In 2021 the New Zealand Government amended the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Public Audit Act 2001 to make it mandatory for some entities to make climate-related disclosures. These amendments were collectively called The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (CRD). The CRD requires around 200 large financial institutions to start making climate-related disclosures as of 1 January 2023. This made New Zealand one of the first countries in the World to make climate-related disclosures mandatory for some entities.
The External Reporting Board (XRB), the government body responsible for the establishment and maintenance of New Zealand’s financial reporting standards, has published a set of climate standards called the Aotearoa New Zealand Climate Standards. The goal of these standards is to support capital allocation toward low-emissions, climate resilient activities. The New Zealand climate-related disclosure framework is comprised of three standards:
- NZ CS 1 contains the climate-related disclosure requirements for each of the four thematic areas (Governance, Strategy, Risk Management, and Metrics and Targets) and the assurance requirements for greenhouse gas emissions disclosures.
- NZ CS 2 provides optional adoption provisions. This standard acknowledges that the full requirements of NZ CS 1 will be challenging for some entities and so provides a limited number of exemptions for first-time adoption.
- NZ CS 3 establishes general requirements for entities to follow when making disclosures under Aotearoa New Zealand Climate Standards.
The new standards are based on the Task Force on Climate-related Financial Disclosures (TCFD), which is widely acknowledged as representing international best practices. Margules Groome has given a general introduction to TCFD in a previous article that was released on 11th September 2023. This article also describes how TCFD fits within other international financial reporting standards.
The TCFD framework includes four thematic areas, being governance, strategy, risk management, and metrics and targets. Disclosures need to cover:
- How the entity’s governing body is taking responsibility for climate-related risks and opportunities and how the board is providing oversight.
- The scenario analysis undertaken by the entity to identify climate-related risks and opportunities and quantify their potential impact under three different climate scenarios (1.5 degrees Celsius climate scenario, 3 degrees Celsius climate scenario plus one additional scenario).
- A description of how transitional and physical climate-related risks are being integrated into the entity’s overall risk management processes.
- Cross-industry metrics for greenhouse gas (GHG) emissions and removals as well as any other performance indicators and targets used to measure and manage climate-related risks and opportunities.
Margules Groome believes that some of the New Zealand’s largest forestry assets that are owned by overseas investment organisations may well be required to produce a mandatory report under these New Zealand standards. Globally, some of the timber investment management organisations that own forests in New Zealand such as Manulife and New Forests have already started to publish initial climate-related financial disclosures. In Manulife’s 2021 climate-related disclosure report that covers their global asset portfolio, they used their New Zealand forestry asset as an example of the scenario analysis they are undertaking in the Strategy section of their report.
While many New Zealand forestry and forest products businesses may not be required under New Zealand law to make mandatory climate-related disclosures, Margules Groome is of the view that investors, lenders, and insurers will increasingly require businesses to make climate-related disclosures consistent with TCFD. We further expect these disclosures to be increasingly quantitative underpinned by increasingly sophisticated methodologies. It is therefore imperative that forest and wood products businesses are proactive. The aim of both the Aotearoa New Zealand Climate Standards and TCFD is not only to provide transparency on climate-related issues but also to help an entity transform into a more climate resilient entity.
In October, the XRB published a Comparison Document explaining the differences between the Aotearoa Climate Standards (NZ CS) and the IFRS Sustainability Disclosure Standards (IFRS S1/S2). The Comparison Document finds that the core content of NZ CS 1 is consistent with that of IFRS S2 (i.e. the four pillars being governance, strategy, risk management, and metrics and targets). However, at a more granular level, there are differences under each of the four pillars that the Comparison Document sets out (based on the TCFD approach). Pragmatically, larger entities with more international exposure may wish to seek to comply with both sets of requirements.
Margules Groome can assist you to prepare for Climate-Related Financial Disclosures. For further information contact Margules Groome.