Wednesday, 31 July, was the final date that climate reporting entities (CREs) with a climate reporting period ending on 31 March 2024 could lodge their climate statements on the Climate-related Disclosures (CRD) Register. In this article we set out some of our observations about this next round of climate statements.
The CRD Register can be found here. This update follows our previous article about the first round of CRD filings due 30 April 2024 for CREs with a calendar year reporting period, found here.
Who should read this? Why?
All CREs will be interested in the broad spectrum of approaches other CREs have adopted while preparing their climate statements. In particular, CREs with 30 June or 30 September balance dates currently preparing their first climate statements will be interested in this second cohort of CREs’ climate statements.
Climate Statements and the CRD Register
The CRD regime introduced under Part 7A of the Financial Markets Conduct Act 2013 (FMCA) requires CREs to prepare climate statements and lodge them on the CRD Register within four months of the CRE’s balance date.
Many of the CREs that were due to lodge by 31 July are managed investment scheme (MIS) managers reporting in respect of their registered schemes with 31 March balance dates.
All climate statements accepted by the Companies Office Registrar are accessible on the CRD Register. Out of around 200 CREs expected to file this year, as at 9:00am on 2 August 2024, climate statements for 83 CREs have appeared on the CRD Register. This includes climate statements from the 51 of 52 CREs required to lodge by 31 July.
Our view
Climate statements
Wide variations: There is still a lot of variation across the climate statements in terms of the overall approach, size and level of detail. But we are starting to see market practice in particular sectors start to take shape already as more climate statements are published on the CRD Register.
Statements range anywhere from 10 to 100 pages in length, but length does not necessarily correlate with the extent of effort a CRE has put in. There are many different factors that contribute to the size of the document, such as the number of diagrams used, the design formatting, and level of detail. Some statements are text-heavy with smaller font, while others have incorporated tables and graphs to enhance the digestibility of the information. We strongly support the fair presentation principles in NZ CS 3 including Understandability and Completeness, recognising that there is a challenging balance to ensure alignment with all. As with any disclosure document, it can often take much longer to keep information concise but easy to understand, while still meeting the requirements.
MIS Managers are required to report in respect of the individual funds they manage, rather than their own business as a manager. As permitted by the FMCA, nearly all MIS Managers have been producing climate statements combining within one document each individual fund in a registered scheme. For example, there is typically one document for the KiwiSaver Scheme, and one for the Investment Funds Scheme – these documents being broadly identical. For most CREs, the only material differences between each of their scheme statements are found in the ‘Metrics and Targets’ section where greenhouse gas emissions and physical and transition risk metrics are disclosed, or where the scheme contains an ESG-focused fund that has a different or additional investment objective.
Structure: In terms of structuring, although there is no requirement to order climate statements to align with the order of NZ CS 1, many CREs have followed the governance, strategy, risk management, and metrics and targets order for their climate statements. Some have used the disclosure requirements in NZ CS 1 as headings, which can help to signpost what information the CRE has disclosed for compliance with a specific requirement.
Governance: The Governance sections are generally comparable across the climate statements, but there are differing levels of detail. For example, most CREs have provided illustrative diagrams of their governance structures which we consider to be an effective approach, but some CREs expand on the descriptions of the roles and responsibilities of each board committee, management committee, and/or individual roles within those.
Strategy: An area where there are very diverse approaches is the integration of climate-related risks and opportunities into corporate strategy. In large part, we are not surprised this is the case for the first year. In some cases, especially at the larger end of town, CREs have been taking climate change into account voluntarily for some years, as influenced by the TCFD. For other CREs, it is apparent that the implications of climate change for business strategy only started to be identified during the reporting period, and this area continues to be a work in progress.
While scenario analysis was expected to be one of most difficult aspects of the CRD regime at the time NZ CS 1 was issued, there is generally a good standard of disclosure for compliance with these requirements in the climate statements we have reviewed. What we take from this is that the sector support and targeted guidance from the XRB and FMA has been helpful for CREs in both undertaking and disclosing this process.
Particularly the financial institution CREs continue to make of the industry body scenario narratives to varying degrees, many choosing the three scenarios ‘orderly’, ‘too little too late’, and ‘hothouse’. Those were published with some variations by the FSC, ICNZ and NZBA. Other financial institutions, more often those who are part of global groups, have chosen other scenarios, with some having more than three. For the non-financial institution CREs, the variety of approaches is even wider, with some having regard to sector narratives, and others not.
Transition planning is also raising challenges for CREs, particularly evident by the fact that so many CREs have elected to use Adoption Provision 3, exempting them from disclosing a transition plan. To prepare for the next climate statements, we think it likely that CREs would welcome a similar level of support and guidance for transition planning as was provided for scenario analysis – as soon as possible given most CREs are already in their second reporting period.
Risk Management: Financial institution CREs are in the business of managing risks, so it makes sense that many of the recent climate statements convey the message that climate-related risks are considered among a raft of other risks as part of an overall risk management framework when managing their business or funds. Others have specific responsible investment approaches. While there are similarities in these management processes, the way the information is presented is highly variable.
Metrics and Targets: MSCI has been a common data provider across this second cohort especially for MIS Manager CREs, which will assist with comparability of metrics. We have seen many CREs elect to use Adoption Provision 4 and not disclose scope 3 emissions.
Many CREs have not committed to targets for this reporting year, in particular, greenhouse gas emissions targets. The NZ CS does not require CREs to set any targets, but it does require CREs to disclose prescribed information if they have set any, to give a full picture of how that CRE is meeting the target, and when. CREs must be able to substantiate all claims made in their climate statements, which means having a reasonable basis for committing to, for example, a Net Zero by 2030 or similar target. While of course we would like to see as many CREs as possible working towards mitigation, we agree that CREs should be setting targets very carefully to ensure they are sustainable and able to be achieved in future.
Methods and Assumptions: Many CREs have included robust supplementary information in the Appendices, which are crucial sections of these climate statements. A common issue we saw with the first cohort of disclosures was a lack of methods and assumptions, and the limitations and uncertainties of those, as required by NZ CS 3. It is possible that this information has not been prioritised due to not being in NZ CS 1. In fact, this content is fundamental, as it provides evidence of claims the CRE is making or qualifies any of the claims made to ensure primary users are not mislead.
As an additional issue associated with methods and assumptions, what we are seeing is a high level of technical detail being disclosed in these Appendices that many primary users could struggle to understand. However, there is a difficult trade-off here between disclosing important but complex information about methodologies and metrics, and ensuring that primary users are able to comprehend that information.
Final comments on climate statements: Overall while there is still a lot of room for uplift, with about a third of CREs having filed, New Zealand can be pleased with the high level of commitment and engagement by CREs.
The CRD Register
On the other hand, the CRD Register remains difficult to use with limited functionality. Users cannot search for or filter CREs or schemes based on useful factors such as climate statement filing status, filing due dates, or type of CRE. Additionally, contrary to the Companies Office website, users cannot reliably find a CRE by entering part of a CRE’s name.
No modifications to the CRD Register have been made since our last update on the CRD Register in early April, other than a link to a spreadsheet listing “recent lodgements”. This spreadsheet was updated yesterday on 1 August, but will only be updated monthly.
The most reliable way to see if a statement for a particular CRE or fund has been lodged is to look up the particular entity and after at least three clicks through an entity’s entry on the Register. Users are then required to download the statement to view it, which further impedes accessibility.
We continue to hope that some improvements are made to the CRD Register so that it matches the efforts and resources CREs have put into their climate statements. For example, now that most MIS managers have lodged multiple documents (generally one per scheme) comparing approaches across KiwiSaver providers will be of interest to primary users, but the CRD Register does not facilitate that.
What next?
In line with their Climate-related Disclosures Monitoring Plan 2023-2026, the FMA will be taking an educative and constructive approach and intends to provide feedback to CREs to encourage good practice for later reporting periods. We expect the FMA to begin their feedback process for the first cohort of CRD filings with comments to improve their climate statements within the next few weeks.
The key lessons from the two cohorts of CRD climate statements will be discussed at the INFINZ Climate Related Disclosures Series Event on 29 August 2024, hosted by MinterEllisonRuddWatts. The panel will be of interest to key personnel at CREs who are interested to learn about areas of improvement for the next climate statements. Click here to register.
This article was co-authored by Hannah Cross (Solicitor) and Darlene Hu (Intern) in our Financial Services team.
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