Governance is the first category in Aotearoa New Zealand Climate Standard (NZ CS) 1 and is usually the starting point for climate statements.

Key disclosures include:

1. How often and through what processes the governance body is informed of climate-related risks and opportunities. 
2. How climate-related responsibilities are assigned to management and management’s processes for learning about, deciding on, and monitoring these risks and opportunities.
3. The governance body’s role in setting, monitoring, and overseeing the achievement of climate-related metrics and targets, including whether remuneration policies are tied to performance metrics and if so, how. 

The governance disclosure requirements stem from the Taskforce on Climate-related Financial Disclosure’s (TCFD) recommendations.^[1] They recognise that primary users (investors, lenders, and other creditors) want to understand how governance bodies and management identify and respond to climate-related risks and opportunities, because this impacts their ability to mitigate risks and capitalise on opportunities, and will ultimately impact upon the climate reporting entity’s (CRE) long-term profitability and sustainability.

This year’s governance disclosures often lacked clarity and detail on the governance body’s level of engagement in, and oversight of, the climate reporting process and to what extent climate-related matters were integrated into governance-level decision-making and strategy. While most CREs illustrated the roles the governance body, governance committees, and management played in the process, many did not clearly articulate the lines of reporting and information flows between them. This is understandable in the first year of reporting, as many CREs will not yet have sophisticated structures for managing climate-related issues and reporting. 

In year two, CREs should focus on building and enhancing their governance structures and integrating them into existing processes, such as strategy development and regular risk management. This will improve disclosures and increase the value derived from the reporting process. 

To strengthen oversight and improve governance disclosures in year two, CREs should consider the following practical steps: 

Current review processes
This could include: Assessing whether the current governance framework remains fit for purpose in the context of climate reporting Seeking feedback from participants about what governance processes worked well and which could be improved Evaluating whether the governance body’s involvement in key processes (eg scenario analysis and the identification of climate-related risks and opportunities) is sufficient to provide adequate oversight of the CRE’s response to climate change Documenting and recording climate reporting procedures and assessing against FMA and XRB guidance, and[2]   Building in sufficient time in the climate reporting timetable for governance body engagement in the process.
Clearly define the governance body’s role in the climate reporting process
Many of this year’s disclosures did not draw a clear distinction between the governance body’s:  Involvement in the process of preparing the climate statements, and  Involvement in ongoing monitoring of climate-related risks and opportunities (in the broader risk management context). CREs should clarify this distinction in their internal policies and processes. In year two, CREs should include documentation in their disclosures to illustrate the governance body’s role in the reporting process.
Create a dedicated oversight committee
Establish a dedicated governance committee to oversee climate-related risks and opportunities. This can streamline processes and ensure consistent information flows throughout the reporting year.
Assign dedicated roles within the organisation and clearly define them
Establish sustainability or climate roles to assist management and the governance body with the identification, assessment, and management of climate-related risks and opportunities. They will need to collaborate closely with other internal stakeholders, including finance, asset management and customer relations.
Record governance/management interactions and lines of reporting in project plan
Ensure your project plan allows for regular engagement and reporting as between management and governance, with clear lines of reporting and standardised reporting formats. This will ensure efficient and transparent information flows and give decision-makers timely access to critical data. There should be a reciprocal dialogue between management and governance.
Educate governance body members
Debrief on the first year of reporting and identifying any knowledge gaps. Address those gaps and ensure adequate training for governance body and management team members on overseeing and identifying climate-related risks and opportunities.
Determine materiality thresholds and triggers
NZ CS requires disclosure of all “material” information,[3] so CREs must understand materiality in the context of their business, sector, and industry. To assist in determining materiality, CREs need a materiality framework that maps qualitative and quantitative materiality considerations and integrates the interests of primary users and other stakeholders.
Ongoing risk management
Governance bodies should consider increasing their oversight of, and involvement in, climate-related risk identification and management that sits outside the mandatory reporting process. This will augment their understanding of, and ability to respond to, climate-related risks and opportunities, and will ensure that climate-readiness becomes embedded into the operational structure.
Metrics and targets
Review year one and long-term metrics and targets to ensure they are achievable and fit for purpose, particularly emissions reduction targets which are heavily influenced by external factors such as policy, regulation, and technology change. CREs should also consider linking KPIs to climate as well as general sustainability milestones.
Build compliance and verification in your reporting process
CREs with robust compliance and verification processes achieved more effective disclosures in their first year of reporting. Robust compliance and verification frameworks ensure regulatory compliance, increase the accuracy and transparency of disclosures, and lead to clear records of reporting (essential for audit or investigation purposes). Strong compliance and verification frameworks will also ensure that all disclosures are fairly presented, coherent, and substantiated, in accordance with the fair presentation requirements in NZ CS 3.

If you want to improve your governance processes or disclosures in year two, please get in touch with one of our experts to discuss, or speak with your usual Simpson Grierson contact.

Special thanks to Isabel van Tuinen for her assistance in writing this series.

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^[1] TCFD, “Recommendations: Task Force on Climate-Related Financial Disclosures”, Recommendations | Task Force on Climate-Related Financial Disclosures (fsb-tcfd.org).

^[2] XRB, “Resources”, Resources » XRB; FMA, “Climate Reporting Entities (CREs)”, Climate Reporting Entities (CREs) | Financial Markets Authority (fma.govt.nz).

^[3]  Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make on the basis of an entity’s climate-related disclosures.