Jun 3, 2022
New Zealand nears conclusion in setting non-financial reporting standards for climate related disclosures
New Zealand’s impending climate-related disclosure (CRD) regime, concerned with implementing corporate non-financial disclosure requirements, has made substantial progress in recent times. The broad agenda was set out by the Minister of Climate Change James Shaw on announcing the move to CRD in September 2020, with a related release by the Ministry of the Environment stating that “In July 2022, the XRB [External Reporting Board] will provide a formal exposure draft of the complete climate standard alongside accompanying documents, such as the draft adoption standard.”
Since then the XRB has kept up with its published three-stage timeline for developing and delivering the finalised standards for Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures (NZ CS 1). So far the XRB has issued two consultation documents for which submissions are now closed: Governance and Risk Management in October 2021, and Strategy and Metrics and Targets in March 2022. The next cab off the rank will be the Formal Exposure Draft of NZ CR 1 in July 2022, which will “comprise the entire climate-related disclosure framework” (XRB website).
NZ CR 1 is part of a series of standards and related concepts that XRB is charged with developing, and is put in its wider context on the XRB’s website:
The climate-related disclosures legislation gives the XRB a mandate to develop a climate-related disclosures framework. The XRB intends to issue the following:
NZ CS 1 is the main disclosure standard and will be based on the recommendations of the Task Force on Climate-related Financial Disclosures. NZ CS 2 will be an adoption standard to enable entities to begin their climate-related disclosure journey. NZ CRDC will be an authoritative notice containing key concepts, like materiality. We also intend to issue accompanying guidance.
The climate-related disclosure framework is being informed through engagement with a broad range of stakeholders—in particular, entities that will be subject to the regime as well as the investors who will benefit from it.
The purpose of mandatory CRD is set out on the Ministry of Business, Innovation and Employment’s website:
The majority of large New Zealand entities provide limited or no information on what climate change might mean to them, or are reporting in inconsistent ways.
This information deficit is driving what the Productivity Commission termed in their Low Emissions Economy report “an ongoing and systemic overvaluation of emissions-intensive activities”.
The goal of mandatory climate-related disclosures is to:
Mandatory reporting of climate-related disclosures will help New Zealand meet its international obligations and achieve its target of zero carbon by 2050. It will also help to address climate change risks outlined in the National Climate Change Risk Assessment by making our financial system more resilient.
|
Mandatory climate-related financial disclosures: who is directly affected?* Around 200 entities in New Zealand would be required to produce CRD, these including:
Notes:
Licensed Supervisors will undertake monitoring and oversight of CRD compliance in the financial statements of their respective supervised entities that are captured under the CRD regime. *Primary source: Ministry of Business, Innovation & Employment, May 2022 |
The steady rate of progress being achieved by the XRB in working its way through the NZ CS 1 timeline should encourage those with an interest in the standard, such as large debt issuers and fund managers, to keep a close eye out on the release of the Formal Exposure Draft. According to the XRB, the draft will be launched on 28 July 2022, clearly a green-letter day for CRD. The consultation period will last for two months until 26 September 2022. The XRB is required by law to publish the finalised NZ CS 1 by December 2022 at latest, so the timeline is pretty tight.
Major economic blocs standardising non-financial reporting requirements
Momentum building in the EU
Fortuitously, at the same time as the XRB is moving towards publishing a complete draft of NZ CS 1, in the European Union (EU), the European Financial Reporting Advisory Group (EFRAG) published on 29 April 2022 its own draft sustainability reporting standards for public consultation. EFRAG is the EU’s functional equivalent of New Zealand’s XRB.
EFRAG’s website describes the organisation as follows:
EFRAG is a private association established in 2001 with the encouragement of the European Commission to serve the public interest. EFRAG extended its mission in 2022 following the new role assigned to EFRAG in the proposal for a CSRD of 21 April 2021, providing Technical Advice to the European Commission in the form of fully prepared draft EU Sustainability Reporting Standards and/or draft amendments to these Standards. Its Member Organisations are European stakeholders and National Organisations and Civil Society Organisations. EFRAG’s activities are organised in two pillars: A Financial Reporting Pillar: influencing the development of IFRS Standards from a European perspective and how they contribute to the efficiency of capital markets and providing endorsement advice on (amendments to) IFRS Standards to the European Commission. Secondly, a Sustainability Reporting Pillar: developing draft EU Sustainability Reporting Standards, and related amendments for the European Commission.
In practice, EFRAG’s core membership is made up of organisations representing the EU’s accounting profession, preparers, users, and national standard-setters.
It is the second, Sustainability Reporting Pillar of EFRAG that is visible in the recently published Draft European Sustainability Reporting Standards. According to the associated media release dated 29 April 2022, “These EDs [exposure drafts] correspond to the first set of standards required under the proposal for a CSRD [Corporate Sustainability Reporting Directive] and cover environmental, social and governance [ESG] matters. This set also includes cross-cutting standards.” EFRAG has published 22 documents in the set as part of the current public consultation process. This vast array of material for interested parties to digest and respond to has a 100-day consultation period that ends on 8 August 2022. Topics covered in the documents include:
As might be expected, the EU does not do things by halves, and New Zealanders can perhaps be grateful that so far they have only had to read and submit on two documents issued by the XRB, with one more to come, rather than 22 documents courtesy of EFRAG. Nonetheless, whatever the EU lands on by way of its sustainability reporting standards, particularly in relation to ESG, will have global reach and inevitably impinge on New Zealand’s economy. The EU has a well-earned reputation for generating comprehensive rules and standards in any area it decides to regulate. Those who wish to take part in the XRB’s upcoming consultation round on the Formal Exposure Draft starting from the end of July could do well to cherry pick through the EU’s swathe of proposed CSRD standards for anything that might be useful to bring into the New Zealand context before NZ CS 1 is set in stone.
The USA joins the fray
In Europe and New Zealand it is official entities linked to setting accountancy standards that have been tasked with standardising non-financial reporting under the sustainability, ESG, and CRD banners. In the USA it is the principle financial markets regulator, the Securities and Exchange Commission (SEC) that is doing the heavy lifting for the cause. EFRAG refers to the SEC work as a reference model for European sustainability reporting standards (p. 7, Cover Note for Public Consultation, Draft European Sustainability Reporting Standards, April 2022).
The SEC published its proposed rule for CRD entitled The Enhancement and Standardization of Climate-Related Disclosures for Investors on 21 March 2022. This document runs to 490 pages in length. Originally the public consultation period was supposed to end on 11 April 2022, but understandably the SEC has since extended the deadline for consultation on this and other related proposed rules to 17 June 2022. Setting the proposed rule in context, in a related a media release of 21 March 2022, SEC Chair Gary Gensler was quoted as stating that:
"I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers."
"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."
That sort of mission statement by the SEC on CRD could well apply to New Zealand’s situation. As with the EU’s standardisation of CRD, so too will the USA’s be globally impactful, especially given the SEC’s huge powers and long reach. There may be some nuggets in the SEC’s proposed rule that could be worthy of contemplation in relation to finalisation of NZ CR 1.
Ramifications in New Zealand
The incoming NZ CR 1 regime has largely been supposed to apply to just those entities that will be required to report under it. However, there could be wider implications for integrated financial products (IFPs) offered in New Zealand as being linked with non-financial, green, ethical, sustainable, socially responsible, or ESG features. In December 2020 the FMA published a Guidance entitled Disclosure framework for integrated financial products, setting out its advertising and disclosure expectations in respect of retail investments (primarily debt securities and managed investment products) that incorporate non-financial factors, and so clearly has concerns around how IFPs are promoted to retail investors. The regulator followed up by publishing on its website in July 2021 a dedicated webpage entitled Ethical investing to reinforce its concerns, and provided a very wide definition of IFPs to include “any financial product incorporating non-financial considerations”. In both the Guidance and the webpage, the FMA goes into some detail about the application of fair dealing (FMC Act Part 2) and disclosure obligations (FMC Act Part 3) as the applicable legislative bases for adjudicating what is compliant and what is not in offering IFPs.
However, once NZ CP 1 is finalized, it may offer a rule book or standard of measurement against which IFPs can judged for their non-financial claims, even if the issuers of the IFPs themselves do not fall under CRD reporting obligations. The central merit of CRD is its standardised measurement system, which produces results that can be peer reviewed, tested, and accepted or rejected, meaning that if such measurement can be applied to a CRD reporting entity, it may also be potentially applicable, at least for testing, acceptance and rejection purposes, to analysis of IFPs by investors, financial advisers, licensed Supervisors and the FMA. It would still be FMC Act Parts 2 and 3 that would provide the legal springboard for taking action against errant advertising and disclosure, but NZ CR 1 could potentially serve as a tool to help enable discovery of IFP compliance or non-compliance with the FMC Act.
Conclusion
“Only two months remain until the XRB launches its Formal Exposure Draft of NZ CR 1 for public consultation at the end of July, over which time interested parties can study international alternatives, and after that there will be just two months to make submissions before the standard is finalised, locked down, and rolled out by the end of the year,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.
“For those entities who will be captured by the CRD regime, it will be critical to engage with the last chance to have direct input on a far-reaching system that will apply to them most likely from late 2023 or early 2024 onwards.”
“The old saying that you can hardly criticise the government if you did not bother to vote applies also in this instance – industry players who will be directly affected by NZ CS 1 need to make certain that their informed voices are heard loud and clear in the last round of CRD consultation.”
“Given that in the EU and the USA, EFRAG and the SEC respectively have already published their proposed rules on sustainability and climate-related reporting standards, and are currently publicly consulting on them, there could yet be fruitful opportunities to source good ideas from abroad for what might be useful to apply within the context of New Zealand’s CRD framework, supposing that changes can still be made.”
“Apart from monitoring and oversight regarding compliance of entities captured under the incoming CRD regime, licensed Supervisors will also need to become more vigilant and effective with respect to monitoring and oversight of IFP issuer compliance with FMC Act advertising and disclosure requirements.”
“Because New Zealand’s financial markets are likely to see increased issuance of IFPs, both bonds and managed funds, it is vital that there is strict accountability for issuers concerning their obligations under FMC Act Parts 2 and 3.”
“All this change means that Supervisors will need to upskill themselves in order to be able meaningfully to undertake the kinds of analysis, interpretation and interrogation that sustainability, climate-related and similar claims made by CRD reporting entities and IFP issuers demand in order to protect investors.”
“Potentially NZ CR 1 could provide both issuers and Supervisors with guidance and tools for assessing IFP-related advertising and disclosure claims concerning non-financial, green, ethical, sustainable, socially responsible, or ESG aspects and their purported benefits provided to investors, but that remains to be seen in practice once a finalised standard is achieved.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].