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The January 2023 release of New Zealand’s climate-related disclosures encompassing Climate Standards (CS) 1, 2 and 3 signifies an important milestone for the APAC nation. It marks a pivotal moment in establishing its first coherent and mandatory framework for entities to evaluate their climate-related risks and opportunities with the primary aim of empowering users to make better informed decisions based on their climate assessments. A broader objective is to facilitate increased capital allocation towards sustainable initiatives that align with New Zealand’s 2030 agenda commitments and its ongoing journey towards a low-emission, climate-resilient future as outlined in its 2050 net zero carbon targets. [1]
The CS encompass three integral components with NZ CS 1, detailing explicit disclosure criteria influenced by the Taskforce for Climate-Related Financial Disclosures (TCFD) framework but tailored to accommodate ISSB’s evolving sustainability reporting standards; NZ CS 2, offers exemptions from particular disclosure obligations in NZ CS 1, especially for the inaugural reporting phase, acknowledging the need for time to establish robust standards; and NZ CS 3, delineates fundamental principles and overarching guidelines for the creation of climate statements, such as the concepts of fair presentation and materiality, ensuring comprehensive and compliant reporting. [2]
Currently, a significant portion of New Zealand entities offer limited details regarding how climate change impacts them, often featuring inconsistent or entirely absent reporting. The New Zealand Ministry of Business, Innovation and Employment labels this information gap as an “ongoing and systemic issue” characterized by an excessive emphasis on emissions-intensive activities. [3]
With the new climate-disclosure standards, it is expected that entities will begin to assess their climate-related risks and opportunities within the context of Scopes 1, 2, and 3, with a keen focus on uncovering their potential financial impacts. Moreover, the launch of these standards which came into effect this year with mandatory disclosures beginning in 2024 aligns closely with the global trend in climate disclosure, highlighting the growing awareness by jurisdictions to climate change’s substantial financial ramifications.
To add more depth to the abovementioned, a recent review conducted by the Basel Committee on Banking Supervision (BCBS) in 2020 revealed that in recent years many jurisdictions globally did not have explicit mandates in place to measure climate-related financial risks. As a result, it was noted that these worsening climate-related risks could potentially have damaging consequences to the safety and financial stability of entities across all sectors. [4]
Typically, climate-related financial risks encompass a range of factors, including physical and transition risks. Physical risks involve the direct impact of climate change on assets, operation, and infrastructure. In contrast, transition risks stem from the efforts to mitigate climate, such as regulatory changes and shifts in consumer behavior. [Figure 1]
The Reserve Bank of New Zealand in response has commented on the importance for entities to recognize the interplay between physical and transition risks, as well as the potential compounding effect of these risks with other business challenges. For example, this may encompass credit, market, operational, underwriting, liquidity, reputational, strategic, and legal risks too. From the latest disclosure standards considering the identification of such compounding risks from Climate Change, it is recommended that entities should integrate their climate-related risks into their broader risk management framework, acknowledging their unique characteristics.
Such distinctive features include the nonlinear nature of climate tipping points, the far-reaching impact on financial systems, the uncertain and extended time horizons over which these risks may materialize, and the unprecedented nature of climate change, making traditional risk assessment methods inadequate. [5]
With the financial impacts from climate change on entities certain, the published climate disclosures will also provide a way for businesses to consider how different entities are adapting their business to respond to these impacts. Moreover, by enhancing their understanding of these risks and investing in improved risk management, entities can mitigate the magnitude of these impacts. They can identify opportunities arising from the transition to a low-carbon economy, such as meeting the growing demand for sustainable finance and aligning with climate-aware customers. [6]
External Guidance and Support
To evaluate how New Zealand’s standards measure up against existing benchmarks, the External Reporting Board or XRB undertook a thorough examination of the global regulatory environment. This encompassed a comprehensive review of prevailing standards, exposure drafts for upcoming legislation, and in-depth technical discussions with other government regulators.
The XRB has also provided guidance to assist entities in understanding and adhering to these standards. This guidance, which includes staff recommendations, exists independently from formal regulations and secondary legislation. It outlines a clear path for entities to follow in implementing the required disclosures, with specific references to the Task Force on Climate-related Financial Disclosures (TCFD) that entities can incorporate into their reports. [7]
The XRB is also committed to providing guidance to all sectors with plans to reissue guidance for fund managers. There are intentions to develop guidance specifically for banks and insurers to ensure all reporting entities can easily discern any differences.
Given New Zealand’s significant export activity which stands at over 95%, the development of consistent domestic and international standards is paramount, making it crucial for climate disclosures made in a New Zealand context to resonate internationally. Moreover, the impact of these standards is important for addressing carbon-related concerns and stakeholder impact as a downplaying climate-related risks on an entity is likely to turn away existing clients and potential investors too.
All in all, the launch of these standards demonstrates New Zealand’s commitment to the 2030 Agenda and its 2050 net-zero carbon goals, addresses the long-term risks of climate change, and enhances its entities’ resilience to both physical and transition risks. Moreover, it incentivizes increased capital attraction and reinforces entities’ dedication to the caring for and doing its part for the environment.
Sources
[1] https://www.xrb.govt.nz/dmsdocument/4770
[6] https://www.minterellison.co.nz/insights/new-zealand-leads-with-mandatory-climate-related-d
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