New momentum on climate risk reporting expectations - what does this mean for the wider financial services industry?

On 12 April 2021, the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill was introduced to Parliament.  The Bill will require approximately 200 organisations (including registered banks, insurers and fund managers who are ‘large’ defined by reference to assets or revenue) to report on their climate-related financial risk and gives effect to the Government's promise to introduce the world's first mandatory climate risk reporting regime. If passed into legislation, the omnibus Bill will amend the Financial Markets Conduct Act, the Financial Reporting Act 2013 and the Public Audit Act 2001.

At this early stage, the Bill as drafted will require 'climate reporting entities' to, among other things, prepare climate statements in accordance with applicable climate standards, obtain assurance for such statements from a qualified assurance practitioner and retain relevant records. Climate reporting entities will also be required to lodge their statements with the Registrar of Financial Service Providers and provide a link to the statements in their annual report.

The Bill also introduces significant penalties for non-compliance. Under the Bill, directors of a climate reporting entity who knowingly fail to comply with applicable climate standards commit an offence and could be liable for imprisonment for a term of up to 5 years and/or a fine not exceeding $500,000. In turn, the climate reporting entity could itself face a fine of up to $2.5 million for the same offence.  Certain contraventions would also give rise to civil liability including a pecuniary penalty not exceeding $1 million in the case of an individual or $5 million in any other case.

Once enacted, the climate related disclosures will be required in respect of financial years commencing 2022. We will continue to provide updates on the Bill as it progresses through the House. 

The Bill's introduction follows a growing momentum of Government action in the climate disclosure space. On 12 March 2021, Letters of Expectation were sent by the Minister of Finance, Grant Robertson, to Crown financial institutions requiring them to report on their exposure to climate risk.  The letters set out the Government's expectation that these Crown financial institutions report on their climate change-related financial risk and that this risk becomes a routine consideration in their investment decisions. The entities affected are Accident Compensation Corporation, the New Zealand Superannuation Fund (NZ Super), the National Provident Fund, the Government Superannuation Fund and the Earthquake Commission.

These Letters of Expectation fit within the Government's broader push announced in September last year to implement the world's first mandatory climate risk reporting regime. The regime will be modelled on the framework recommended by the Task Force on Climate-related Financial Disclosures (TCFD) and implemented on a comply-or-explain basis. The specific framework for New Zealand is to be developed by the External Reporting Board. A timeline of relevant events is supplied at the end of this update.

Many Crown financial institutions are already well on their way to reporting on climate risk. In October 2020, NZ Super released its Climate Change Report. The Report incorporates climate risk reporting based upon the TCFD recommendations, including reporting against governance, strategy, risk management, metrics and targets. For other financial institutions looking to begin reporting on their climate risk, NZ Super's Report provides a New Zealand-relevant model of what TCFD-style reporting can look like. 

There are three types of risk covered by the TCFD framework. In addition to physical and reputational risks, the framework also covers legal risk, such as regulatory steps taken by the Government to address climate change (think carbon pricing, for example). Although it remains uncertain what exact steps the Government will take to address climate change, or when these risks will crystallise in a material way, it can be anticipated that increasingly urgent and disruptive steps to reach the target of net zero carbon emissions by 2050.

This issue was an explicit priority when the Government changed the default KiwiSaver provider settings to exclude funds that invest in fossil fuel production to help address the impacts of climate change and transition to a low-emissions economy. Given the Government's stake in KiwiSaver through its ongoing contributions to individual members' balances, it's possible that similar requirements may be introduced for schemes that sit outside of default provider status.

It is apparent that net zero carbon emission commitments are front of mind for the Government as it prepares for the next climate summit in Glasgow in November 2021.

Overall, the Letters of Expectation and mandatory disclosure regime represent a step-change in how climate risk is to be considered. Ultimately it is the Government's expectation that climate risk becomes a routine consideration in investment decision-making. When the financial consequences associated with climate change risks will crystallise is uncertain. However, first adopters of climate risk reporting will be in a better position to (a) price the climate risk that they hold, and (b) manage that identified risk. As the adage goes, 'what gets measured, gets managed'.

Going forward, the importance of climate risk reporting is likely to extend beyond regulatory compliance. In addition to mandatory reporting for domestic entities, climate reporting will become essential for those wanting to access international markets. Financial institutions in international jurisdictions that have adopted climate risk reporting will require consistently presented, reliable data on the exposure of and management of climate risk of entities that they invest in and do business with. Hot on the heels of New Zealand, the UK has now announced its intention to make TCFD-aligned disclosures mandatory across the economy by 2025, with a significant portion of mandatory requirements in place by 2023. See our earlier update 'Lessons in climate risk reporting on the path to mandatory disclosure: A marathon, not a sprint' for more examples of the voluntary update of TCFD reporting in international jurisdictions. For those looking to begin their climate risk reporting journey, first movers in New Zealand and abroad set the standard for what reporting can look like. If you would like to learn more about the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill or best practice in climate risk reporting, please don't hesitate to contact us.

Timeline of relevant events