XRB publishes comparison document for NZ CS and IFRS S1 and S2

  • Legal update

    16 October 2023

XRB publishes comparison document for NZ CS and IFRS S1 and S2 Desktop Image XRB publishes comparison document for NZ CS and IFRS S1 and S2 Mobile Image

On Friday, 13 October, the External Reporting Board (XRB) published a comparison document explaining the differences between the Aotearoa Climate Standards (NZ CS) and the IFRS Sustainability Disclosure Standards (IFRS S1/S2).

A link to the Comparison Document is available here.

Who should read this? Why?

All climate reporting entities (CREs) as defined in Part 7A of the Financial Markets Conduct Act 2013 (FMCA) should read this Comparison Document. It will be particularly relevant to those with an international connection, e.g. who raise capital internationally, are a subsidiary of an international group, or operate as a branch in New Zealand.

Many CREs (i.e. those with 31 December or 31 March year ends) are more than halfway through their first reporting year and will be publishing their first climate statements in the first part of 2024. The greater the understanding as to the New Zealand regime and how it aligns with the international approach, the better.

What does it cover?

In New Zealand, the NZ CS have already been issued as New Zealand led the world with one of the first mandatory climate-related disclosure regimes, for entities which are CREs.

The IFRS S1/S2 are not directly binding, but are expected to guide jurisdiction-specific requirements to the extent each country’s reporting standards authority sees fit. For example, the Australian Treasury has stated that the draft for the Australian mandatory climate-related disclosure standards, to be released by the Australian Accounting Standards Board later in the year, will “closely align” with the IFRS S2.

The Comparison Document provides the XRB’s reconciliation of the NZ CS it issued with IFRS S1/S2. It finds that:

  • the core content of NZ CS 1 is consistent with that of IFRS S2 (i.e. the four pillars being governance, strategy, risk management and metrics and targets). 
  • the key concepts and general requirements in NZ CS 3 and IFRS S1, such as the principles of materiality and fair presentation, are also well aligned. 

However, at a more granular level, there are differences under each of the four pillars that the Comparison Document sets out (based on the TCFD approach). These differences come in various forms, including additional requirements not found in NZ CS or vice versa, or greater specificity required by IFRS S1/S2 compared to the NZ CS’ more high-level approach.

The specific IFRS S1/S2 standards that are not required by the NZ CS and vice versa are in the Appendix of the Comparison Document.

The Comparison Document identifies 10 key differences in its main findings:

1. Current financial impacts

There are additional disclosures under IFRS S1/S2 related to current financial impacts that NZ CS does not require.

2. Scenario narratives

While scenario analysis disclosures are required across both standards, NZ CS 1 requires three climate-related scenarios with specific temperature outcomes (i.e. 1.5, greater than 3, and a third degrees). IFRS S2 does not prescribe the number of scenarios or any temperature outcomes.

3. Quantitative approach to scenario analysis

IFRS S2 requires entities to consider mandatory application guidance when establishing their scenario analysis approach – the NZ CS does not. Further, IFRS S 2 states that a quantitative approach is required for entities with high capabilities and resources and a high degree of exposure to climate-related risks and opportunities. The NZ CS does not require a quantitative approach. In fact, in the Staff Guidance for Entity Scenario Development the XRB encourages CREs to use quantitative information carefully when drafting their scenario narratives.

4. Disclosure of climate resilience assessment

IFRS S2 distinguishes between a climate resilience assessment and scenario analysis and requires disclosure of both. Under NZ CS, CREs must be undertaking an assessment of their climate resilience following scenario analysis but they do not have to disclose such assessment.

5. Frequency of climate resilience assessment

IFRS S2 has an additional requirement to assess climate resilience annually.

6. Anticipated financial impacts

NZ CS requires CREs to disclose their anticipated financial impacts that they have identified before the effects of any transition plan are factored in. Comparatively, IFRS S2 requires disclosure of various anticipated financial impacts after factoring in the entity’s planned climate strategy.

7. Climate-related opportunities for risk management

Unlike IFRS S2, NZ CS does not require CREs to disclose how they address climate-related opportunities and integrate them into their overall risk management process – they are only required to do this for climate-related risks.

8. Financed emissions

There are additional requirements for entities in asset management, commercial banking or insurance under IFRS S2 related to financed emissions that NZ CS does not require.

9. Industry-based metrics guidance

IFRS S2 requires consideration of specific guidance when an entity is determining what industry-based metrics to disclose. NZ CS does not, but rather only requires disclosure of the industry-based metrics the CRE has used to measure and manage climate-related risks and opportunities.

10. Revision of comparatives

Although both IFRS S1 and NZ CS 3 requires disclosure of comparative data, only IFRS S1 requires entities to revise those comparatives when estimates change. NZ CS 3 instead requires an explanation for any changes and the effect on the current climate statement.

The relationship between IFRS and NZ CS

The International Sustainability Standards Board (ISSB) are a supranational organisation and created the IFRS S1/2 as a foundation for what mandatory climate reporting could and should look like.

The XRB stated in NZ CS 1 that as a result of “the need for alignment with the ISSB…in some cases the XRB Board decided to align more closely with the requirements in the ISSB’s [exposure draft of IFRS S1/S2]” than the TCFD recommendations.

Our view

As the applicable climate standards under legislation, it is the NZ CS that are legally binding on CREs under the FMCA.

For those entities which are either:

  • not CREs in New Zealand but want to produce voluntarily; or 
  • are CREs in New Zealand and are also required to produce,

climate statements that are aligned with international standards, the XRB has done some of the heavy lifting in establishing the commonalities and differences between the mandatory climate reporting requirements for New Zealand and the international base standards.

As expected, they are largely aligned in terms of the principles applied. This makes sense given both sets of standards are TCFD-inspired. But there are differences in terms of the minimum disclosures required under the NZ CS versus the IFRS S1/S2.

That said, as the Comparison Document acknowledges, once we see NZ CS-compliant climate statements, in practice some of the differences may not be as pronounced as currently anticipated.

What the Comparison Document does highlight is that the XRB have worked hard to produce standards that are workable for the smaller entities that fall within the New Zealand regime (compared to some other jurisdictions). It also shows that XRB have leaned into producing standards that will encourage businesses to integrate their understanding of the climate impacts they face into their general business strategy and risk management, compared to taking a purer financial reporting style approach.

A question which will confront the XRB and New Zealand, once other jurisdictions start to roll out their mandatory regimes (especially Australia, given the high degree of integration between the economies), is whether there is pressure to align further than currently is the case, with international standards. That will be an issue to watch over the next couple of years.

In the meantime, one approach that some larger entities with more international exposure may wish to take is to seek to comply with both sets of requirements – in the same document – to facilitate easier understanding by international users. This should be possible so long as the report is clear as to which elements under the New Zealand regime are mandatory, and which are voluntary.

Finally, it’s important to remember that while the XRB has been tasked with creating the NZ CS, the FMA is tasked with enforcing any non-compliance. This includes whether final reporting statements (under NZ CS or other standards) are compliant with the applicable requirements.

What next?

The XRB says that it will commence a post-implementation review of NZ CS in December 2025. That review will include consideration as to whether NZ CS needs to align with international standards if any requirements meet user needs and the objective of NZ CS.

If you have any questions about the Comparison Document, the NZ CS or about the CRD regime generally, please contact one of our experts.


This article was co-authored Hannah Cross, a Solicitor in our Financial Services team.