Climate-Related Disclosures: How this change will affect governance

In January 2023, the External Reporting Board (XRB) issued a framework of Climate Standards to facilitate the aim for Aotearoa New Zealand to ensure capital is allocated to activities which promote the transition to a low-emissions and climate-resilient future. To foster this objective it produced three climate-related disclosures (NZ CS 1, 2 and 3) for some entities to comply with.

In this article we break down the requirements because while currently it applies to the largest companies, it is likely to apply to others in the future as well. This will increasingly impact governance and reporting responsibilities for directors in the future.

NZ CS 1, 2 and 3

The first Climate Standard (NZ CS 1) sets out disclosure requirements for Governance, Strategy, Risk Management and Metrics, and Targets so entities consider how their activities raise climate-related risks and opportunities. It applies to entities that must prepare climate statements, by virtue of the Financial Markets Conduct Act 2013, to comply with the framework.

The second climate-related disclosure standards (NZ CS 2) allows for exemptions from the disclosure requirements to recognise that high-quality disclosures will likely take time to develop. Entities may use adoption provisions 1 to 4 (see exemptions in blue) under the NZ CS 2 during their first reporting period. Entities in their first, second and third reporting period can use adoption provisions 5 to 7 (see exemptions in orange) and provisions 6 and 7 are available to entities who have previously prepared climate statements but not in the immediately preceding reporting period.

Under NZ CS 1 entities are required to disclose the following for each area:

Governance

• The governance body responsible for overseeing climate-related risks and opportunities along with a description of their role and the body’s: processes, frequency of being informed, skills and competencies available to give oversight, way of considering risks and opportunities when implementing strategies and how it oversees the achievement of metrics and targets;
• The management’s role in assessing and managing climate-related risks and opportunities, including how responsibilities are assigned to management-level positions/committees and when and how they engage with the governance body.

Strategy

• The entities’ current climate-related impacts (physical, transition and financial);
• The scenario analysis used to identify climate-related risks and opportunities and its business models’ resilience, including how it analysed 1.5 degrees Celsius, 3 degrees Celsius or greater, and a third climate-related scenarios.
• The short, medium and long-term climate-related risks and opportunities and its links to strategic and capital plans, and decision-making processes around funding;
• Anticipated impacts, including financial impacts, of climate-related risks and opportunities the entity reasonably expects;
• Information regarding its current business model, strategy, business plan, internal capital deployment and decision-making to show how it will arrange itself while the global and domestic economy moves toward a low-emissions, climate-resilient future.

Risk-Management

• Processes for identifying, assessing and managing climate-related risks and how these are integrated into its overall risk assessment processes by describing: the tools/methods used to identify and assess the scope, size and impact of the risk (and how frequently this is done), the short, medium and long term horizons, how the entity prioritises climate-related-risks in relation to other risks, and whether parts of the value chain are excluded.

Metrics and Targets

• Relevant metrics of: gross greenhouse gas emissions (including standards used to measure this, the approach used, the sources of emission factors and global warming potential) and its intensity, transition and physical risks, the amount of assets, business activities, expenditure, financing, investment or remuneration aligned with or used toward climate-related opportunities and risks, and internal emissions prices;
• Relevant industry-based metrics of the entities’ industry or business model, as well as other performance indicators, used to measure and manage climate-related risks and opportunities;
• The targets used, and their performance, to manage climate-related risks and opportunities including information about timeframes, interim targets, the base year to measure progress from, descriptions of performance, and for each greenhouse gas emissions target: whether they have an absolute or intensity target, how it contributes to global warming to 1.5 degrees Celsius (and its basis for determining this), and the extent the target relies on offsets (and how these are verified);

NZ CS 3 sets out the following principles and general requirements to provide for high-quality climate-related disclosures:

• Disclosures must achieve a fair presentation by meeting NZ CS 3 principles;
• Disclosures must be relevant (i.e. capable of affecting primary users’ decisions), accurate (free from material error), verifiable (possible to corroborate information), comparable (enables primary users to understand similarities and differences in and among items), consistent (uses the same method from each reporting period), timely (available for primary users to make decisions in time);
• The presentation of disclosures must be balanced (free from bias and manipulation), understandable (with clear and concise information), complete (does not leave out details that may result in information being false or misleading), coherent (presentation of disclosures explains context and relationships with other disclosures);
• Disclosures may be prepared as a specific document or included within other documents such as annual reports;
• When determining its climate-related risks and opportunities an entity is to consider the exposure of its value chain too (the range of activities, resources and relationships of an entity’s business model and external environmental it operates in);
• Entities are to prepare climate-related disclosures for the same reporting period as its annual financial statements and use the same presentation currency that is in their financial statements;
• Information must be disclosed where it is material (i.e. if leaving it out or obscuring it may reasonably influence primary user decisions);
• Comparative information is to be disclosed for each metric for the immediately preceding two reporting periods and their trends, and changes to the methods of disclosure are to be explained to enable consistency;
• Entities are to disclose their methods, assumptions and data and estimation uncertainty as well as methods, assumptions and limitations of methods to estimate greenhouse gas emissions;
• Entities who comply with the Aotearoa New Zealand Climate Standards are to have a statement of compliance.

Exemptions under NZ CS 2

Entities who are in their first reporting period may adopt provisions 1 to 4 to be exempt from disclosing:

1. The entities’ current financial impacts of physical and transition climate-related impacts under paragraph 12(b) of NZ CS 1 (see ‘Strategy’ above).
2. Anticipated financial impacts of climate-related risks and opportunities the entity reasonably expects under paragraph 15(b) of NZ CS 1 (see ‘Strategy’ above).
3. Information regarding its current business model, strategy, business plan, internal capital deployment under paragraphs 16(b) and 16(c) of NZ CS 1 (see ‘Strategy’ above).
4. Gross greenhouse gas emissions under paragraph 22(a)(iii) of NZ CS 1 (see ‘Metrics and Targets above).

Entities who are in their first, second or third reporting period may adopt provisions 5 to 7 to be exempt from disclosure of:

5. Comparative metric information for immediately preceding two reporting periods under paragraph 40 of NZ CS 3, where entities have used adoption provision 4 above they are exempt from greenhouse gas emission metrics in second and third reporting periods (see NZ CS 3 principles above);
6. Comparative metric information disclosure for the immediately preceding two reporting periods under paragraph 40 of NZ CS 3 for entities in their first reporting period are only required to provide one year comparative information in their second report period (see NZ CS 3 principles above);
7. Comparative metric trend analysis from previous reporting periods to the current reporting period where entities are in their first and second reporting periods (see NZ CS 3 principles above);

Entities who have previously prepared climate statements but not in the immediately preceding reporting period may use adoption provisions 6 and 7 above too.

This is a brief summary of the climate related standards and should not be relied on as legal advice, for further queries or questions please contact one of our lawyers at Parry Field Lawyers.