FMA raises the bar on climate reporting: what reporters need to know

The Financial Markets Authority (FMA) has published its third climate-related disclosures (CRD) insights report, setting out observations from its review of 62 climate statements prepared during the New Zealand CRD regime's second reporting period.

The FMA’s focus has shifted from baseline compliance to the quality and usefulness of disclosures as the regime matures. There is increased scrutiny on whether climate statements operate as integrated disclosures that clearly link climate-related risks and opportunities to strategy, expenditure and financial performance.

This marks a clear turning point in the CRD regime. The expectation is no longer mere compliance with climate standards, but substantive and informative reporting. The bar has been raised.

 

The FMA’s focus areas

The FMA’s review focused on four key areas:

• improvements required from prior insights reports and entity-specific feedback;
• disclosure of material climate-related risks and opportunities;
• first-year mandatory disclosure of current financial impacts and transition planning; and
• compliance with assurance requirements for greenhouse gas (GHG) emissions disclosures.

 

Key takeaways for reporters

Physical risk disclosures need to be specific and identify a clear 'risk pathway'

The most significant theme in the report is the FMA’s concern with the quality of physical risk disclosures. The FMA noted that many disclosures lack sufficient detail on how climate hazards and events translate into risk.

The FMA found that many disclosures:

• remain vague or generic;
• fail to identify specific hazards or explain how those hazards are changing over time;
• do not adequately explain how hazards translate into damage or loss;
• lack clarity on which assets, operations, geographies or sectors are exposed;
• group multiple hazards of differing materiality into a single risk; and
• do not adequately explain how risks may intensify over time, instead applying consistent assumptions across short-, medium- and long-term horizons.

The FMA emphasises that clear 'risk pathways' are required. Reporters should articulate the pathway from the underlying climate hazard, such as extreme rainfall, through to its potential consequences. This includes how the hazard results in damage or loss, the assets or activities exposed, and the resulting financial or operational impacts.

Weak underlying data and analysis are undermining physical risk disclosures

Inadequate underlying data collection and analysis are identified as key factors contributing to the poor quality of physical risk disclosures. In many cases, the data outputs relied on were not appropriate for the hazards being assessed, which may result in risks being understated, overstated or misidentified.

The FMA identified:

• reliance on inappropriate or insufficient datasets;
• weak explanation of the data, methodologies and assumptions underpinning physical risk assessments; and
• limited disclosure of uncertainty and limitations.

Reporters should take a more critical approach to the data underpinning their physical risk assessments. This includes assessing whether the climate hazard data used fits the specific risks being analysed, identifying its limitations, and explaining how those limitations may affect conclusions.

Reporters should also consider whether alternative or up-to-date sources, including publicly available datasets or location-specific information, could improve the robustness of their analysis.

Assurance failures elevate compliance risk for reporters

Concerningly, the FMA identified several assurance issues, including omissions and errors in independent assurance reports.

Key issues included:

• use of incorrect assurance standards;
• incomplete coverage of GHG disclosures subject to assurance;
• unclear cross-referencing between climate statements and GHG inventory reports;
• deficiencies in assurance reports, including missing independence statements and incorrect terminology;
• failure to lodge assurance reports on the CRD register; and
• misalignment with the reporting period, for example assurance reports dated before the signing of the climate statements.

While the execution of assurance standards is the responsibility of the assurance practitioner, the FMA emphasises that reporting entities should consider the issues above to ensure that assurance reports meet their obligations under the Financial Markets Conduct Act 2013 (FMCA).

Transition planning must be integrated, not standalone

Continuing its broader theme that climate statements should be integrated rather than standalone disclosures, the FMA’s comments on transition planning reinforce the expectation that disclosures form a coherent, connected framework.

Although most reporters made reasonable efforts in the first year of mandatory disclosure, the FMA identified:

• weak linkages between identified risks and transition plan aspects of strategy; and
• insufficient explanation of how targets and actions respond to material risks.

Transition planning should not be developed in isolation. It should present a coherent, end-to-end narrative that is internally consistent across the document.

When drafting transition plans, reporters should clearly link identified risks and opportunities to specific strategic responses, including targets, actions, capital allocation and financial impacts. Where no targets or actions exist, that absence may itself be material and should be clearly disclosed.

Other recurring issues continue to undermine disclosures

Alongside these overarching themes, the FMA also identified recurring deficiencies that continue to undermine reporting quality. While these issues are not new, the report suggests the FMA is becoming increasingly less tolerant of them as the regime matures. These include:

• incomplete filings on the CRD register for documents that form part of the climate statement;
• reliance on prior-year climate statements to meet current-year disclosure requirements;
• unexplained inconsistencies between reporting periods; and
• insufficient disclosure of the extent to which targets rely on offsets, as well as unclear cross-referencing to GHG disclosures.

For the next reporting period, reporters should ensure that all components of their climate statement are properly filed and cross-referenced, review disclosures for internal consistency, particularly across strategy, risk and metrics, and ensure that key assumptions, such as reliance on offsets, are transparently explained and easy to trace.

Failure to address these foundational issues is likely to draw greater scrutiny going forward.

 

The FMA's next steps

The FMA has signalled that it will continue to take an educative and constructive approach in the next reporting period, while placing increased emphasis on improving physical risk disclosures and the underlying data and analysis supporting them.

Planned initiatives include educational workshops, publication of supporting material, and the development of a 'live' register of publicly available Aotearoa New Zealand climate hazard data and analysis.

 

What reporters should take from this

The FMA’s report makes clear that the bar for climate reporting in New Zealand is rising. The FMA is increasingly focused on the rigour of analysis, the coherence of a climate statement's overall narrative, and the completeness of disclosures.

Overall, reporters should be reviewing whether their disclosures:

• are integrated, credible and support informed decision-making;
• clearly explain material physical risks using specific, entity-relevant analysis;
• are supported by robust data, appropriate methodologies and transparent assumptions;
• demonstrate clear, consistent linkage across risks and opportunities, strategy, financial impacts and decision-making; and
• are supported by complete and accurate assurance and cross-referencing practices.