Climate change disclosure rules pass final hurdle

This article originally featured on Good Returns and was written by Matthew Martin. 

All but one of New Zealand's political parties have voted to pass the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill meaning around 200 large banks, insurers, KiwiSaver schemes and fund managers will now have to produce annual climate statements.

The new legislation will require certain entities, known as Climate Reporting Entities (CREs), to produce annual climate statements that identify and report on the impact of climate change on their organisations and disclose greenhouse gas emissions.

It also expands the Financial Markets Authority's (FMA) responsibilities as the FMA has been charged with monitoring and enforcing the new regime.

The intent of the climate-related disclosure (CRD) regime is to ensure that the effects of climate change are routinely considered in Climate Reporting Entities' business, investment, lending and insurance underwriting decisions.

The CRD legislation also tasks the External Reporting Board (XRB) with responsibility for developing climate reporting standards for the new regime. The standards will be based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

The XRB is now consulting on Climate-related Disclosures - Governance and Risk Management.

Climate statements will be required to be produced by a CRE for annual reporting periods that will begin when the XRB issues its first relevant climate standard which is expected in December 2022.

The FMA plans to issue high-level guidance for CREs on compliance expectations by December 2022 and provide more detailed guidance throughout 2023.

The Bill was read for the third time in Parliament on Thursday with only the ACT Party voting against it - the final vote was 110 for and 10 against.

ACT's Dr James McDowell describes the Bill as "highly prescriptive" and "micro-managed greenwashing" saying it will add significant costs to the businesses involved.

FMA director of capital markets Sarah Vrede says the FMA welcomes the new legislation and that its initial regulatory approach will be focused on supporting climate reporting entities and other relevant stakeholders as they prepare for the new regime.

"For the next few years, we will have a strong focus on supporting and encouraging development of good practice.

"In the early stages of the new regime, enforcement action is likely to be focused only on serious misconduct, such as failure to produce climate statements or where climate statements are false or misleading.”

The CRD regime will capture around 200 entities, comprising:
- Large, listed issuers of quoted equity securities or quoted debt securities (over $60 million in market capitalisation or quoted debt, respectively. Issuers listed on growth markets are excluded);
- Registered banks, credit unions and building societies with total assets over $1 billion;
- Licensed insurers with total assets over $1 billion or annual gross premium revenue over $250m; and
- Managers of registered schemes, such as Kiwisaver schemes and investment funds, (other than restricted schemes) with greater than $1 billion in total assets under management

The Ministry of Business, Innovation and Employment (MBIE) and the FMA are currently consulting with levy payers on two potential funding options for the FMA’s new CRD regime responsibilities and consultation closes on November 7.

Mindful Money founder and chief executive Barry Coates says he welcomes the new legislation which is timely with the climate summit COP26 starting on November 1.

"We are internationally recognised for our leadership on this issue," says Coates.

"New Zealand is the first country to require climate reporting and many others are in the process of developing their own legislation."

He says the legislation is an important contribution to transparency and disclosure in an era when climate change is having a major impact on companies and fund managers.

"This Bill will provide information to investors and members of the public about the risks of climate change and what 200 reporting entities are doing to manage those risks. It will enable them to make better financial decisions."

He says once reporting becomes more common the challenge will be to interpret and compare that information and evaluate how those reporting are managing financial risks, but also how they are avoiding harmful impacts on the climate and contributing to climate solutions.