Director action points for climate reporting

  • Opinion

    18 April 2023

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New Zealand’s new mandatory climate related disclosures regime (CRD) came into effect earlier this year and is contained primarily in Part 7A of the Financial Markets Conduct Act (FMCA). The CRD regime applies by law to about 200 of New Zealand’s largest financial institutions and NZX listed companies. The first climate reporting period will be the first financial year starting on or after 1 January 2023. So, for these organisations with default 31 March balance dates, their reporting period started on 1 April 2023.  

In the wake of Cyclone Gabrielle and other severe weather events this year, the preparation of climate statements provides an opportunity to better understand and prepare for the current and future impacts of climate change, and build climate resilience through transition planning. Those impacts include both:

The physical impacts: i.e. the risks and opportunities for a business resulting from climatic events themselves, such as rising sea levels, more volatile weather, wildfires, storms, and floods, changing land uses, bio-incursions (introduction of exotic pests), These physical risks will directly affect many New Zealand businesses. For example, the agriculture, horticulture and fisheries sectors are likely to be particularly impacted. In addition, tourism and businesses with coastal property and infrastructure investments may be affected. Physical implications will also flow through those with second-tier exposure to the frontline (e.g. lenders and insurers) and impact the price or availability of finance and insurance.

The transition impacts: i.e. business-related risks and opportunities that follow societal and economic responses to climate changes and the transition toward a lower-carbon and more climate-resilient future. These include policy and regulatory risks, technological risks, market risks, reputational risks, and legal risks, in New Zealand and internationally.

Preparing climate statements can also assist directors in discharging their duties to guide and monitor the business by understanding and acting in relation to the risks faced by the business and the new opportunities that may be created. Therefore, there is value in going beyond the technical requirements, and engaging with the exercise as a matter of good governance. 

In this note, we’ve set out the basics of the regime and what directors should be thinking about and what they should be testing with management and making sure is already underway.

Who is captured by the CRD regime?

The CRD regime is mandatory for certain FMC reporting entities referred to as “climate reporting entities” (CREs), including, in summary:

  • NZX listed issuers equity and debt issuers with a market capitalisation or nominal value of quoted products exceeding NZD60 million (other than those listed on a growth market);
  • large registered banks, licensed insurers, credit unions and building societies (with total assets exceeding NZD1 billion, or, in the case of licensed insurers, where premium income exceeds NZD250 million); and
  • large managers of registered managed investment schemes (with total assets exceeding NZD1 billion) in respect of the schemes in question.

In addition, Crown Financial Institutions have received letters of expectation from their Ministers indicating that they should comply as if they were CREs. Some State Owned Enterprises (SOEs) and other companies are also voluntarily taking this path. That’s because the regime provides a rigorous framework for evaluating the potential impact on their business of climate change, and prepares them for responding to requests for information from the CREs they deal with as a condition of business. 

What is required?

The core obligations under the FMCA currently in effect are to: 

  • keep climate records throughout the reporting period so that the statements can comply with the Aotearoa New Zealand Climate Standards released in December 2022 (available here);
  • prepare climate statements in accordance with the Climate Standards; and 
  • file and publish the climate statements within 4 months of the balance date (3 months for listed issuers).

In addition, the CRE’s greenhouse gas (GHG) emissions disclosures for reporting periods ending on or after 27 October 2024 will be subject to external assurance requirements. 

But the greatest value is the analytical exercise required in preparation for issuing the climate statements. CRE’s may also aspire to report that they have given effect to the regime during the reporting period. As we say, going beyond the technical requirements for disclosure, enables proactive engagement with risks and opportunities. 

What is a climate statement? 

A common misconception is that a climate statement is only a report on a CRE’s GHG emissions. While a climate statement does contain GHG emission disclosure, this is not the primary purpose of a climate statement. 

A climate statement is primarily an assessment of how climate change is currently impacting the CRE and how it may do so in the future. It is meant to enable primary users to assess the climate-related risks and opportunities the CRE has identified, the anticipated impacts of these on the CRE, and how the CRE will position itself as the global and domestic economy transitions towards a low-emissions, climate-resilient future. 

To achieve this, the climate statements contain disclosures based on the TCFD’s four pillars on climate disclosures, being: 

  • governance: enabling users to understand the role of the Board in overseeing, and management in assessing and managing, climate risk and opportunity; 
  • strategy: enabling users to understand how climate change is currently impacting an entity and how it may do so in the future; 
  • risk management: enabling users to understand how an entity’s climate-related risks are identified, assessed, and managed and how those processes are integrated into existing risk management processes; and
  • metrics and targets: enabling users to understand how an entity measures and manages its climate-related risks and opportunities (including scope 1-3 emissions). 

The above includes climate scenario analysis across at least three climate-related scenarios: 

  • 1.5 degrees celcius above pre-industrial averages (which would align with the Paris Accord goals);
  • 3 degrees celcius or greater above pre-industrial averages; and 
  • a third climate-related scenario (to be selected by the CRE). 

The climate-related scenarios are not intended to be probabilistic or predictive, or to identify the ‘most likely’ outcome(s) of climate change. They are intended to provide an opportunity for CREs to better understand and prepare for the uncertain future impacts of climate change.

What should directors of CREs be doing?

First and foremost, directors will want to know that their businesses have actually considered and are positioned for the changing world. That means they will want to understand the scenario analysis being undertaken, and their entity’s response, given the strategic nature of the subject matter.

The climate statements require considerable time to prepare, even for CREs using sector scenario analysis, and input from the entire organisation due to the required disclosures. Therefore, work should already be underway and cannot be left until after the end of the reporting period. While not technically required under the Climate Standards, CREs may want to undertake the scenario analysis early enough that it can be integrated into risk management and strategy development, to allow it to report that its governance and risk management processes address identified material risks. The first climate statements will start being published in the first 3-4 months of 2024, for entities with 31 December balance dates.

As with financial statements, the directors face civil and criminal liability where the CRE does not comply with the CRD regime. While the FMA has indicated an educative approach during the initial application of the CRD regime, with enforcement aimed at serious non-compliance, the FMA expects boards to put their best foot forward.  

Directors should therefore be considering the following matters as part of the organisation’s preparation of climate statements. The points below are prepared with entities that have not previously done full TCFD reporting in mind, necessitating greater attention from directors in setting up the disclosure frameworks and assessing the strategic subject matter of the disclosures themselves: 

Has a working group comprising the right people within the business been assembled?

No one person within the organisation will be able to prepare the statements on their own and directors must be comfortable that the right mix, or access to the right mix, of expertise from governance, operational, financial and legal fields is available.  

Does the working group have access to consultant support as needed?

Some aspects of climate statements will require broader expertise e.g. forecasting financial impacts of climate change. It will be important that this is available not just to ensure the right disciplines are applied but also to have access to a wider pool of expertise and manpower. Having said this, consultants should not drive the process, only the CRE’s people can do that and TCFD and XRB guidance says as much.

Does the Board have the right level of oversight?

Whether a Board Committee oversees the work or not, the directors must be in a position, when reading the statements, to assess whether they agree with the presentation of climate risks, opportunities (including forecasts) and transition plans (including key assumptions). Therefore, the Board must ensure it receives information to support this during the process. These are strategic matters and should form part of monitoring the company’s affairs, and therefore they are matters on which directors should have a view and understanding. This also ties into record keeping (see below). 

Is the record keeping appropriate?

While the record keeping regulations are not out yet, the Board should be comfortable that it is able to show due process is being followed and that the right information goes to it for consideration. As the FMA has said “Without proper supporting documentation, it can be unclear whether an entity and its directors have sufficiently considered, understood, and reviewed their disclosures, and whether these are based on reasonable and well-considered inputs and assumptions.” This does not mean a director has to be a climate scientist, but they should (assuming a competent team has been delegated this work) be able to engage with and understand how a given set of circumstances affect (at least qualitatively) the business and have a view on the risk, opportunities and transitional planning associated with it, including the key underlying assumptions. Conceptually, this is not too different to forming a view on impairments, useful life estimates, and contingent liabilities following expert advice. 

Is the disclosure consistent with the CRE’s other disclosures?

Climate statements do not live in a vacuum. They will come out when financial statements and corporate governance statements do. Therefore, disclosures need to be consistent to avoid the risk of being misleading for this reason e.g. is the forecast information in the climate statement consistent with assumptions underlying the useful life of assets? This is something the FMA expects auditors to look into, and it will be investigating itself as well. More generally, this is an opportunity to consider other ESG statements made by the CRE for greenwashing risk. The Climate Standards prescribe a significant degree of rigour in preparing climate statements which should guard against greenwashing. Therefore, statements inconsistent with them should be updated to remove this risk. 

What should I think about when I read climate statements?

The climate statements provide commentary on strategic issues affecting the CRE. Therefore, even though a large part of their preparation will be delegated (and experts engaged, given that they are new and technical, and management sign offs given), we think that directors should have to read and understand them and test them against their own knowledge of the CRE as they would with financial statements. This is particularly important where full TCFD reporting has not previously been undertaken. Directors will also need to be comfortable with the risks and opportunities selected by management, the transition plan selected by management, the current and anticipated impacts, and the key assumptions underlying disclosures. Essentially, directors must understand the risks and opportunities facing the business and how the business will react to them.    


This article was co-authored by Shaanil Senarath-Dassanayake, solicitor in our financial services team.