Today, the Financial Markets Authority (FMA) has published a consultation document proposing guidance for climate reporting entities (CREs) in relation to offer documents and annual reports in light of the climate-related disclosures (CRD) regime.
A link to the consultation document is available here. The consultation will be open until 30 August 2024.
Who should read this? Why?
All CREs will want to be aware of the FMA’s expectations. While expressed as a consultation, the document likely reflects FMA’s views of existing obligations and will assist CREs to decide whether their other disclosures need to be updated in light of their CRD, and if so, how.
It is particularly relevant for continuous issuers e.g. managers of registered managed investment schemes (MIS), especially managed funds. The consultation specifically addresses potential impacts on Product Disclosure Statements (PDS), Statement of Investment Policies and Objectives (SIPO), and other Disclose register content.
What does it cover?
Under section 57 of the Financial Markets Conduct Act 2013 (FMCA), a PDS and register entry must contain all material information related to a regulated offer of financial products.
The consultation document proposes guidance for CREs in relation to the following disclosure documents:
- any current or new PDS for their financial products;
- the Other Material Information (OMI) on the offer register on Disclose for their financial products;
- any SIPO on the offer register on Disclose; and
- any annual report.
The main takeaway is that the FMA considers the introduction of the CRD regime, its effect on an issuer that is a CRE, and the issuer’s climate statements are likely to be material information that may influence investors’ decisions. A CRE’s disclosure documents should therefore reflect that materiality.
The FMA’s view is that, in accordance with s 57, issuers such as equity or debt security issuers or MIS managers, should consider whether the PDS and/or register entry should be updated.
Product Disclosure Statements
The proposed guidance says that the disclosure need not be lengthy, nor is it necessary to repeat or summarise the information in the climate statements. The main purpose of the disclosure is to alert investors to the issuer’s status as a CRE, and explain how to obtain a copy of the climate statements.
At a minimum, the guidance suggests (and offers some examples of) a brief disclosure to be included in the “About” section of a PDS explaining that the issuer is a CRE and where their climate statements can be accessed. There are also examples provided for issuers that are not yet CREs but may become one as a result of an initial public offer or offer of debt or equities, to disclose that fact briefly in the PDS for such an offer.
The guidance also refers to an issuer’s obligation to include in the risk section of the PDS, information about climate-related risk if it creates a significant risk to the issuer’s business, which many issuers are already doing.
Disclose Register
The FMA clarified that CREs do not have a specific obligation to file their climate statements on the Disclose Register as other material information. The requirement is to file on the Climate-related Disclosures Register (CRD Register).
However, given the likely materiality of the information to investors, the FMA provides two options for CREs to consider – (1) filing climate statements on both the Disclose Register as OMI, and on the CRD Register; or (2) file climate statements on the CRD Register and cross refer that filing in the PDS (and OMI as relevant).
SIPOs
The FMA also states that, if a CRE’s climate-related investment policies are directly relevant to achieving the investment objectives and strategies of the MIS, they expect the SIPO to include either an explanation of these policies or a link to them.
Annual reports
The consultation document helpfully summarises the existing requirements under Part 7A of the FMCA and the NZ CS. These relate to a CRE’s requirement to refer to its climate statements in its annual report, and the ability to provide climate statements within the same document as its annual report (subject to NZ CS 3 integrated reporting requirements).
Timing
The proposed guidance says that CREs should consider updating their continuous issue PDS and/or register entry within 12 months of publication of the finalised information sheet (or if sooner, when the PDS is next updated).
Our view
Consultation on the guidance is to be welcomed, as it provides useful confirmation of the FMA’s likely expectations as to what is required. Ideally this would have occurred much earlier e.g. at the beginning of the first climate reporting period, or at least well before a large number of CREs have already lodged (or are in the last few days before lodging) their first climate statements. However, we acknowledge the heavy workload the FMA CRD team have.
We would expect that for most CREs, considering climate-related risks in investment and other strategic decisions is not a new concept. Many are already reporting on climate-related matters in their offer documents and annual reports, as they consider material risks. Preparation and lodgement of climate statements, for those entities, may not have identified any new material risk, and simply involved disclosure in a prescribed format.
We support the FMA’s encouragement of consistency across disclosure documents, where possible. But that needs to be tempered. There is likely to be a broad spectrum as to the degree of relevance the content of the climate statements will have for a CRE’s interested parties (e.g. investors, customers, and creditors). So in practice, consistency and coherence may look very different for each CRE.
There will be some particular areas of the consultation that some will wish to respond to, with the objective of seeking greater flexibility in any final guidance.
An example of that will be whether the information is to be disclosed in the PDS, as opposed to only the register entry. This will be particularly relevant to MIS managers in relation to managed funds, in relation to which the PDS has a prescribed length limit of 12 A4 pages or 6,000 words – which is already very short.
The original intention behind s 57 of the FMCA was that the PDS, especially for managed funds, would be a short, concise document with largely prescribed information (inspired by UCITS disclosure for funds), and would then be supported by the register entry where investors could find all other material information. That’s why s 57(1) refers to the PDS containing “all of the information that it is required to contain by the regulations” while s 57(2) refers to the register entry containing “all material information relating to the regulated offer that is not contained in the PDS”.
The suggested “brief” wording the FMA has used in the consultation is 68 words, which will be challenging for those MIS managers that are already finding the mandatory word limit tight, e.g. if they manage a number of funds within a scheme.
As a further issue, the proposed option to file climate statements on the Disclose Register as well as the CRD Register could raise questions for CREs in relation to s 82 of the FMCA, which creates an offence for statements that are false, misleading, or likely to mislead on the register entry. That said, climate statements should already be subject to a similarly robust due diligence process as offer documents, to ensure the content is correct and substantiated (as well as to provide directors with the benefit of the ‘all reasonable steps’ defence in the FMCA).
Finally, as the FMA will no doubt agree, the preparation of climate statements is not intended to be a tick-box exercise, rather the CRD regime was intended to encourage CREs to integrate climate considerations into their overall governance, strategy, and risk management. Incorporating them into a CRE’s broader disclosures aligns with that goal.
What next?
Many MIS manager CREs will be lodging the climate statements in respect of the funds within the schemes they manage by 31 July 2024 in line with a 31 March year-end, and their FY25 reporting periods has already begun.
The consultation will be open until 30 August 2024. If you have any questions in relation to the consultation document, or your disclosure obligations more generally, please contact one of our experts.
This article was co-authored by Hannah Cross, a Solicitor in our Banking and Financial Services team.
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