On 12 April 2021, the New Zealand Government introduced the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (Bill), which will receive its first reading this week. Once passed, disclosures will be required for financial years commencing in 2022, meaning that the first disclosures will be made in 2023.
The Bill will amend the Financial Markets Conduct Act 2013, the Financial Reporting Act 2013, and the Public Audit Act 2001 by implementing a single broad policy to broaden non-financial reporting by requiring and supporting the making of climate-related disclosures by certain FMC reporting entities and supporting related matters.
See here for the government’s media release, here to follow updates as the Bill goes through Parliament, and here for more information about the Bill. We expect the Bill to move forward at a reasonably fast pace.
The Bill is progressing in parallel with the External Reporting Board (XRB)’s development of the relevant climate-related financial disclosures reporting standard.
Who needs to read it?
The Bill will make climate-related disclosures mandatory (on a disclose or explain basis) for around 200 private sector entities in New Zealand, including:
- all equity and debt issuers listed on the NZX;
- all registered banks, credit unions, and building societies with total assets of more than $1 billion;
- all managers of registered investment schemes with greater than $1 billion in total assets under management;
- all licensed insurers with greater than $1 billion in total assets under management or annual premium income greater than $250 million.
Crown financial institutions with greater than $1 billion in total assets under management, such as ACC and the NZ Super Fund, are also expected to report on climate risks as announced by the government this year. The subsequent letters of expectation released by the Minister of Finance state that Crown financial institution’s climate reporting should be in line with the Task Force on Climate-related Financial Disclosures (TCFD) framework, which is widely acknowledged as international best practice.
What does it cover?
Specific purposes of the Bill
- These include:
- to ensure that the effects of climate change are routinely considered in business, investment, lending, and insurance underwriting decisions;
- to help reporting entities better demonstrate responsibility and foresight in their consideration of climate issues; and
- to lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-emissions economy.
Amendments to the Financial Markets Conduct Act 2013
- The new Part 7A contains climate-related disclosure requirements for certain FMC reporting entities considered to have a higher level of accountability (under existing section 461K). These entities are defined in new section 461O as climate reporting entities.
- Part 7A provides for climate reporting entities to prepare climate statements in accordance with climate standards issued by the XRB, to obtain an assurance engagement from a qualified CRD assurance practitioner in relation to those statements to the extent that those statements are required to relate to greenhouse gas emissions, to lodge those statements with the Registrar of Financial Service Providers, and to keep CRD records.
- Managers of registered schemes may be a climate reporting entity if it is “large” (as defined in new section 461Q) and required to prepare climate statements for each separate fund of each scheme, with the size of the individual schemes or funds being immaterial.
- As “large” and “large manager” are defined by reference to accounting periods, an entity may be a climate reporting entity in relation to some accounting periods but not in relation to other accounting periods.
- The Bill extends the ability of the Financial Markets Authority, who will be responsible for the independent monitoring and enforcement of the relevant reporting entities’ compliance with the new reporting standards, in respect of powers including the making of stop orders, direction orders, as well as granting exemptions from compliance with Part 7A.
Amendments to the Financial Reporting Act 2013
- The key group of amendments relates to the XRB’s new, additional, functions relating to the issue of climate standards for the purpose of any enactment that requires climate statements or other information to be prepared in accordance with those standards.
- The Bill also provides for the XRB to issue guidance on a wider range of environmental, social, governance (ESG), and other non-financial matters that can be applied by entities on a voluntary basis. The purposes of these provisions are:
- to provide those who prepare financial statements with guidance on best practice ESG and related disclosures; and
- to improve the quality of disclosures on a range of issues beyond the types of information presented in financial statements.
Amendments to the Public Audit Act 2001
- The main changes are in relation to defining what a qualified CRD assurance practitioner is.
The governments introduction of the Bill is to be welcomed as the next step in developing the climate-related financial disclosures and is timely following the XRB’s announcement of its timeline to develop the related standards.
The content of the Bill itself contains few surprises and puts into what will become codified law government’s expectations that have mostly been communicated.
We expect the Bill to go through the Parliamentary processes at a reasonably fast pace if reporting entities are going to be required to consider climate-related reporting during the 2022 financial year.
A question the Bill raises is how and to what extent government departments, Crown, and local authority entities will be legally obliged to follow the new climate-related financial disclosures, or is it simply an “expectation” that they disclose in line with the TCFD recommendations (James Shaw, Climate reporting for Crown financial institutions, 12 March 2021). In our view, given government departments, Crown, and local authority entities may compete with listed entities, it is important there is a level playing field and they have at least as strict requirements. Further, many such entities are major emitters.
We recommend potential reporting entities keep a look out for consultation materials which we expect to be released very soon ahead of the Select Committee stage.
For some of our recent climate-related disclosure news alerts, see the following:
- XRB issues timeline for developing climate-related financial disclosures
- Climate-related financial disclosures: Driving capital markets and corporate governors to address the climate emergency
- The gathering storm – and how to prepare
If you have any questions about the Bill or would like to know how it may affect your business, please contact one of our experts.
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