For most climate reporting entities (CREs), the strategy sections of their climate statements make up the largest portion of their disclosures.

There are three key aspects to preparing strategy disclosures: 

1. Scenario analysis: Systematically exploring the impacts of plausible future events under conditions of uncertainty. 
2. Climate-related risks and opportunities: Identifying all physical and transitional climate-related risks and opportunities in the identified scenarios and assessing their materiality. 
3. Transition planning: Describing the CRE’s targets (including interim targets) and actions the CRE will take to transition to a low-emissions, climate-resilient future (noting that disclosure of the transition plan itself may be able to be delayed till year three of reporting). 

Done well, scenario analysis can produce detailed and topical information that CREs can use to build on their approach to climate change and ensure that their business model, strategy (including transition plans), and capital deployment are all responsive to key physical and transition climate-related risks and opportunities. Getting to these outputs, however, takes time and a structured approach.

While the first climate statements produced some detailed strategy section disclosures, a core focus for year two will be moving from identification to integration. 

Set out below are our key observations and recommendations for entities looking to improve their strategy disclosures in year two. 

Get the scenario process right
The scenario analysis process is a critical part of the transition planning puzzle. If the process is not structured and comprehensive, the scenarios generated will be less useful and bring fewer insights. For CREs without an existing framework, the XRB’s processes set out in its Staff Guidance for Entity Scenario Development are a good starting point. The Guidance sets out a comprehensive and structured approach to scenario analysis that enables CREs to get the most out of their scenario analysis exercises by setting up a framework designed to producing valuable, entity-specific information that will assist organisational decision-making and strategy.
Consult stakeholders and primary users
Stakeholder engagement in this year’s climate statements was understandably limited due to time constraints. However, CREs should prioritise engagement with stakeholders and primary users in year two as it will help them to determine and refine the focal question for their scenario analyses, ensuring that it is topical and fit for purpose, and help establish the materiality of potential disclosures.  CREs should also seek stakeholder views on climate-related risks and opportunities identified in the first reporting cycle to understand which are most significant to stakeholders and should be a focus in year two and transition planning.
Greater emphasis on driving forces and critical uncertainties needed
While neither driving forces[1] nor critical uncertainties[2] are standalone disclosure requirements in NZ CS 1, they are key inputs to scenario analysis and to the identification of climate-related risks and opportunities (as well as being fair presentation disclosures, where warranted). It was not always clear in year one whether CREs had considered the full spectrum of social, technological, economic, environmental, and political (STEEP) factors at the entity-level in order to identify their driving forces or whether they had used those factors to refine their sectoral analysis to produce entity-specific scenario narratives.  The climate statements also did always not demonstrate an understanding of key driving forces and critical uncertainties. Identifying the driving forces that will most significantly impact the CRE’s outcomes is critical in developing bespoke climate-related scenarios. Evaluating the degree of uncertainty associated with each driving force will help determine the focus of each scenario and highlight the key distinguishing features among them, allowing uncertainties to manifest in various ways. Undertaking a structured analysis of this nature enables CREs to explore a range of scenarios rather than getting locked into a narrow view of what the CRE considers will happen. In year two, CREs should spend more time identifying and assessing STEEP factors before producing detailed scenario narratives. This will assist CREs to prepare bespoke, tailored narratives and hone their strategic planning and risk management processes.
Benchmark against industry peers
Benchmarking disclosures against industry peers will highlight strengths, weaknesses, and gaps in disclosure for CREs and allow them to identify best practices and emerging trends. This will result in higher quality disclosures and ensure CREs stay competitive in their industry.
Tailor your analyses
A key benefit of climate reporting is the tailored scenario analyses which provide detailed and meaningful insights into the CRE’s business. This year, many CREs relied heavily on sector scenarios to produce their individual narratives, resulting in generic sector insights with little tailoring, which are less valuable to the CREs’ specific businesses and operations. CREs should develop detailed narratives to gain deeper insights and allow higher quality assessment of climate-related risks and opportunities, which are then disclosed effectively as summaries in the climate statements. This is particularly important for CREs with international value chains, who should be conducting scenario analysis exercises that consider all material locations.
Keep up to date on key developments and publications
CREs must factor relevant and material external information into their disclosures, so need to keep up to date on important developments, including: The Ministry for the Environment’s work to develop a climate change adaptation framework for New Zealand (Adaptation framework | Ministry for the Environment). Depending on a CRE’s sector and geography, this could be critical in assessing climate-related risks and opportunities, establishing appropriate mitigations, and undertaking transition planning. The Government is planning to release the final version of the second Emissions Reduction Plan before the end of 2024, which will record key policy tools for 2026 to 2030. This is likely to be a key transition planning input, particularly for CREs with existing emission reduction targets.  The Government is also developing a range of policies and plans that will impact on climate-related risks and opportunities across all sectors, including for resource management, energy, transport, and agriculture.  Australia has introduced new climate-related disclosure requirements. CREs captured by both regimes should ensure their disclosures are consistent, accurate, and comply with the specific requirements of each jurisdiction. The World Economic Forum Global Risks Report 2024 (Global Risks Report 2024 | World Economic Forum | World Economic Forum (weforum.org)). This is a useful resource for any entities with global operations and should be factored into any scenario analysis exercise that captures geographies outside of New Zealand, as well as being considered for New Zealand-felt impacts of systemic risk.

Transition planning

From year two onwards (or year three if proposed extensions are implemented)^[3], CREs will also need to disclose their transition planning efforts. A “transition plan” is part of a CRE’s overall strategy that describes its targets, including interim targets, and actions for its transition towards a low-emissions, climate-resilient future. In practice, this means changing the CRE’s business model and strategy in response to climate-related risks and opportunities.

Transition planning requires CREs to:^[4] 

• Review the outputs from the scenario analysis process and identify the key climate-related risks and opportunities for the CRE’s business model and strategy in each scenario; 
• Identify ways to manage and mitigate those risks and opportunities; 
• Determine preparatory actions in the short, medium, and long term to achieve a better overall strategic position and build resilience; and 
• Integrate those options and actions into existing strategy. 

When done properly, transition planning can:^[5]

• Mitigate exposure to legal, trade, and capital access risks while showcasing market opportunities and enhancing appeal to investors and stakeholders;
• Help identify and leverage opportunities and facilitate the shift to a low-emissions, climate-resilient economy;
• Allow the governance body to establish a strong, long-term strategic direction, fostering better decision-making and ensuring timely and appropriate execution; and 
• Enhance capacity to manage the growing uncertainties of the operating environment.

Key considerations for transition planning include:^[6] 

• Transition planning should prioritise concrete actions rather than relying on external factors;
• Transition planning covers emissions reduction, resilience and adaptation and the actions to transition to a climate-resilient future;
• Transition plans should be integrated into overall business strategy, rather than standalone plans; and
• Transition planning should balance short-term costs with long-term risks and opportunities. 

Transition planning is strategic, so the governance body needs a high degree of oversight and control over the process. It should engage with relevant board committees and management in the transition planning process to ensure the plan is responsive to the needs of the business.

Transition planning is a significant undertaking. Early engagement is critical to developing a robust and comprehensive transition plan. Even if disclosure adoption is delayed until the third reporting period, CREs should start early to give themselves time for review and development.

For further transition planning guidance, refer to Chapter Zero’s Transition Planning guide for directors, recently released in conjunction with the XRB (available here). The Guide sets out both the role that directors play in transition planning, as well as detailed guidance in relation to integrating transition planning into strategy development. 

We can help with right-sized solutions. Please get in touch with one of our experts to discuss, or speak with your usual Simpson Grierson contact to see how to take this forward.

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

 

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