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The Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill – mandatory climate-related financial disclosures

by Stephen on May 13th, 2021


Following the announcements in September 2020, in which the Government announced that it would be introducing a (mandatory) climate-related financial disclosure regime that would require certain financial reporting entities to report against a standard developed by XRB, the Bill that will introduce the new regime has received its first reading.

The impact of the new disclosure regime will require affected financial reporting entities (listed issuers, registered banks and licensed insurers) to start making climate-related financial disclosures by the 2023/24 financial year.

The new disclosure regime contained in the Bill will be implemented through an amendment to the Financial Markets Conduct Act 2013.  The FMA will be responsible for the independent monitoring, reporting and enforcement of the new disclosure regime.


While the law changes in the Bill is framed as a disclosure regime, providing a framework for a series of financial disclosures – its objective is to promote a more efficient allocation of capital in light of the potential impacts of climate change.  The aim is to help New Zealand transition to a sustainable and low-emissions economy, and to ensure that reporting entities consider and understand the financial impacts of climate-related risks and opportunities.  

This objective reflects the TCFD ‘s[1] view that climate-related disclosures will promote a greater understanding of the financial implications of climate change and potential for climate-resilient solutions, opportunities and business models for companies.  (So that investors valuing assets or investment opportunities “correctly” and lessen the risk of misdirected investment or “stranded assets”- by funnelling investment away from emissions-intensive sectors to low-emissions activities).

In 2017, the Government requested the Productivity Commission to inquire into how New Zealand could transition into a lower net-emissions economy.  This followed New Zealand’s ratification of the Paris Agreement on climate change.  At that time, the Government set New Zealand’s target as being to reduce greenhouse gas emissions by 30% below 2005 levels by 2030.  However, in 2018, the incoming Minister for Climate Change upped the ante by requesting the Productivity Commission to include a target of net-zero emissions by 2050 in its analysis.

One of the information barriers to climate change identified by the Productivity Commission was that of a systemic overvaluation of emission-intensive activities.  As a result, it recommended the introduction of a mandatory climate-related financial disclosure regime to overcome this information barrier and encourage investment that would support the transition to a low-emissions economy.

The Government response to the Productivity Commission was that of support for its recommendations – on the basis that disclosure (of the risks and opportunities associated with climate change) will help investors, lenders and insurers make decisions and incentivise reporting entities to manage those risks and opportunities.

There then followed a period of public consultation – which resulted in data being gathered which indicated a high level of support for a new mandatory, comply-or-explain, disclosure regime.

Reporting and disclosure regime

By way of background, the TCFD’s reommendations for as disclosure framework focus on (four) areas – representing the core elements of how organisations operate (governance, strategy, risk management, and targets).  These recommendations set the benchmark for international best practice for climate-related financial reporting.

A key element of the TCFD recommendations is ‘scenario analysis’ – whereby reporting entities describe the resilience of their strategy, taking into consideration different climate-change scenarios.  This includes a “2 degree scenario” (a scenario under which the Earth’s temperature has risen more than 2 degrees Celsius above pre-industrial levels).

Against this background, the Bill takes a comply-or-explain approach to disclosures, meaning that climate reporting entities must either comply with the applicable reporting standards or if not – explain why.  Failure to comply could attract a range of penalties, with the potential for significant fines ($500,000 for individuals or NZ$2.5 million for reporting entities) for more serious breaches.

Climate reporting entities

As noted above, the catchment of ‘climate reporting entities’ in the Bill is limited to listed issuers and other large private sectors entities (with $1 billion of total assets under management or annual revenues in excess of $250 million).  Public sector financial institutions with total assets of $1 billion or more are not mentioned in the Bill. 

The $1billion threshold has been set with the aim of ensuring that 90% of assets under management in New Zealand are captured by the new disclosure regime.

A number of large central and local government entities are likely to be major emitters of greenhouse gases and should be subject to the same requirements as the private sector entities covered by the Bill.  Instead, the Minister of Finance has issued letters of expectation to central government financial institutions (such as ACC and NZ Super Fund – but apparently not (for example) DHBs) which state the Minister’s expectation that they will report climate-related matters in line with the recommendations of the TCFD.  Clearly, this is less than a legal obligation – and is not backstopped by the penalty regime in the Bill. 

Reporting standards – to be developed by XRB

The External Reporting Board (XRB[2]) will develop new reporting standards, as well as guidance material, to underpin the new regime.  The new standards will be based on the TCFD recommendations.

Support will be provided by the Ministry for the Environment which will work on how to undertake the scenario analysis component to be required by the new reporting standards.

The basis of the comply-or-explain regime will likely mean that, where the required information is not available or the relevant disclosures cannot be made (on a best endeavours basis) the climate reporting entity will be able to explain.

Changes to the FMC Act / enforcement by the FMA

The new Part 7A to be added to the Financial Markets Conduct Act 29013 (FMC Act) providing for climate-related disclosure requirements for climate reporting entities.

Part 7A provides for climate reporting entities to:

  • prepare climate statements in accordance with climate standards issued by the XRB;
  • obtain an assurance engagement from a qualified climate related disclosure (CRD) assurance practitioner (who will be subject to a new licensing regime – separate from that of licensed auditors) in relation to those statements to the extent that those statements are required to relate to greenhouse gas emissions;
  • to lodge those statements with the Registrar of Financial Service Providers; and
  • keep CRD records.

The Bill appoints the Financial Markets Authority (FMA), to the role of providing independent monitoring and enforcement of the climate reporting entities’ compliance with the new climate reporting standards, with powers which include the making of stop orders, direction orders, and that of granting exemptions from compliance with Part 7A.

The Bill also provides amendments to the Financial Reporting Act 2013, which comprises:

  • changes to provide for XRB’s new functions relating to the issue of climate standards – or other information to be prepared in accordance with those standards; and
  • enabling XRB to issue guidance on a wider range of environmental, social, governance (ESG), and other non-financial matters that can be applied by entities on a voluntary basis.  The stated purposes of these provisions are:
    • to provide those who prepare financial statements with guidance on best practice ESG and related disclosures; and
    • to improve the quality of disclosures on a range of issues beyond the types of information presented in financial statements.

In short, the Bill provides the framework (skeleton) with much work to do by the target timeline for implementation – in an area that is very, very new and which is likely to be subject to a steep learning curve and which is still evolving.

By contrast to the financial reporting regime, which has developed against a backdrop of generally accepted accounting practice and international financial reporting standards, large swathes of the new regime will need to be developed on a greenfields basis.

Penalties for directors

In keeping with the penalty regime for defective disclosure or financial reporting under the FMC Act, a director of a climate reporting entity that has contravened any climate-related disclosure obligation is subject to personal exposure by being treated as also having contravened. 

As with defective disclosure or financial reporting contraventions, the Bill adds to the defences of a director under the FMC by providing that, in any such proceeding, it is a defence if the director proves that they took all reasonable steps to ensure that the climate reporting entity complied with the relevant provision.

Other Government factors

The new disclosure regime is being developed against a backdrop of moves by Government, such as its decisions about the recommendations of the Climate Change Commission – and its setting of emissions budgets (to meet its Paris Agreement commitments).

The implications of this cluster of new developments are still uncertain.  For example, some commentators suggest that it could impact (bank) lending criteria and the costs and availability of insurance cover. 

There is also, as demonstrated by such developments as the recent judicial review proceedings of the Waka Kotahi NZTA-led Mill Road arterial project, the risk that climate reporting entities and their directors may be exposed to the efforts of interest groups to hold the Government to account for its climate-change commitments.

Changes to the Emissions Trading Scheme (ETS) are also proposed – to lift the price cap on carbon credits.

In turn, this raises the prospect of farming being brought into the ETS, to reduce the pressure on other parts of the economy such as the transport sector – and increasing tensions about land use (such as pastoral farming versus forestry). 

Further information

Please contact me should you have any queries concerning the information to be provided.

[1] Task Force on Climate-related Financial Disclosures (TCFD) is an industry-led taskforce created by the G20.

[2] XRB is an independent Crown Entity responsible for accounting and auditing & assurance standards.

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