Significant amendments will be made to the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill as a result of the select committee and submissions process, which reported back on 16 August.
The Economic Development, Science and Innovation Committee has recommended a number of pragmatic changes, the net effect of which will narrow the regime’s application, provide more time for the market to adjust and reduce compliance costs.
Key change recommendations are:
- the exclusion of issuers with a market capitalisation under $60m (currently about 30 companies on the NZX, representing only 0.68% of NZX’s total market capitalisation). Growth markets hosting small and medium sized enterprises (e.g. Catalist) will also now be excluded
- an extra two years deferral of the requirement that reporting entities arrange external assurance for their reporting of greenhouse gas (GHG) emissions (which will now be required within three years of the Bill passing)
- removal of a licensing regime for “climate-related disclosures assurance bodies” to regulate assurance practitioners
- removal of the “disclose or explain” option so that all reporting entities will now need to disclose, and
- removal of the requirement to explain why “immaterial” information has been excluded from the climate statements – another move to reduce bloat.
However, the Committee was not persuaded to:
- soften the penalties provisions or defer their implementation
- include large private entities or the public sector, judging this to be outside the Bill’s ambit
- provide any exemption for reporting entities that do not have direct control over investee company GHG emissions (e.g. fund managers, banks and insurers), or
- define specifically the extent to which a reporting entities indirect GHG emissions would be required to reported (i.e. Scope 1, 2 and/or 3 GHG emissions), instead leaving this to the XRB to determine when it issues its climate standard in late 2022.
The XRB planned consultation schedule is as follows:
- an exposure draft for the ‘Governance’ and ‘Risk Management’ sections of the climate standard will be released on 20 October with submissions due by 22 November
- an exposure draft for the ‘Strategy’ and ‘Metrics & Targets’ sections of the climate standard will be released in early March 2022, with submissions due four weeks later, and
- a formal exposure draft of the full standard in July 2022, with a three month consultation period.
Three year deferral for assurance
Climate reporting entities will still be required to prepare climate statements in respect of the first accounting period to commence after the XRB issues its climate standard but will have a longer window before they need to seek assurance of their GHG emission disclosures.
The Committee accepted that the original timeframe would not provide sufficient time for preparers and the assurance industry to develop the necessary professional capacity.
While the Committee has removed the proposed licensing regime for “climate-related disclosures assurance bodies”, assurance practitioners will still be required to comply with all applicable assurance standards.
Assurance of GHG statements will now be required from three years after Royal assent, and practitioners will need to provide any qualified reports to the Financial Markets Authority (FMA), the XRB and the climate reporting entity’s supervisor.
Failure to meet these requirements will attract a fine for practitioners of up to $50,000.
Disclose or explain
Under the original version, entities could be exempted from disclosure on the grounds that they were not materially impacted by climate change provided they also prepared a separate report explaining why this was the case. That report then required independent assurance supporting its conclusion.
The Committee considered the exemption would undermine the climate-related disclosure regime’s goal of providing consistent and comparable climate reporting. Consequently, it has now recommended that all entities be required to disclose: while entities will be affected by climate change to varying degrees, any need for differential reporting can be achieved through the application of the XRB’s climate standard.
The Committee determined that the XRB is best placed to address materiality in its standard so is recommending deleting the provision which would have allowed entities to exclude immaterial information but required them to assure the exclusion (section 19D).
The Committee’s view was that this would result in lengthy reports of limited value to users.
National’s minority position
The National Party members of the Committee issued a minority report articulating their concerns with the increased regulation and compliance cost, advocating in particular:
- their preference that the disclosure requirements commence in the financial year beginning two years after the XRB finalises its climate standard, not one year
- the extension of the regime to public sector entities, and
- National’s continued support for the “disclose-or-explain” approach.
Please reference our guide 'The time is now – a guide for climate-related financial disclosures' released on 13 August 2021.