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Will climate-related financial disclosures be compulsory?

Will climate-related financial disclosures be compulsory?

Will climate-related financial disclosures be compulsory?

Monday 2 December, 2019

MBIE has released a discussion document for consultation on whether NZ businesses should be subject to mandatory reporting of climate-related information and seeking information on the cost to businesses of introducing mandatory reporting.

Who will it apply to?

Reporting requirements would apply to all entities with public debt or equity, banks, general insurers and reinsurers, asset owners (institutional investors), and asset managers (investment managers). The discussion document anticipates that many businesses who fall outside these categories will receive direct and indirect pressure from insurance companies and capital-providers to identify and manage climate-based risks and opportunities, so the new regime may end up having a much wider impact.

Will it be compulsory?

Climate-related reporting would be on a ‘comply or explain’ basis. It will be mandatory for businesses to comply with the climate-related disclosure regime unless a business analyses and reports that it sees itself as not being materially affected by climate change, with an explanation as to why. The proposed disclosure regime framework is the 11 sets of disclosures recommended by the Task Force on Climate-related Financial Disclosures (TCFD)[1], considered internationally recognised best practice. Businesses would have to make disclosure within four areas: governance, strategy, risk management, and metrics and targets.

The TCFD states that, in determining whether to disclose climate-related information, organisations should take the same approach to determining materiality as with other non-climate related information disclosed in their annual report. Climate-related disclosure will be in a stand-alone TCFD report contained within the organisation’s annual financial reports in order to promote shareholder engagement, and to make such information more available to investors. Organisations which conclude that they are not required to make climate-related disclosure will have to disclose why they have not complied in their annual reports.

Will it be audited?

At this stage, the discussion document does not recommend compulsory auditing of climate-related disclosure but suggests that compulsory auditing be reconsidered within three years of the mandatory disclosure regime coming into force.

How will this affect New Zealand businesses?

Almost all sectors of the NZ economy face major disruption from climate impacts and climate transition in the near future. Risk areas that were once deemed ‘non-financial’ are now generally accepted to have financial consequences.

A mandatory climate-related disclosure regime will inevitably highlight which businesses are responding to climate-related risks and is likely to influence investor behaviour.  Should the government decide to implement the regime, legislators will need to ensure that the financial disclosure thresholds minimise any avoidable burden on reporting entities.

Participating in the consultation process is an opportunity to provide input on the regime early and have this feedback inform MFE and MBIE’s position when they prepare their submissions to Cabinet.  Consultation closes at 5pm on Friday 13 December.

Please contact Campbell Izzard for further information or if you would like assistance in making a submission.

[1] The Taskforce on Climate-related Financial Disclosures was established by the Financial Stability Board in April 2015 at the request of the G20.

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