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Mandatory Reporting on Climate Risks

by Stephen on September 23rd, 2020

Last week, the Minister for Climate Change James Shaw announced that New Zealand will be the first country in the world to require the financial sector to report on climate risks. 

The announcement noted that 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 $1 billion in total assets under management
  • all licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million
  • all equity and debt issuers listed on the NZX
  • Crown financial institutions with greater than $1 billion in total assets under management, such as ACC and the NZ Super Fund

Query whether those reporting entities which are operating managed funds, or like banks and insurers, have funds under management – will be required to report on their own activities or those of the businesses in which those funds are invested.

According to the Minister’s press statement around 200 organisations will be required to disclose their exposure to climate risk.  The Minister’s press statement also noted that the $1 billion threshold will make sure about 90% of assets under management in New Zealand are included within the disclosure system.  Given that the target audience (of about 200) equates roughly to the number of traded instruments on NZX – this seems to be where the bulk of the compliance burden will fall.  See also the comments below about a recent study by the McGuiness Institute.

The standard for reporting will be developed by the External reporting Board (XRB) – for a mandatory (comply-or-explain) reporting regime.  And the FMA will be responsible for independent monitoring, reporting and enforcement.

The new regime is to be based so as to meet the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) – which the Minister’s press statement says is widely acknowledged as international best practice. 

The new regime, which would see New Zealand as the first country to introduce a mandatory climate-related financial disclosure regime, would be implemented via legislation (under the FMC Act – or possibly by means of regulations made under the Financial Reporting Act 2013).  The target timeline, in terms of which financial entities could be required to make disclosures, is said to be 2023 at the earliest.

Background – policy

Last week’s announcement can be seen as a logical progression for New Zealand, as a signatory to the Paris Climate Agreement, in terms of which the adopting countries commit to take action on climate change – by seeking to hold the increase in global average temperature to well below 2°C above pre-industrial levels.  This is to be achieved by the signatories decarbonising their economies to meet their emissions-reduction commitments (targets).

Much more detail about New Zealand’s commitments under the Paris Agreement, including targeted reductions in what is known as biogenic methane emissions, is available on the Ministry for the Environment website.

The level of transparency to be achieved through disclosure is seen as an important building block in the process of transitioning to a low carbon/low emissions economy.

The Minster’s announcement also appears to be a logical next step from the discussion document released by the Government late last year entitled ‘Climate-related Financial Disclosures – Understanding your business risks and opportunities related to climate change’.  That discussion document included proposals for a mandatory climate-related financial disclosure regime.  In turn, this echoed a number of the recommendations made by the Productivity Commission in 2018.


Any form of disclosure regime has a number of goals, including as a means of enabling both reporting entities and their stakeholders to make informed decisions about risks and how to monitor (and mitigate) the impact of climate change on their activities.  However, the efforts of NZX and others to foster a measure of voluntary reporting on ESG factors have been described as rather patchy.  A recent report by the McGuiness Institute (a Wellington-based non-partisan think tank) indicated that the absence of a specific requirement to report on climate risks represented

“…a significant information gap for shareholders and broader stakeholders that must be rectified.” 

The McGuinness Institute’s starting point was that, although company directors are obliged to take climate-related financial risks into account, there is no obligation to report on those risks in an annual report.

However, it appears that, even among those NZX issuers which have done some work on monitoring the environmental impact of their business, there are issues with getting to grips with (consistent) benchmarking and identifying material issues in way that is relevant and meaningful for both the business and its external stakeholders.  As a result, the E element in (voluntary) ESG reporting under the NZX Corporate Governance framework appears to be a work in progress. 

Contrast this with the efforts of major property developers, both here and overseas, to label their developments as “green” or “net carbon neutral” using various approaches.  This underlines the point that any disclosure regime that relates to greenhouse gas emissions will need to be the subject of independent assurance.

Leading edge vs fast followers

The Minister’s announcement signals that, by introducing a mandatory climate-related financial disclosure regime, New Zealand is moving faster than other countries in the area of climate risk reporting by the corporate sector (noting that the list of disclosers includes Crown agencies with more than $1 billion in assets under management).

The immediate question is whether New Zealand should be a fast follower rather than at the leading edge of disclosures affecting capital markets activity, when it seems that the bulk of the compliance burden is going to fall on NZX listed issuers.  Specifically, there is an obvious risk for those mandated to disclose – that they will be put at a competitive disadvantage when they are competing against privately-owned and/or overseas domiciled competitors who are not subject to such disclosures.

Also excluded from mandatory disclosure will be other major contributors towards the emissions profile of our economy – such as DHBs and CCOs and assorted co-ops.  By contrast, some of the thought leaders elsewhere in the business community may want to have their enterprises opt in to any reporting regime in order to demonstrate that they are already ahead of the curve on ESG issues.

As well as the risk of the sort of distortions that are alleged by critics of the ETS, the prospect of unintended consequences, such as providing yet another disincentive to listing on the NZX (particularly when it is competing with the ASX for new listings), highlights the need to trial and consult widely. 

Pleasingly, Minister Shaw is reported to be alive to some of these risks and is suggesting that there must be a review process once the new regime has been in force for a short period. 

The new regime may also provide a viable benchmark for those parts of the economy that are not (at least initially) subject to mandatory reporting.  In turn, this may assist companies (and their directors) who consider that their duties extend to taking into account the financial implications of climate change.  The latter point is a viewpoint that the McGuinness Institute and a handful of other commentators have already been pushing with some conviction.

Further information

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