Climate-related Disclosures: XRB Climate Standard Consultation Launch and CRD Bill passes Third Reading and Committee of the Whole House stage

  • Legal update

    21 October 2021

Climate-related Disclosures: XRB Climate Standard Consultation Launch and CRD Bill passes Third Reading and Committee of the Whole House stage Desktop Image Climate-related Disclosures: XRB Climate Standard Consultation Launch and CRD Bill passes Third Reading and Committee of the Whole House stage Mobile Image

It has been a busy week in relation to New Zealand’s climate-related disclosures regime:

  1. On Tuesday 19 October 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (CRD Bill) passed through the Committee of the Whole House stage, and on Thursday 21 October 2021, the CRD Bill passed the Third Reading stage, so it is now in final form.
  2. On Wednesday 20 October 2021, the External Reporting Board (XRB) launched its consultation on the Governance and Risk Management sections of the proposed climate-related disclosure standard to be issued under the CRD Bill.

The Ministers of Commerce and Consumer Affairs (Hon Dr David Clark) and of Climate Change (Hon James Shaw) participated in the XRB’s launch event and made clear that these are crucial steps to give effect to the Government’s proposal, announced in September 2020, to be the first country in the world to have a mandatory climate change disclosure regime, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

We summarise both developments below.

Who should read this?

All climate reporting entities (CREs) and their advisers should read these developments and consider making submissions (as appropriate) on the climate standard.

CREs include: 

  • large listed issuers (entities with a market capitalisation exceeding $60 million);
  • large registered banks, licensed insurers, credit unions, and building societies (with total assets exceeding $1 billion, or in the case of licensed insurers where premium income exceeds $250 million); and
  • large managers of registered managed investment schemes (with total assets exceeding $1 billion).

In addition, other businesses should monitor developments as it is likely that the CREs they deal with may expect similar disclosure from them as part of the terms of business.

Developments to the CRD Bill
Refresher on the CRD Bill

The CRD Bill is based on the premise that climate change is now widely understood as a financial issue, which may materially impact on business performance, position and prospects, and businesses should be preparing for and disclosing those impacts.

Climate change impacts include:

  • Physical risks: e.g. as a result of volatile weather and warmer seas, droughts, inundation, flooding and storm damage on infrastructure, changes in viable land uses and fish stocks etc.
  • Transition risks: e.g. as a result of market forces and government responses to the threat of climate change. These include the initiatives recommended by the Climate Change Commission and currently being consulted on by government (see our newsletter here), reactions of investors and consumers, and a rise in activist litigation.

The CRD Bill will take effect by amending the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Public Audit Act 2001 and implementing a single broad policy to broaden non-financial reporting by requiring and supporting the making of climate-related disclosures by CREs and supporting related matters.

At a high-level, CREs will be required to do the following:

  • prepare climate statements that comply with the climate-related disclosure framework;
  • keep proper records that will enable it to ensure that its climate statements comply with the climate-related disclosure framework (described below under “XRB’s Draft Standard”). These records must be retained by the entity for a period of at least 7 years after the records are made;
  • obtain an assurance engagement in relation to statements, to the extent those statements are required to disclose greenhouse gas emissions; and
  • lodge copies of climate statements prepared with the Registrar of Financial Service Providers within 4 months after the balance date of the entity.

Under the CRD Bill, the Financial Markets Authority (FMA) is tasked with the independent monitoring, reporting and enforcement of the CRD regime and CREs.  The XRB is tasked with issuing climate standards and has the power to issue non-binding guidance on non-financial matters (including a wide range of environmental, social, governance matters).

Following the Select Committee report, the CRD Bill split different CRD obligations into phases – some that commence on or after the date on which the XRB issues the first climate standard that applies to the entity, and those that apply three years after Royal Assent under Part 1A.

See our previous news alert on this and other changes to the CRD Bill following the select committee report here.

Committee of the Whole House stage

At the Committee of the Whole House stage, there were four supplementary order papers (SOP) discussed in relation to changes to the CRD Bill.

The Government’s amendments to the CRD Bill under SOP No 63 were passed by Parliament.

They included:

  • a technical change to the definition of “market capitalisation” to determine if a listed debt issuer is large enough for the CRD Bill to apply. The SOP changed the test for a listed debt issuer from net assets of the issuer and its subsidiaries to the aggregate dollar value of all the entity’s quoted debt instruments when they are issued; and
  • changes in relation to an assurance practitioner’s report on parts of climate statements relating to greenhouse gas emissions.

The Opposition’s SOPs were not passed by Parliament.

They included proposing:

  • delaying the effective date for the CRD requirements;
  • applying CRD to crown entities (despite the Government noting that this is covered in letters of expectation from Ministers to the entities and/or under the Carbon Neutral Government Programme); and
  • reinstating the materiality and comply-or-explain provisions (which the Government has left to XRB to address in the climate standards rather than in the CRD Bill itself).

The changes made during the Committee of the Whole House stage effectively see the CRD Bill take its final form before Royal Assent.

XRB’s Draft Standard

As noted above, CREs must prepare climate standards that comply with the climate-related disclosure framework.  The XRB’s consultation document (linked above) notes that this framework will comprise of at least two standards and one authoritative notice:

  • Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures (NZ CS 1).
  • Aotearoa New Zealand Climate Standard 2: Adoption of Climate-related Disclosures (NZ CS 2).
  • Aotearoa New Zealand Climate-related Disclosures Concepts: this is an authoritative notice containing climate-related disclosure concepts (NZ CRDC).

Yesterday’s launch and the current consultation is in relation to the Governance and Risk Management sections of NZ CS 1.

Background to NZ CS 1

At the consultation launch, the Ministers and XRB confirmed that NZ CS 1 will be based on the TCFD.  However, as the XRB noted, because the TCFD operates by way of recommendations which may be complied with on a voluntary basis, but compliance with NZCS 1 will be required by law, there will be some differences.

The TCFD frames climate-related information in the business context into four pillars: governance, strategy, risk management, and metrics and targets. It also provides a set of 11 distinct recommended disclosures across the four pillars.


However, NZ CS 1 will be more principles-based and not overly prescriptive, to allow CREs to provide information depending on the extent to which they are impacted by climate change.

NZ CS 1: Proposed Governance section

Governance looks to enable primary users to understand the role an entity’s board and management plays in overseeing, assessing and managing climate-related issues and that climate-related issues receive appropriate attention.

At a high-level, the disclosures focus on the level of oversight boards and management have on climate related risks and opportunities, how much it’s being monitored, whether and how a board accesses expertise on climate-related issues, performance metrics in relation to the implementation of climate-related policies, processes on informing and making decisions about climate-related issues, and whether they are being considered among other business discussions.

The requirements under the governance section also align with existing New Zealand frameworks such as the NZX Corporate Governance Code.  In contrast to other international standards, the XRB does not require disclosure of specific climate-related skills and competencies of board members as there is an expectation a board should already have a diverse skill set to govern the entity.

NZ CS 1: Proposed Risk Management section

Risk management and its disclosure requirements help primary users to understand how an entity’s climate-related risks are identified, assessed and managed, and how those processes are integrated in existing risk management processes.  It will work alongside the Strategy disclosures (once published) to support the evaluation of an entity’s overall risk profile and the quality and robustness of its risk management activities.

When compared to the relevant TCFD pillar, the XRB in NZ CS 1 introduces additional items to be disclosed when an entity is describing its processes for identifying and assessing climate-related risks.  These include the tools and methods used, the time horizons considered, as well as the value chain stages covered.

To be of use to primary users, the disclosures also require an entity to how it determines the relative significance of climate-related risks, such risks in relation to other business risks, and then finally how decisions are made to mitigate, transfer, accept or control those climate-related risks.

XRB’s timeline for NZ CS 1

The below timeline sets out XRB’s planned actions as it continues to develop and deliver its three iterations of NZ CS 1:


Other things to note in the consultation

Aside from the above, people should read the broader consultation document as it covers a range of things that underpin the climate-related disclosures regime.

The XRB explains where and why it diverts from terminology and recommendations under the TCFD and invites feedback on whether people agree with this approach or not.  The XRB also asks for feedback on its approach to keep NZ CS1 concise and the proposal that sector-specific requirements be provided with accompanying guidance.

The document briefly introduces NZ CS 2, saying the adoption standards hopes to provide entities with practical solutions or phased relief in relation to providing comparative information when new requirements are being applied for the first time.  The XRB also says that it intends to issue NZ CRDC which will describe the concepts that underpin NZ CS 1, including the objective and primary users of climate-related disclosures, how disclosures fit into wider sustainability reporting, qualitative characteristics of useful information, and the interconnection between financial statements and climate-related disclosures.

Finally, the XRB gives readers a heads-up of the other issues it is currently considering.

  • The first two issues, relating to scenarios and GHG emissions, will directly inform the next consultation in March 2022.
  • Another issue which is the definition of “material” and related requirements for the application of materiality to climate-related disclosures is also expected to be provided in the March 2022 consultation.
  • Other issues of assurance and presentation requirements are relevant to the entire climate-related disclosure framework.
Our view

The CRD Bill and NZCS 1 standards are proceeding very quickly for a regime that will have such a profound impact. The regime is expected to apply as early as for financial years starting in 2023. CREs should therefore be working now on their arrangements to comply.

The XRB’s consultation helps to get the market to engage quickly, given the pace at which the CRD regime is progressing. We think the XRB’s approach of consulting in stages is clever, as it lets businesses start now to begin to prepare what will be required. It also makes sense that they have consulted on the governance and assessment of risk, ahead of the strategy, and the metrics and targets sections which will come next year.

It makes sense for each CRE to get its governance structures sorted and then run through the methodologies it will take in order to work out its exposure to climate change.  This will assist CREs to develop risk mitigation strategies which will in turn link to the XRB’s future consultations in March 2022 on strategy and metrics and reporting.

In relation to the CRD Bill, the Government has said that it expects approximately 200 businesses to be CREs.  In addition, during the Committee of the Whole House Hon James Shaw stated:

“The intention is that all Public Service departments—all departmental agencies, the New Zealand Defence Force, the Police, the Parliamentary Counsel Office, etc.—will be required to report on their metrics and targets from 2021-2022, which is a year ahead of where the private sector will be required to report under this piece of legislation here.”

Minister Hon. Dr David Clark also noted that:

“The decisions are being implemented through letters of expectation, and I give the member my undertaking that this Government will implement that”.

However, that still leaves the majority of businesses in New Zealand outside the CRD regime, including some very large unlisted enterprises. If the objective is, in line with TCFD, to ensure businesses are considering and disclosing the coming impact of climate change on those businesses it is a notable omission to leave out such a large part of the economy. We recommend that those large businesses who are not CREs also consider the proposals carefully, with a view to voluntary compliance.

Overall, the speed at which the CRD Bill has moved in parliament this week is unsurprising given the upcoming COP 26 Summit on 31 October 2021, which was acknowledged by Minister Hon. Dr David Clark during the Third Reading.

The Government plainly hopes that New Zealand’s developments in the climate-related disclosures space will become a discussion point at the COP 26 Summit, where parties are gathering to discuss deliverables of the Paris Agreement and the UN Framework Convention on Climate Change.

For some of our previous news alerts on climate governance generally, see the following:

What next?

The CRD Bill is very likely to receive Royal Assent by December 2021. The main reporting requirements of the regime will come in to force on or after the date on which the XRB issues NZ CS 1.

The XRB’s consultation on the Governance and Risk Management sections will close on 22 November 2021 and the next consultation in March 2022 will focus on the Strategy, and Metrics and Targets sections.

The XRB has stated that it expects to issue NZ CS 1 in December 2022.

This means a CRE with a 31 December balance date would be required to prepare their first climate statement as part of their 31 December 2023 reporting, though any climate-related disclosures relating to GHG emissions will only need to be assured as part of their 31 December 2024 reporting.

Who can help?

If you have any questions in relation to the CRD Bill or would like to know how it may affect your business, or if you would like any assistance in making a submission in relation to NZ CS 1, please contact one of our experts.