Yesterday, 30 April 2024, was the final date by which climate reporting entities (CREs) with an accounting period ending on 31 December 2023 were required to complete and lodge their climate statements on the climate-related disclosure (CRD) register, here.

Who should read this? Why? 

The first cohort of CREs' climate statements provide a useful overview of the wide range of approaches CREs have adopted. This may be of interest to all those working on climate statements for the remaining CREs – especially those with balance dates on 31 March who will be required to file by 31 July 2024. They will already be well advanced in their preparations.

An overview of the CRD regime

The CRD regime was introduced under Part 7A of the Financial Markets Conduct Act 2013 (FMCA) and captures around 200 financial institutions in New Zealand. It requires mandatory climate reporting from climate reporting entities (CREs) in respect of reporting periods starting on and from 1 January 2023. Part 7A was adopted and implemented as part of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act which amended the FMCA, the Financial Reporting Act 2013, and the Public Audit Act 2001.

The CRD applies to CREs, which include:

• large NZX-listed issuers of quoted equity securities or quoted debt securities;
• large registered banks, licenced insurers, credit unions and building societies; and 
• large licenced managers of registered managed investment schemes.

Under the CRD reporting regime, CREs are required to:

• comply with record-keeping requirements in relation to the information used in the climate statement; and
• lodge and make the climate statement available to the public within four months after the CRE’s balance date.

These reporting requirements are for the purpose of achieving three climate standards published by the External Reporting Board (XRB) in December 2022 where:

• NZ CS 1 sets out the specific disclosure requirements for the content of the climate statements, structured around four thematic areas: governance, strategy, risk management, and metrics and targets;
• NZ CS 2 sets out relief provisions from specific disclosure requirements under NZ CS 1 (mainly for the first reporting period) in recognition that implementing good quality standards will take time; and 
• NZ CS 3 sets out the principles and general considerations which climate statements must abide by (fair presentation, materiality, etc).

Our view

All CRD reports are accessible on the Companies Office website. Anyone can search the CRD register for a climate statement, where CREs are listed in name order. Currently, only entities with a reporting period up to June 2024 are listed on the register, where CREs will be added by the Companies Office as their reporting deadlines approach.

As at noon on 1 May 2024, climate statements for 28 CREs (out of 30 named) appeared on the CRD register. That said, it may be that there have been delays in publishing documents already uploaded, by the Registrar of Companies which administers the website.

While the climate standards specified the content requirements that entities must disclose in their statements, the overall structure, materiality, and appearance of their CRD reports are largely up to the CREs themselves. As a result, there have been a wide range of approaches to date:

• Some have included their climate statement as a section in the end of their annual report, following their annual financial statements and using a similar style, others produced a separate document and have kept the disclosure as brief as permitted, using bullet points to convey their key points.
• Others have issued glossy multi-page special purpose publications. These are often very detailed, use sophisticated artwork and in some cases include other ESG content. These reports may encompass the visual corporate branding of the entity, making for an inviting read with a mix of page structure styles, imagery, and charts.

This diversity of approach is understandable in year 1 given the lack of precedent or guidance. But in time it would assist primary users to compare disclosures, particularly of competing institutions, if there was a more consistent approach.

In relation to the scenario analysis included in strategy sections, the benefit can be clearly seen from using various sector narratives such as by the New Zealand Banking Association and the Financial Services Council. That has generally meant that it is easier to compare how different entities are seeing risks and opportunity arising from largely similar scenarios. Similar initiatives should in our view be encouraged in other areas.

Overall, our view is that generally the CREs in the first cohort to lodge have done a very good job in addressing the challenges of the regime and have plainly devoted significant resources to preparing their statements. While there are areas for continuing improvement, we expect those will be addressed in future years, especially with the benefit of Financial Markets Authority (FMA) feedback of the type outlined in the Next Steps section below.

By contrast, the CRD register itself is a disappointment - given an objective of the regime is to enable the effects of climate change to be routinely considered in business, investment, lending, and insurance underwriting decisions, including to make client statements easily available for the “primary users” e.g., depositors, investors, and policy holders.

While the CRD register is relatively easy to find and access on the Companies Office website, we found using the register to access statements challenging. Multiple screens need to be clicked through. If you want to understand what has been lodged by CREs overall, you need to open the entry for every CRE listed, to see whether or not it has lodged its climate statement.

If an entity has lodged a statement, it takes three clicks onto separate pages to access the report, where it is only possible to see if a statement has been lodged on the final of these three pages. When using the back arrow on the webpage, it reverts to the first page of the register, not the most recent page of searches. While a spreadsheet recording recent lodgements is accessible from the website, this is not being kept up to date.

We look forward to future updates to the website to rectify these issues for the benefit of all the register’s users, and to maximise the intended impact of the regime in informing the public.

Next Steps

The FMA climate-related disclosures monitoring plan (published in June 2023 - see here) was verbally updated by the FMA at a recent Financial Services Council event, and we have also learned from various engagements with the FMA for clients over the last several months. From that, it is clear that the FMA appreciates that CRD is challenging and that we are all on a learning journey. At least initially, the FMA will be taking a “broadly educative and constructive approach” and reserve enforcement action for serious misconduct, eg a failure to produce (or lodge) climate statements by the required date, or where the statements are misleading or deceptive (e.g., “greenwashing”). But uplifts are expected in year 2 and beyond.

Broadly, the approach the FMA plans to take is as follows:

In Year 1: Setting initial compliance expectations – reporting periods commencing in 2023 and lodging in 2024

The FMA will review as many climate statements as possible to understand whether and how CREs have complied with their CRD regime obligations. In particular, they are aiming to review all the climate statements lodged in the first half of 2024 in order to publish a monitoring report in November 2024, in time to inform the second years’ climate statements. They may also do a second report to cover those lodged in the second half of 2024, as many significant entities have 30 June or 30 September balance dates. We also expect the FMA will write to individual CREs to provide specific, direct feedback where they think that is needed to uplift the approach in year 2 on specific issues. 

The FMA has advised that initial focus areas for the first year of reporting will be: 

• Filing within the legislated time frame (i.e., within 4 months of balance date): where CREs have not met this requirement, the FMA will consider the most appropriate next steps depending on the nature and extent of the non-compliance, including taking regulatory action if required.
• Filing by the correct entity: This can be complex where there is more than one CRE in a group, and the FMA has recommended that entities take advice.
• Meeting the disclosure requirements: The FMA will do their best to assess whether all climate statements filed meet the requirements of the CRD framework and contain the required disclosures. Where they identify mandatory disclosures that do not comply with the CRD framework or have been omitted, generally the FMA intends to take a graduated and broadly educative approach in year 1. But they may review the CRE’s supporting records to understand why, and whether the CRE has made their best efforts to consider the framework and comply accordingly.
• Being transparent and providing context: The FMA will consider whether disclosures relating to the quality and nature of underlying information are transparent, as these are essential for users to understand climate statements. They will be particularly concerned by any disclosures that are potentially misleading or to be unsubstantiated. 
• Being internally and externally consistent: The FMA will consider consistency of information within the climate statements (i.e. internal consistency), e.g., whether statements and descriptions in a CRE’s disclosures are aligned and consistent across all required governance, strategy, risk management, and metrics and targets disclosures; also consistency of information across climate statements and any other documents or statements a CRE publishes (i.e. external consistency) e.g., financial statements, market announcements, annual reports, other sustainability reporting, public statements, and websites. If they notice any inconsistencies or contradictory messages that may be in breach of other laws or regulations, they may share this information with the applicable Government agency.

In this regard, the FMA’s Regulatory team are working on a consultation document to be issued in the next two to three weeks for proposed guidance on “best practice” in relation to references to climate statements in disclosure documents, including:

• current or new Product Disclosure Statements for their financial products;
• the Other Material Information on the offer register on Disclosure for their financial products;
• any Statement of Investment Policies and Objectives on the offer register on Disclose; and 
• any annual reports.

In Year 2: Supporting development of best practice – reporting periods commencing in 2024

In the second year, the FMA will incorporate three additional areas into their reviews of climate statements. These include assessing whether CREs have: 

• obtained independent assurance over their GHG emission disclosures for reporting years beginning on or after 27 October 2024; 
• improved on their first-year reporting based on areas covered in the FMA’s monitoring reports and any individual feedback provided to them; and 
• made reasonable efforts to comply with all additional disclosure requirements, noting that the first-time adoption provisions under NZ CS 2, which will no longer be available to CREs in their second reporting year.

The FMA will continue to review as many climate statements as possible and provide feedback to support better practice.

In Year 3: Steady state guidance, monitoring and enforcement – reporting years commencing in 2025

The FMA plans to settle into a ‘steady state’ level of monitoring by the third year of the regime. They will carry out proactive risk-based sampling and more detailed review procedures, including regularly examining the underlying records that support climate statements. They will also look at whether CREs have consistently improved their reporting, including incorporating feedback that is provided both in our monitoring reports and to them individually. 

This article was co-authored by Andrew Walker, a Law Clerk, in our Financial Services team.