On September 15, 2020, New Zealand's Minister for Climate Change announced that New Zealand will be the first country in the world to require the financial sector to report on climate risks. The requirement would apply to publicly listed companies and large insurers, banks and investment managers. The standard for reporting will be issued by the External Reporting Board (XRB), which will develop the standard in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The XRB is an independent Crown entity responsible for accounting and auditing & assurance standards in New Zealand. The mandatory regime would be introduced through an amendment to New Zealand's Financial Markets Conduct Act 2013. If approved by Parliament, financial entities could be required to make disclosures in 2023 at the earliest.
The announcement comes on the heels of a consultation process that was launched in October 2019 with the release of the New Zealand government's discussion document, Climate-related Financial Disclosures – Understanding your business risks and opportunities related to climate change. The discussion document set out proposals for a mandatory (comply-or-explain), principles-based, climate-related financial disclosures regime. The proposal for a mandatory climate-related financial disclosure system follows through on the recommendation by the New Zealand Productivity Commission in its report, Low-emissions Economy (August 2018). This recommendation was underpinned by two ideas: (i) disclosures are a powerful mechanism to focus reporting entities on the impacts of climate change on their own activities; (ii) disclosure enables investors to make decisions that accurately reflect the climate risk of those choices. While some New Zealand companies have taken the lead by disclosing climate change information, a report published by the McGuinness Institute (a non-partisan think tank based in Wellington) indicated that a majority of large companies do not provide any information, disclose only small amounts of information, or are reporting in an ad hoc way. In its Low Emissions Economy report, the Productivity Commission characterized this information deficit as "an ongoing and systemic overvaluation of emissions-intensive activities". In response, the New Zealand government is proposing that financial firms and listed companies be required to report on climate impacts for their business and investments in a consistent way. The New Zealand government's stated goals of mandatory climate-related financial disclosures is to:
- promote greater transparency and more accurate pricing signals in the market;
- incentivize low-emissions investment; and
- create a level-playing field for businesses already considering climate change in their longer-term risks.
Scope of the Mandatory Reporting Regime
The New Zealand government estimates that approximately 200 entities in the country will be required to make climate-related financial disclosures. These entities include:
- All registered banks, credit unions, and building societies with total assets of more than $1 billion.
- All managers of registered investment schemes with greater than $1 billion in total assets under management.
- All licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million.
- All equity and debt issuers listed on the NZX.
- Crown financial institutions with greater than $1 billion in total assets under management.
Entities would be required to make disclosures if they are over the thresholds on the last day of the two most recent financial years. Further, overseas incorporated organizations would be required to make disclosures in their New Zealand annual reporting if they are over the above thresholds. Foreign exempt issuers listed on the NZX would not be required to make disclosures under this regime, which is consistent with NZX listing rules. The thresholds would be increased from time to time to reflect the movements in a suitable price index. The New Zealand Financial Markets Authority would be responsible for independent monitoring, reporting and enforcement of the regime.
As noted above, the reporting standard will be developed by the XRB based on the recommendations of the TCFD, which are structured around four themes: (i) governance, (ii) strategy, (iii) risk management, and (iv) metrics and targets. Other reporting frameworks aligned with the TCFD framework can also be used. Disclosures would be made on a "comply-or-explain" basis. This means that where information is not available or disclosures are not possible following best endeavours, reporting organizations can explain rather than disclosing. Further details will be made available in implementation guidance being developed by the XRB. In addition, elements of the disclosures relating to greenhouse gas emissions would be required to have independent assurance.
The Road Ahead
The New Zealand government has indicated that stakeholders can provide input at the Select Committee stage of the legislative process. Also, as the XRB develops new standards and guidance materials for producing climate-related financial disclosures, there will be opportunities for further stakeholder engagement. As noted above, the earliest date that financial entities would be required to make disclosures is 2023.
In 2019, New Zealand updated its domestic emission reduction targets to bring them into line with the Paris Agreement: (i) net zero emissions of all greenhouse gases other than biogenic methane by 2050; and (ii) 24% to 47% reduction below 2017 biogenic methane emissions by 2050, including 10% reduction below 2017 biogenic methane emissions by 2030. By introducing a mandatory climate-related financial disclosure regime, New Zealand is moving ahead of other countries who are working towards some form of climate risk reporting for companies, a list which includes Canada, Australia, UK, and the European Union.
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