An overview of XRB’s final climate-related disclosure standards

Final standards align closely to exposure draft – with a few key changes

Final standards released

The External Reporting Board (XRB) has now published the final climate-related disclosure (CRD) framework for New Zealand. This follows its multiple consultations on exposure drafts of the climate-related disclosure standards. The final framework includes:

Aotearoa New Zealand Climate Standard 1 (NZ CS 1): Climate-related disclosures;
Aotearoa New Zealand Climate Standard 2 (NZ CS 2): Adoption of Aotearoa New Zealand Climate Standards (i.e. transitional provisions); and
Aotearoa New Zealand Climate Standard 3 (NZ CS 3): General Requirements for Climate-related disclosures.

Key elements of the final standard – what you need to know

The final standards align closely with the full exposure draft released in July 2022 and align closely with emerging international standards, primarily the prototype standard published by the International Sustainability Standards Board (ISSB).

Key changes from the July 2022 exposure draft are:

NZ CS 1 now requires a reporting entity to explain how its emissions targets contribute towards a 1.5 degree future climate scenario. This inserts a substantive expectation of emissions reductions within the reporting standard which goes further than earlier drafts. XRB explains the importance of the 1.5 degree scenario for entities assessing their climate-related transition risks, despite concerns that a 1.5 degree scenario will be increasingly difficult to achieve. This approach is similar to the approach taken in the current ISSB prototype.
More specific methodology statements are required for GHG emissions reporting, including detail on emissions factors and global warming potential rates used to calculate emissions.
The one year exemption for disclosure of scope 3 emissions remains. Entities making use of this one-year exemption may however apply this exemption to all of their scope 3 GHG emissions sources, or only to a selected subset of scope 3 emissions sources.
The definition of materiality is no longer linked to enterprise value. Information will be material where omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make on the basis of an entity’s climate-related disclosures. This differs from the previous focus on users’ assessments of an entity’s enterprise value.

Where to next

The mandatory CRD reporting regime takes effect for accounting periods that start on or after 1 January 2023. This means that entities with a 31 December balance date will need to report for the financial year ending 31 December 2023 alongside their annual reports, and those with later balance dates will correspondingly be required to report for the reporting period ending in 2024.

The XRB plans to develop more guidance on the standards over the next year and re-issue supporting guidance in early 2023. In the meantime, exposure drafts of the guidance can still be accessed here.

The XRB has aimed to align the standards with the ISSB’s draft global climate-related disclosures prototype, which is also closely aligned with the original framework developed by the Taskforce on Climate-related Financial Disclosures (TCFD). The ISSB’s prototype is expected to be finalised in 2023. The Australian Treasury has also just commenced consultation on a proposal to introduce mandatory climate-related disclosures for certain financial institutions and large ASX listed entities, with any reporting not expected to commence before 2024–2025.

Meanwhile, MBIE and MfE recently announced a consultation on whether to expand the scope of the mandatory assurance requirements for climate-related disclosures. The consultation will explore views on a possible extension of assurance of entities’ GHG emissions disclosures (per the current legislative requirement) to mandatory assurance of their full climate-related disclosures. Consultation closes on 10 February 2023. Consultation also includes consideration of an occupational licensing regime for CRD practitioners. MBIE also plan to consult on an exposure draft of CRD-regulations to support the Act, and seek views on the amount and application of levies to part fund the CRD regime, in Q1 2023.

The Financial Markets Authority (FMA) has also signalled consultation regarding certain exemptions from the regime in Q1 2023.

The XRB’s climate and sustainability agenda now turns to its proposed Ngā Pou o Te Kawa Ora Framework, which seeks to develop a voluntary, non-financial reporting framework for Aotearoa New Zealand.

Key changes between exposure draft and final standard

Topic	Final standard	Exposure draft	Comment on change
Climate-related disclosures (NZ CS 1)
Targets	Disclosure required on the reporting entity’s view as to how the target contributes to limiting global warming to 1.5 degrees Celsius and the basis for that view (including any reliance on third parties).	Disclosure required on whether each of the reporting entity’s GHG emissions target is aligned with science, and if so, whether it has been validated by a third party.	This change clarifies the previously vague term “aligned with science” and allows entities greater flexibility in explaining their target-setting methods, including where they have been developed in conjunction with third parties, rather than only validated by a third party such as SBTi. It will, however, require entities who do not have a 1.5 degree-aligned target to explain this in their disclosure.
GHG emissions	Reinstated the greenhouse gas disclosure requirement for an entity to disclose the source of emission factors and the global warming potential (GWP) rates used.	Source of emissions factors and GWP rates were removed from the greenhouse gas disclosure requirement in the exposure draft.	This change was made in direct response to feedback that sources of emissions factors and GWP rates used are useful information and acknowledging no imposition of additional work for an entity. Entities will have to determine which emission factors to use for the purposes of disclosure.
Adoption of Aotearoa New Zealand Climate Standards (NZ CS 2)
Scope 3 GHG emissions	An entity making use of the one-year exemption for disclosure of scope 3 GHG emissions may apply this to either all its scope 3 GHG emissions sources, or a selected subset of its scope 3 GHG emissions sources.	No clarity that the provision could be used for a selected subset of scope 3 GHG emissions sources.	This change gives entities greater flexibility to disclose some scope 3 emissions where that is possible in the first reporting year.
Comparatives for Scope 3 GHG emissions	Added an adoption provision for comparatives for scope 3 GHG emissions.	No adoption provision for comparatives for scope 3 GHG emissions.	This provision corrects a previous discrepancy by providing that where an entity is making use of the adoption provision for scope 3 emissions in its first reporting year, it will not be able to provide comparative information in its second reporting year, and will only be able to provide one year of comparative information in its third reporting year.
General requirements for climate-related disclosures (NZ CS 3)
Cross referencing	Removed the ability for an entity to cross refer to a website unless the document has been lodged with the Registrar.	Reporting entities could cross-refer to website content.	This change was made due to the practical limitations of meeting the legislative requirement to formally lodge climate statements and the fact that a website can be edited. Entities will still be able to cross refer to documents on a website (as long as a copy of that document is lodged with the Registrar).
Materiality	Amended the definition of “material” to mean impacts that could reasonably be expected to influence decisions that primary users make on the basis of any entity’s climate-related disclosures, instead of on the basis of their assessments of an entity’s enterprise value. Also removed other references to “enterprise value”.	Information was material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that primary users make on the basis of their assessments of an entity’s enterprise value.	This change was made so that the definition of material can be applied by a wider range of entities including public benefit entities and MIS Managers, and to better align with international and other domestic definitions.
Materiality	Clarified that materiality applies to all disclosure requirements in Aotearoa New Zealand Climate Standards.	No clarity of materiality overlay to all disclosures.	This is a welcome clarification from the XRB that entities can make materiality judgments across the entirety of the climate standards, such as in relation to decisions around disclosure of value chain exclusions and/or presentation changes.
Comparatives for metrics	Clarified than an entity does not have to disclose comparatives for a new metric.	No clarification that no comparatives were required for new metrics.	This is a practical change clarifying that comparative information will only be required for new metrics in later reporting years once it is available.
Methods and assumptions, and data and estimation uncertainty	Added an explicit reference to data uncertainty in the disclosures on methods and assumptions, and data and estimation uncertainty.	No requirement to disclose data uncertainty.	The reference to data uncertainty is a useful acknowledgment by the XRB of the data issues that many reporting entities will face in the first few years of reporting.