Input sought on mandatory climate reporting standard

The framework is being developed by the External Reporting Board (XRB) and will be closely based on the recommendations of the internationally recognised Task Force on Climate-related Financial Disclosures (TCFD). New Zealand is the first country to require mandatory reporting against the TCFD standard.

The XRB is seeking input on the Governance and Risk Management sections of the new standard (NZ CS 1). Submissions on the consultation document close on 22 November 2021.

Context

The establishment legislation, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, passed its third reading on 21 October.

NZ CS 1 will be forward looking, acknowledging that expectations regarding good practice are evolving rapidly. The XRB intends for it to focus on high level areas for disclosure, rather than being overly prescriptive, and to be sufficiently flexible to allow reporting entities to provide information proportional to the scale of their climate risk.

NZ CS 1 will be accompanied by NZ CS 2 and an authoritative notice containing climate-related disclosure concepts (NZ CRDC).

NZ CS 2 will provide “adoption standards” to assist the transition to the new regime. These might include practical expedients, phased implementation, or relief from providing comparative information.

XRB’s current thinking is that transitional provisions may be necessary in relation to the more technical ‘Strategy’ and ‘Metrics and Targets’ disclosures but not for the Governance’ and ‘Risk Management’ sections of NZ CS 1, which it thinks are relatively easier to disclose against (in many cases entities will already be doing so). It is asking for feedback on whether this distinction is valid.

NZ CRDC will contain climate-related disclosure concepts to provide broader context for NZ CS 1 and CS 2. These will reflect The TCFD Fundamental Principles for Effective Disclosure and will describe:

• the objective, and primary users, of climate-related disclosures
• how they fit within the context of wider sustainability reporting
• the qualitative characteristics of useful information (relevance, faithful representation, comparability, verifiability, timeliness and clarity), and
• the interconnection between financial statements and climate-related disclosures.

Finally, the XRB intends to issue Guidance that will support consistent application of the standard. This will not be mandatory and so will not be subject to the same formal consultation requirements as the standard and will be updated more regularly to reflect developing best practice.

Key points for this consultation period

The XRB is seeking input on:

• who the primary users of climate related disclosures should be (it has identified existing and potential investors, lenders and insurance underwriters and is seeking feedback on this focus)
• whether the information sought will be sufficiently useful and whether CS 1 as proposed will be clear, comprehensive and appropriately prescriptive. As drafted, a reporting entity would be required to disclose specific details of how its board and management oversee, assess and manage climate risk.

Proposed disclosures in relation to Governance, on which the XRB is seeking comment, include:

• frequency by which the board/board committees are informed on climate risk
• how the board sets and monitors progress against goals and targets for addressing climate related issues
• how the board holds management accountable for the implementation of climate related policies, strategies and targets, including whether and how related performance metrics are incorporated into remuneration policies
• whether and how the board accesses expertise on climate related issues (whether internal/external)

Proposed disclosures in relation to Risk Management, on which the XRB is seeking comment, include:

• the tools and methods used to identify and to assess the scope, size and impact of the climate related risk
• the short, medium and long term horizons considered, including the duration of each
• the value chain stage(s) covered, and frequency of assessment
• how the entity determines the relative significance of identified climate related risks, including in relation to other risks, and
• how the entity makes decisions to mitigate, transfer, accept or control these risks

XRB has laid out a comprehensive list of defined terms, largely taken from the TCFD’s definitions, and seeks feedback on whether to align to TCFD so closely. Specific questions are asked about particular technical terms (e.g., “physical risk” and “transition risk”).

The XRB hasn’t included sector-specific requirements in NZ CS 1 as it is proposing to deal with these in its non-mandatory guidance and is seeking submissions on this approach.

The XRB’s proposal includes an objective in relation to each thematic area (Governance, Strategy, Risk Management and Metrics and Targets). These are intended to assist entities in ensuring their disclosures are sufficient. The TCFD did not include such objectives but they have been included in other global frameworks (CPD, CDSB, GRI, IR and SASB).

In some circumstances, the XRB standard is less detailed than TCFD recommendations (for example, as to which risks and opportunities should be addressed). The XRB states that examples will be provided in its Guidance.

Where to from here

The XRB plans to issue its second consultation document, covering the Strategy and Metrics & Targets sections of NZ CS 1, in March 2022 for a four week consultation window, and to issue a full exposure draft in July 2022 for a three-month consultation. At this point, draft documents will also be published for NZ CS 2 and NZ CRDC.

The final version of NZ CS 1 will be issued in December 2022, meaning entities will be required to disclose according to the standard for accounting periods that start on or after 1 January 2023.

The XRB has identified some of the knottier issues that it is considering as it develops these standards. They include:

• the practicalities of scenario analysis
• requirements for Scope 3 emissions disclosures
• whether to specify a level of assurance and, if so, what it should be
• whether entities should be allowed to integrate disclosures through their annual report with a reference table in the climate statement, and
• how to define ‘material’ and related requirements for the application of materiality to climate-related disclosures.

Chapman Tripp is assisting a number of entities with submissions on NZ CS 1 for 22 November 2021 and to prepare for mandatory climate related disclosures from 2023.

Read our other commentary below:

• Legislation introduced requiring climate-related risk disclosures
• The time is now – a guide for climate-related financial disclosures

Our thanks to Emma Ricketts for assisting with this Brief Counsel.