requirements, with the TCFD reporting framework as the default 'comply' element. Extended external reporting and sustainability frameworks that are aligned with TCFD would also be acceptable under the new regime.

Consistent with the TCFD recommendations, the disclosure system would apply to listed issuers, banks, general insurers (including reinsurers), asset owners (i.e. institutional investors) and asset managers (i.e. investment managers). The consultation seeks feedback on whether there should be a small entity exemption, and if so, what criteria should be used (e.g. annual revenue, total assets, a combination of the two, or other measures).

The disclosures would be made in a stand-alone climate-related financial disclosure report, within the entity's annual report.

Non-disclosure would only be allowable on the basis of the entity's analysed and reported conclusion that they see themselves as not being materially affected by climate change, with an explanation as to why they have not complied in the annual report.

The proposal envisages that the new mandatory (comply-or-explain) climate-related financial disclosures would come into effect for financial years commencing six months on or after the date that the regulations are introduced.

There would be a one-year financial year transition period where it would be permissible to not provide a full set of TCFD disclosures, subject to explaining why the disclosures are incomplete.

What is the TCFD reporting framework?

The TCFD framework is widely regarded as international best practice for climate-related financial disclosures. Its recommendations are structured around four thematic areas (which are supported by a set of disclosures):

  1. Governance: Disclose the organisation's governance around climate-related risks and opportunities.

  2. Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation's businesses, strategy, and financial planning where such information is material.

  3. Risk management: Disclose how the organisation identifies, assesses, and manages climate-related risks.

  4. Metrics and targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

The recommendations are designed to generate decision-useful, forward-looking information on climate-related financial impacts and also to increase focus on the risks and opportunities of a transition to a lower-carbon economy.

Trends for disclosure of financial risk from climate change

The New Zealand Government is not alone in considering how best to implement TCFD-aligned disclosures, although if new mandatory disclosure requirements were to be introduced it would place New Zealand at the forefront of countries exploring this.

The TCFD recommendations have already had recognition in New Zealand, notably in NZX's Environmental, Social and Governance Guidance Note. The updated NZX Corporate Governance Code also recommends that an issuer “should provide non-financial disclosure at least annually, including considering material exposure to environmental, economic and social sustainability risks and other key risks."

The TCFD recommendations have been similarly recognised in Australia, the United Kingdom (UK) and by the European Union. The ASX Corporate Governance Council updated its Corporate Governance Principles and Recommendations in February 2019 to include an amendment to “encourage entities to consider whether they have a material exposure to climate change risk" by reference to the TCFD recommendations. The UK Government has set out an expectation for all listed companies and large asset owners to disclose in line with TCFD by 2022, and is exploring mandatory disclosure. The European Union is considering reopening the EU Non-Financial Reporting Directive, which would likely make TCFD disclosure mandatory, and its non-binding guidelines for reporting of climate-related information in June 2019, draw heavily on the TCFD recommendations.

Next steps

The feedback from this consultation will inform the Government's final decisions about the proposed regime on climate-related financial disclosures. After the consultation period has ended, officials will prepare a report that summarises the submissions and recommends changes in response and then seek agreement from Cabinet to make the recommended changes. Submissions close on 13 December 2019.

Other consultations

Submissions on the Ministry for the Environment's consultation: Reforming the New Zealand Emissions Trading Scheme: Rules for auctioning close on 19 December 2019.

Submissions are open on the Climate Change Response (Emissions Trading Reform) Amendment Bill, closing on 17 January 2020.

If you have any questions about the matters raised in this article, or would like assistance preparing a submission, 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.

For more information
  • Simon Watt

    Partner Wellington
  • David Craig

    Partner Wellington
  • Anna Buchly

    Partner Auckland
  • Toby Sharpe

    Partner Auckland
Related areas of expertise
  • Climate change
  • Banking and finance
  • Financial sector regulation
  • Corporate governance and advisory