In one of its last acts before the election, the Government announced a mandatory climate-related financial disclosure regime. Its plan was to introduce amendments to the Financial Markets Conduct Act to apply the regime to certain large organisations within the financial sector.

Parliament is back in early February, and the legislative agenda will soon get underway. In this first of a series of articles, we recap and outline where things now stand with the disclosure regime.

Deliberate step

The Government has made clear that forcing change is necessary to shift NZ to a low emissions economy. The disclosure regime is one example of the deliberate changes in several areas of the NZ economy intended to prompt a wider and faster transition. The disclosure regime will apply to various apex organisations within the financial sector, creating a trickle-down effect in the wider economy. This is supported by growing public and economic pressure on organisations to modify behaviour that is inconsistent with climate change goals.

Regime based on international recommendations

The new regime will build on the TCFD recommendations, now being widely adopted internationally by users and preparers of financial filings as the basis for standards for climate-related financial disclosures.

The TCFD recommendations recognise that organisations will need to disclose new information, and that a comprehensive approach is necessary to identify and report on the risks (and opportunities) presented by climate change. The TCFD has proposed that organisations adopt a framework for proper assessment and disclosure of climate-related matters in four areas, reflecting core organisational elements: governance, strategy, risk management, and metrics and targets.

Wide ranging impacts, direct and indirect

The XRB (the Independent Crown Entity responsible for accounting and auditing and assurance standards in NZ) and the Financial Markets Authority (FMA) have the task of implementing the proposal. Ultimately, disclosures by the reporting entities may become subject to an audit and assurance process. The XRB will be responsible for setting the financial reporting strategy and issuing standards for both financial reporting, and audit and assurance.

The impact of the disclosure regime will be far reaching, and likely well beyond just the organisations required to report. We expect financial institutions to seek climate-related risk information from their customers, suppliers and counterparties, as part of understanding their own aggregate risk position. Further (and to the point of the whole exercise), we expect financial institutions to also start factoring the financial impacts of climate change on their suppliers, customers and counterparties into the cost of lending. Suppliers, customers and counterparties should therefore expect financial institutions to start requesting information about their climate-related risks (and opportunities) as a prerequisite to future transactions.

The ultimate goal is that all involved take steps to reduce their climate-related risks, and in so doing help NZ transition to a net-zero emissions position.

Where to from here?

• The XRB has started work toward developing the new standards. The Government expects them in force in 2023, at the earliest. The C-19 crisis has impacted on this and the exact timing will be dependent on how long it takes the XRB to set standards. Nevertheless, we expect the XRB to adopt a collaborative process, with regular notification to the market of its progress.
  
  
• The Financial Markets Conduct Act will need to be amended, requiring approval in Parliament. At the time of writing, the necessary amendment bill has not been introduced. If the usual law reform process is followed, there will be opportunity for public submissions.
  
  
• Reporting entities, to the extent they have not done so already, should prepare for the new regime addressing all aspects of the TCFD framework, and sufficient to allow the organisation to be confident of its disclosures by the time the mandatory regime is in place.
  
  
• Reporting organisations can learn from the experiences of others. Meridian Energy, BNZ, Westpac, the NZ Super Fund and Auckland Council (among others) are already reporting on a voluntary basis.
  
  
• It will be prudent for other organisations, while not directly subject to the reporting regime but who are customers or stakeholders of reporting entities, to also consider their own financial exposure to climate change risks.

The countdown is on

Time is the main challenge facing all organisations affected by the new disclosure regime, directly or indirectly. Implementing a comprehensive risk management programme, in relation to a set of risks that are new (and extending to all relevant matters arising from the economy’s transition to a low emissions state), will take considerable time and organisational will. Company directors will also need to be confident that the information ultimately arising from that process meets legal requirements, is useful to stakeholders and the market and, ultimately, satisfies the auditors.