New Zealand to lead the world in climate-related financial disclosure
Yesterday, Climate Change Minister James Shaw announced the proposed climate-related financial disclosure regime. The regime will make New Zealand the first country in the world to require the financial sector to report on climate risks. “Today is another step on the journey this Government is taking towards a low carbon future for Aotearoa New Zealand and a cleaner, safer planet for future generations,” Minister Shaw said.
The media release is available online.
How the regime will work
The new regime will operate on a mandatory comply-or-explain basis, based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, which is widely regarded as international best practice.
Businesses covered by the regime will be required to make annual disclosures, covering governance arrangements, risk management and strategies for mitigating any climate change impacts. The External Reporting Board (XRB) will develop one or more reporting standards, which entities must either comply with, or if they do not comply, explain why not.
As stated by Minister Shaw, “What gets measured, gets managed – and if businesses know how climate change will impact them in the future they can change and adopt low carbon strategies”.
The Financial Markets Authority will be responsible for independent monitoring, reporting and enforcement.
Who will be captured
The new climate reporting requirements will apply to:
- 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 $1b in total assets under management;
- All licensed insurers with greater than $1b in total assets under management or annual premium income greater than $250 million;
- All equity and debt issuers listed on the NZX; and
- Crown financial institutions with greater than $1b in total assets under management, such as ACC and the NZ Super Fund.
Organisations incorporated overseas will also be required to disclose in their New Zealand annual reporting.
In total, the government estimates around 200 organisations will be captured by the regime.
The TCFD is an appropriate base framework for a disclosure regime in New Zealand, as it is adaptable to all types of organisations, designed to solicit forwarding-looking information which can be directly used in the decision-making process, and importantly, its international quality will allow for cross-border integration and comparison.
There is no doubt that the proposed regime is a step in the right direction. However, given the narrow focus on large financial institutions and listed companies, there is a serious question as to whether this step is hefty enough, or will create competitive distortions.
The regime proposed is limited in its coverage. Notably it currently excludes large portions of the New Zealand economy, which is dominated by privately-owned, government-owned or co-operatively-owned entities as well as subsidiaries of multi-nationals. As highlighted in Growing New Zealand’s Capital Markets 2029, there are approximately 1,200 private companies with revenues exceeding $30 million, compared to 70 listed issuers.
There is a risk that the distinction between entities imposed by the proposed regime will lead to unintended consequences, such as disincentivising listing and creating distortions in the economy. For example, in many cases one of several competitors in a sector will be listed, and will be required to report, while its privately or overseas owned competitors will not.
But more importantly, entities sitting either side of the proposed threshold are equally likely to have a climate impact and face an equal climate risk.
Despite such concerns arising from the initial announcement, Minister Shaw provided reassurance in his Q&A session on climate-related financial disclosure where he indicated that once the legislation is passed and there is widescale adoption, the criteria will be revisited. In particular, Minister Shaw also said that after the election the next government would consider whether other Crown agencies and local authority owned entities should be required to report on climate risks under the existing Zero Carbon regime, or be included in the proposed new regime.
In addition, it may well be that entities that are not technically subject to the mandatory regime decide to comply voluntarily. The TCFD framework is a useful methodology for businesses to demonstrate to their stakeholders that they are thinking about the potential impact of climate change and factoring it into their governance and operations. Amongst other things, TCFD based analysis and disclosure will assist directors who wish to demonstrate that they have responded to the now well-accepted duties (see the Aotearoa Circle legal opinion in New Zealand and the Noel Hutley SC opinion in Australia) to take into account the financial implications of climate change.
If this anticipated roll-out is successful, such broader coverage would allow for comparison of performance across all sectors, incentivising the rapid adoption of good practice and innovative solutions.
We will look for further detail when the cabinet papers become available. This will provide detail such as whether the reporting for fund managers will relate to the fund manager’s own business, or to the entities into which its funds invest.
The proposed regime still needs to be incorporated in legislation and approved by Parliament, which can only occur after the election. If it is approved, financial entities will have until at least 2023 before they will be required to make disclosures, at which point the XRB will have established a clear and considered set of reporting standards.
If you have any questions in relation to the proposed climate-related financial disclosure regime or are considering how these changes will affect your business, please contact one of our experts.