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The Bill to narrow the scope of the climate-related disclosures (CRD) regime was reported back to Parliament by Select Committee on 30 January and is expected to pass in the first half of this year.
It will drop fund managers out of the mandatory scheme entirely and will reduce the pool of listed companies required to produce CRD by raising the market capitalisation threshold from $60m to $1b.
Those entities that will be relieved of the obligation to report should be thinking now of how best to respond in terms of the long-term interests of their business. While tempting to simply celebrate the reduced compliance burden, there are important legal and reputational factors to consider.
Response considerations and options
Key factors in formulating a response will include prevailing market practice and expectations, directors’ duties, your organisation’s strategic direction and risk profile, as well as the expectations of stakeholders, including key customers and suppliers.
For those navigating this complex set of decisions, there are three broad options to consider:
- Discontinue publishing CRD altogether.
- Continue to publish CRD voluntarily in accordance with the New Zealand Climate Standards (NZ CS).
- Maintain some form of climate-related reporting, potentially by integrating this into broader sustainability or annual reporting.
Table 1 below analyses potential benefits and risks of each option.
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Options |
Potential benefits |
Potential risks |
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Option 1: Stop producing CRD altogether This may appear an attractive option, particularly for smaller listed issuers with limited resources available for reporting and/or where no preference has been indicated by shareholders and/or stakeholders. |
Eliminates the resource investment associated with preparing CRD. Removes the administrative burden associated with reporting. |
Information previously disclosed in mandatory CRD may become outdated or misleading over time. This could leave the entity open to legal challenge if not subsequently corrected or appropriately qualified - for example, if an entity’s CRD stated the business was not exposed to any material climate-related impacts or risks, an investor that relied on that information to their detriment could potentially challenge the statement. Recommendation 4.4 of the NZX Corporate Governance Code remains in place. It recommends that issuers make non-financial disclosures at least annually, including as to environmental factors and practices, and that they explain how operational or non-financial targets are measured. NZX listed issuers can elect not to comply with this recommendation but need to explain why they have not done so. Company directors remain subject to a fiduciary duty to take into account identified material risks when making decisions about the company. An entity that has disclosed material climate-related risks in its CRD disclosures may have an obligation to communicate to the market in some form how those risks are being managed and how that duty is being discharged. There is a risk of needing to ‘re-invent the wheel’ if there is a prospect of re-entering the CRD regime – this is particularly relevant for issuers with a market capitalisation close to $1b, or if the entity is on a strong growth trajectory or expected to need to report under the Australian CRD regime. Future changes to the CRD regime cannot be ruled out, especially with the upcoming 7 November general election. |
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Option 2: Continue producing full CRD CRD reporting on a voluntary basis may be advantageous for entities with well-developed CRD resourcing and processes and where there are shareholder and other stakeholder expectations of continued reporting on climate-related risk. |
Alignment with the NZ CS provides a predictable reporting structure, facilitating benchmarking for primary users (although there are also benefits on aligning with Australian or international standards, discussed below). Continued reporting in the same format maintains consistency, making it easier for primary users to understand and respond to. The Bill proposes to dis-apply the Financial Market Conduct Act’s (FMC Act’s) substantiation requirements in respect of both mandatory and voluntary CRD, but only where it is materially compliant with the Climate Standards. |
With CRD no longer mandatory, continued reporting in full form may represent unnecessary resource outlay. Although not required to comply with the NZ CS, the fair dealing provisions under Part 2 of the FMC Act will remain in place (other than the substantiation requirements where voluntary CRD is materially compliant with the Climate Standards). These include liability for CREs under section 19, which prohibits misleading and deceptive statements in CRD, including by omission. In short, greenwashing risk remains a real consideration for voluntary CRD. |
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Option 3: Integrate key climate-related disclosure topics into other reporting Entities may consider a hybrid approach whereby they continue to report on the most material aspects of CRD, using alternative reporting vehicles, such as a sustainability report or a dedicated section in an annual report. |
Allows for streamlining and potential efficiencies by combining reports. Enables entities to report only on those aspects of CRD that are most material and relevant for primary users, e.g., key risks, targets and strategy (including a transition plan). Allows the entity to update the market on material non-financial disclosures in line with the NZX Corporate Governance Code and to demonstrate director attention to material climate risks. Entities captured by the Australian regime may consider consolidating relevant aspects of CRD into a single group report, aligned to the Australian climate disclosures standard (AASB S2). |
As above, there may be a risk of greenwashing, including misleading by omission, if only selected disclosures are retained where these create a misleading overall impression of the entity’s climate strategy, risks or performance. |
Key considerations for voluntary reporting
Greenwashing risk for voluntary disclosures and non-disclosure
Greenwashing remains a real consideration for all climate-related communications. Inconsistencies between public statements on climate-related matters - such as annual reports, company websites, or investor presentations - or omitting material climate-related information from such disclosures may expose an entity to legal challenge for misleading or deceptive conduct.
There is also a risk that out-of-date disclosures, where the market has not been informed of new material risks or necessary qualifications, and where relied upon by third parties such as investors, could give rise to liability under the FMC Act or Fair Trading Act.
Accordingly, organisations should ensure they retain processes to maintain the accuracy, consistency, and currency of climate-related communications, regardless of whether formal or mandatory CRD is produced.
Particular care should be taken when asserting alignment with the NZ CS - for example, distinguishing between reports that are merely “broadly consistent with” or “mapped to” the NZ CS, versus those that are fully “aligned with” or “compliant with” the standards, and clearly defining the scope of any such claims.
Directors’ duties
Climate risk is well understood as a foreseeable financial risk for many companies, and the decision to cease CRD does not absolve directors of their ongoing duty of care and diligence or of their obligation to act in what they believe to be the best interests of the company when taking into account climate-related risks.
CRD has served as one platform for directors to demonstrate that they are actively considering climate risk in their governance and strategic decision-making. If an entity elects to discontinue formal CRD, a consideration when weighing up alternatives may be how directors will continue to demonstrate to shareholders and the broader market that they are discharging their duties.
Harmonisation of reporting across borders
Entities operating in multiple jurisdictions, particularly those captured by the Australian disclosure regime but not by New Zealand requirements, may see advantage in shifting to a harmonised approach to climate reporting.
This could involve a single group climate report or mirroring disclosures across jurisdictions, a practice already adopted by some organisations in the context of modern slavery reporting.
Aligning with the Australian framework, while also referencing New Zealand-specific context where relevant, may help reduce duplication and inconsistency – enhancing comparability and process efficiency, creating a coherent narrative around transition strategy, and reducing the risk of greenwashing arising from inconsistencies between reporting platforms.
User expectations
Users of CRD, including lenders, investors, asset owners, rating agencies, and insurers, may continue to expect reporting on climate risk, regardless of changes to mandatory requirements.
For some lenders, the assessment of climate risk is expected to remain a key component of portfolio and credit risk analysis, influencing lending decisions and terms – especially among investors and asset owners that are focussed on aligning portfolios with the Paris Agreement.
Conclusion
The removal of mandatory CRD obligations may not have removed many of the underlying drivers for robust climate-related disclosure. Those affected by the changes and asking, “what now?” would do well to remain alive to directors’ duties, greenwashing risk, opportunities to streamline reporting across jurisdictions and the need to meet user expectations.
In particular, organisations should ensure that any voluntary disclosures are clear, accurate, and consistent, and that governance and approval structures for climate and sustainability reporting remain appropriate to manage any potential risks.
There is no one-size-fits-all response to climate reporting. We recommend that boards and management teams engage proactively to develop a right-sized approach. Our expert team has deep experience in both mandatory and voluntary climate disclosures and are happy to provide more tailored advice.
