Preparing insurers for climate-related disclosures

  • Publications and reports

    30 November 2023

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The insurance industry is already alive to the physical effects of climate change, with the early weather events in early 2023 being one instance of extreme weather causing damage to policyholders’ homes and businesses. Insurers are also thinking about the transition impacts: the more subtle but equally powerful market forces and government responses to the threat of climate change – examples of this range from the rapid growth in new electric vehicle registrations to the requirement for default KiwiSaver providers to exclude fossil fuel investments. 

Insurers are also facing the mandatory framework requiring climate-related disclosures (CRD) by climate reporting entities (CREs) under Part 7A of the Financial Markets Conduct Act 2013 (FMCA). The ultimate aim of the prescribed disclosures is to “support the allocation of capital towards activities that are consistent with a transition to a low-emissions, climate-resilient future.” 

In this article, we summarise the CRD regime’s requirements for climate statements and offer some practical recommendations for insurers as to what they can do now to prepare for the CRD regime and to ensure compliance with the CRD framework.    

Climate-related disclosure: The core obligations

Most insurers who are CREs will already be well into their first reporting period, given the requirements to prepare and lodge climate statements take effect for accounting periods that start on or after 1 January 2023. For example, insurers that are CREs with a 31 December balance date will be lodging their first climate statement by 30 April 2024, in respect of the 2023 reporting year.

The definition of CRE captures, among other ‘large’ entities, licensed insurers that have over $1 billion in assets or premium income over $250 million per annum. Under Part 7A, CREs have some key obligations:  

1. Annual climate statement 

Prepare an annual climate statement in in accordance with the climate-related disclosure framework. These are the External Reporting Board (XRB) issued Aotearoa New Zealand Climate Standards 1, 2, and 3 (NZ CS). NZ CS 1 contains the core requirements across four main pillars: Governance, Strategy, Risk Management and Metrics & Targets. NZ CS 2 deals with transitional provisions, and NZ CS 3 contains the general requirements and principles.  

2. Lodging climate statements 

Lodge the climate statements on the incoming Climate-related Disclosures Register four months after a CRE’s balance date. Climate statements will also need to be linked in a CRE’s annual report. However, the FMA (Financial Markets Authority) has agreed in principle to grant a two-year exemption from this requirement to include such a link for CREs that are required to publish their annual reports within three (rather than four) months of their balance date under other legislation.  

3. Greenhouse gas emissions disclosures  

For periods ending on or after 27 October 2024: Obtain independent assurance over greenhouse gas emissions disclosures (typically this will be a CRE’s second reporting period).  

4. Record keeping

Keep proper records to support your climate-related disclosures. Record keeping requirements are prescribed in the Financial Markets Conduct Regulations 2014 (FMC Regulations) that came into force on 2 October 2023.

Compliance with the CRD regime is no easy feat, and extensive work is required from a wide variety of teams and roles within a CRE’s business. Insurer CREs across the industry are each on their own climate reporting journey, and they will be at varying levels of readiness. 

An important point to remember about the CRD regime is that it is not intended to be a ‘tick-box’ disclosure exercise. It is intended to benefit CREs by developing their climate resilience, and informing relevant stakeholders. The NZ CS requires CREs to consider both climate-related risks and opportunities for their business and how they can best manage these to ensure they can adapt to, or even thrive in, the changing climate.

Climate statements: NZ CS 

The major features of the CRD regime are derived from the Taskforce for Climaterelated Financial Disclosure (TCFD) Recommendations and require disclosures based on the TCFD’s four pillars, being: 

  • governance: enabling users to understand the role of the governing body (usually the board) in overseeing, and management in assessing and managing, climate-related risks and opportunities; 
  • strategy: enabling users to understand how climate change is currently impacting an entity and how it may do so in the future; 
  • risk management: enabling users to understand how an entity’s climate-related risks are identified, assessed, and managed, and how those processes are integrated into existing risk management processes; and 
  • metrics & targets: enabling users to understand how an entity measures and manages its climate-related risks and opportunities (including scope 1, 2 and 3 greenhouse gas emissions). 

The major features of the CRD regime are derived from the Taskforce for Climate-related Financial Disclosure (TCFD)

Key to the approach is a scenario analysis requirement. NZ CS 1 requires the CRE to consider, at a minimum, three climate-related change scenarios: 

  • a 1.5°C scenario; 
  • a 3°C or greater scenario; and 
  • a third scenario chosen by the CRE. 

The outputs of a scenario analysis will identify the climate-related impacts which the governing bodies of CREs must then factor into their risk management and strategy disclosures. That is what is expected to drive both adaption and mitigation by the CREs. Importantly, the scenario analysis does not require the CREs to predict which, if any, of the scenarios is more likely. Instead, the scenarios are intended to provide a range of narratives to expand understanding of the spectrum of outcomes which are possible. 

The roles of the XRB and the FMA 

The two key parties involved in the CRD regime are the XRB and the FMA. The XRB has responsibility for consulting on and issuing climate standards, with an extended function relating to the issue of auditing and assurance standards, and non-binding guidance. 

The FMA, as regulator, is responsible for independent monitoring and enforcement of the CRD regime, as well as providing guidance about compliance expectations. It has powers in relation to enforcement, regulations, and exemptions for CRD requirements. Accordingly, once the NZ CS have been issued, it is to the FMA that insurers should look to understand how the regime will be applied to them. 

XRB Guidance 

The XRB has issued the three NZ CS referred to above. These standards have mandatory status and you must read them together. In particular, NZ CS 3 is important to understand how NZ CS 1 will be applied. 

In addition, the XRB has released various guidance, such as the All Sectors Staff Guidance and the Entity-level Scenario Analysis Staff Guidance. These are not mandatory to follow. Rather, they are intended to assist CREs to understand and comply with NZ CS. We highly recommend becoming familiar with these documents because they contain useful explanations of what the XRB is expecting to see in climate statements and practical examples of what that could look like, how that could be structured, and the level of detail required. 

There are countless ways to report in accordance with the high-level nature of NZ CS, but the XRB’s guidance prompts CREs to start thinking about the climate-related risks and opportunities specific to their business, and what information would be material for their primary users – for insurers, these would typically be the policyholders. The guidance is particularly helpful for some of the more challenging aspects of the NZ CS such as scenario analysis, transition planning, and disclosing metrics and targets. 

Group climate statements: Focus on the New Zealand business 

Understanding your CRD obligations in relation to other related entities is important because this will form the basis of what is reported in your mandatory climate statements. In addition, many will be part of a wider international group which will be preparing to comply with overseas standards aligned with the International Sustainability Standards Board IFRS S1 and S2.

While it may be helpful for New Zealand branches or subsidiaries of overseas insurers to make use of the resources and information made available to them by their overseas parents complying with overseas reporting regimes, NZ CS is paramount. The XRB released a Comparison Document which explains the differences between the NZ CS and IFRS S1 and S2. Overseas insurers that carry on business in New Zealand (e.g. via a licensed branch) may have obligations under one of the two limbs of s 461ZB in the FMCA: 

  • If the overseas parent company has a ‘large’ New Zealand branch: The parent must ensure climate statements are prepared for its New Zealand business as if that business was incorporated in New Zealand; or 
  • If the overseas parent company has multiple New Zealand subsidiaries (that are together, ‘large’): The parent must ensure climate statements are prepared for the group’s New Zealand business as if the subsidiaries within that group were incorporated in New Zealand. 

What this means for the New Zealand branch or subsidiary of an overseas insurer is that it should be preparing climate statements as if it was its own CRE – but subsidiaries do have the option of combining their climate statements into a single document under s 461ZE. 

Good record keeping: Substantiation is key 

The primary document to assist insurers with keeping proper climate records is the FMA’s guidance for keeping CRD records, which sets out the FMA’s principles and expectations for the record keeping requirements. In that guidance, the message is clear: proper climate records will be able to substantiate the content of the CRE’s climate statements and also general compliance with the CRD regime. 

It is not just about keeping evidence of certain facts or data that are included in climate statements, it is also about keeping records showing the processes the CRE undertook to reach the conclusions or targets it has set out in its climate statements. 

The Appendices in the FMA’s guidance contain illustrative examples of the records a CRE might keep in relation to each of the four pillars of NZ CS 1. There are examples that are specifically relevant to insurers such as:

  • A report presented to the governance body that summarises an analysis of the impact of a recent severe weather event on an insurer and its policy holders; 
  • Insurance policy that sets out the payouts related to assets that have been destroyed because of a recent wildfire; and 
  • Workpaper calculating the increase in insurance premiums charged to policy holders due to a reassessment of exposure to climate-related risks. 

Given there may be a large amount of records required to be kept, it may be useful to have one central digital platform for storing evidence that can be accessible both internally, or externally (upon request in accordance with the FMC Regulations). 

FMA’s enforcement approach: Transparency required 

There are liabilities and penalties under the CRD regime, split into civil, criminal and infringement offences. However, the FMA in its CRD Monitoring Plan 2023–2026, states that in the first reporting period, the FMA will be taking a ‘broadly educative and constructive approach’, and supporting development of best practice in the second reporting year. 

While the FMA has said it will take an educative approach towards compliance with Part 7A, climate statements are also subject to Part 2 of the FMCA which prohibits false, misleading and deceptive conduct and unsubstantiated representations. And the FMA has made it clear that they are taking greenwashing behaviour seriously, which would give rise to a contravention of Part 2. 

To the extent that insurers are struggling with reporting, being transparent about any areas in which you are lacking due to limited resources is key. Avoid making any false promises about climate-related targets or giving misleading information about your entity’s progression towards a low-emissions future. Otherwise, you risk breaching Part 2 if you cannot substantiate the content of your climate statements. 

A robust due diligence for verification 

Directors are required to sign off on their CRE’s climate statements. Further, directors are deemed to be liable if the CRE does not prepare, file (and in due course, have assured) the climate statements (s 534). However, s 501 of the FMCA provides a defence for directors if they can prove they took all reasonable steps to ensure compliance with the CRD regime. The defence does not require directors to personally undertake verification of the content in the climate statements, but rather allows directors to reasonably delegate their responsibilities. We unpacked the directors due diligence defence in relation to CRD in our article available here. 

“All reasonable steps” looks like an effective due diligence process. A due diligence process should be documented and provide for a robust chain of verification, including governance structures, how evidence is stored, and a post-process review. This process may be aligned with a CRE’s existing due diligence processes for financial statements, given Part 7A largely mirrors the financial reporting requirements in Part 7 of the FMCA. 

Directors do not need to be climate experts. But they should invest in upskilling themselves and their teams, and engage external experts where required, to ensure that those involved in producing the CRE’s climate statements have the right level of knowledge, expertise and information. 

This article was co-authored by Hannah Cross, a Solicitor in our Banking and Financial Services team.