The climate-related financial disclosure regime

New enforcement risks

In our 2021 litigation forecast, we considered the possible avenues for climate change litigation to be brought in New Zealand in light of the landmark climate change proceeding, Smith v Fonterra, where we represented two of the defendant parties. Following the decision of the Court of Appeal striking out the claims, permission has now been sought to appeal to the Supreme Court. We also reported that a new climate-related financial disclosure regime announced by the Government in September 2020 might soon provide a further avenue for enforcement of climate change related commitments for entities falling within the regime’s scope. A year on from that announcement, the climate-related financial disclosure regime has quickly taken shape. On 27 October 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (CRD Bill) received Royal assent, only six months after its introduction to Parliament in April 2021.

What does the CRD Bill do?

The CRD Bill amends a number of statutes to introduce mandatory climate-related disclosures for businesses subject to the Financial Markets Conduct Act 2013. Once in force, the CRD Bill will require certain entities, known as Climate Reporting Entities (CREs), to produce annual climate statements that identify and report on the impact of climate change on their organisation and disclose greenhouse gas emissions.

Premised on the acknowledgment that climate change is an economic risk that should impact an organisation’s long-term and short-term decision-making, the CRD Bill is the next step in the increasing adoption of legal solutions to climate-related risks. The Bill aims to ensure that the effects of climate change are routinely considered in business, investment, lending and insurance underwriting decisions.

The CRD Bill will apply to approximately 200 CREs, comprised of:

  • listed issuers of quoted equity securities or quoted debt securities (i.e. 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).

The new regime will impose additional disclosure obligations on CREs in each financial year. CREs will be required to:

  • prepare climate statements that disclose information about the effects of climate change on their organisation and are in accordance with climate standards issued by the independent External Reporting Board (XRB);
  • keep proper records that will enable the CRE to ensure that its climate statements comply with the climate-related disclosure framework. The entity must retain these records for at least seven years;
  • to the extent that the statements are required to disclose greenhouse gas emissions, obtain an assurance engagement in relation to those statements; and
  • lodge copies of its climate disclosure statements with the Registrar of Financial Service Providers within four months after the balance date of the CRE and include a copy of the climate statements prepared by the CRE in its annual report.

Climate disclosure statements will be made in accordance with climate standards issued by the XRB. The XRB has modelled the approach of the Task Force on Climate-Related Financial Disclosures and structured CRE’s disclosure obligations into four thematic pillars: Governance, Strategy, Risk Management and Metrics and Targets.

In November 2021, the XRB completed its consultation on the Governance and Risk Management sections of the proposed regime. Governance disclosures will focus on the level of oversight that boards and management have in overseeing, assessing and managing climate-related issues. Risk management disclosures will focus on how CRE’s climate-related risks are identified, assessed and managed and how those processes are integrated into existing risk management processes. The XRB anticipates that the Strategy and Metrics and Targets pillars of the disclosure framework will be released for consultation in March 2022.

Enforcement and Risk

Importantly, the CRD Bill has teeth. Failure to comply with the reporting obligations will expose CREs to enforcement action by the Financial Markets Authority (FMA). The regime will introduce a range of penalties including:

  • Infringement offences: Failure to keep CRD records in the prescribed manner, make CRD records available for inspection, lodge the climate statements or include the climate statement in an annual report are infringement offences and a CRE is liable on conviction to a fine not exceeding $50,000.
  • Civil liability: Where a CRE fails to keep proper CRD records or prepare or lodge climate disclosure statements, this may give rise to civil liability of a penalty not exceeding $1 million in the case of an individual or $5 million in any other case. Failure to keep CRD records for seven years may give rise to a penalty not exceeding $200,000 for an individual or $600,000 in any other case.
  • Criminal liability: It is a criminal offence for a CRE and its directors to knowingly fail to comply with the climate standards in any of the climate statements prepared by the CRE. A director is liable for a fine not exceeding $500,000 or a term of imprisonment of up to five years (or both), and in any other case, a fine not exceeding $2.5 million.

The FMA has indicated that, at least initially, it will be “focused on supporting climate reporting entities and other relevant stakeholders as they prepare for the new regime…in the early stages of the new regime, enforcement action is likely to be focused only on serious misconduct, such as failure to produce climate statements or where climate statements are false or misleading”.

In addition to potential enforcement action by the FMA, the emerging CRE regime and increasing transparency of climate-related risks could give rise to multiple avenues for climate change litigation. CREs should be aware that their climate disclosure statements, if they contain “greenwashing” or are otherwise misleading, could lead to liability under the Fair Trading Act 1986 and the fair dealing provisions of the FMCA for misleading or deceptive conduct or false, misleading or unsubstantiated representations:

  • CREs’ climate disclosure statements and annual reports could become the subject of a claim of misleading or deceptive conduct by way of greenwashing, meaning that a CRE’s disclosure statement includes disclosures that are false or misleading, that a CRE has been unable to fulfil, or that identify climate issues or risks that are not adequately addressed.
  • A claim may be brought against a CRE on the basis that inadequate disclosure (or non-disclosure) of a material climate risk constitutes misleading or deceptive conduct. While we are yet to see such a claim in New Zealand, similar litigation has occurred in Australia (Abrahams v Commonwealth Bank of Australia).
  • With the disclosure of CRE’s climate-related risks and management strategies, there is also a risk of claims being brought against CRE’s by shareholders or investors for alleged failures to appropriately consider or adapt to the risks posed by climate change, where that failure impacts on private interests.

Where to from here?

The CRD Act is coming. The XRB is scheduled to issue a climate standard by December 2022, meaning that CREs will be required to make disclosures in accordance with that standard for accounting periods beginning on or after 1 January 2023. It is therefore important that CREs begin to work on their compliance arrangements now.

Other non-CRE businesses should also monitor developments as it is likely that the CREs they deal with may require similar compliance and disclosure as a condition of business. Moreover, over time, the CRD regime may expand to cover other large organisations.

 

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