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  • Accounting Alert October 2021

Sustainability reporting developments – New Zealand consultation document released

In October, the New Zealand government became the first country in the world to introduce climate-related disclosures in the financial sector. This currently only applies to around 200 large financial institutions, however it is likely the requirements will trickle down to New Zealand’s wider business community in time.

The External Reporting Board (“XRB”) is responsible for the development of the standards that entities captured by the Bill will be required to report in accordance with. The XRB has recently released a consultation document (“the Consultation Document”) that provides key information on the overall structure of the disclosure framework and seeks feedback on specific sections of that framework.

This article briefly outlines some of the key matters addressed in the Consultation Document:

  • Entities that will be required to disclose climate-related information
  • When reporting requirements will commence
  • The climate-related disclosure framework
  • Proposed structure of the first standard
  • Proposed sections of the first standard.


Entities that will be required to disclose climate-related information

The entities that will have a statutory requirement to disclose climate-related information, referred to as climate reporting entities, are:

  • Listed entities with a market capitalisation exceeding $60 million
  • Registered banks, licensed insurers, credit unions and building societies with total assets exceeding $1 billion
  • Managers of investment schemes with total assets exceeding $1 billion.

The Crown may also nominate Crown Financial Institutions as climate reporting entities through a letter of expectation from their relevant Minister.


When reporting requirements will commence

The XRB currently plans to issue a standard by December 2022. This means that entities will be required to provide climate-related disclosures in accordance with the XRB’s requirements for accounting periods that start on or after 1 January 2023. This means that:

For balance dates of: Climate-related disclosures will be required as part of:
31 March 31 March 2024 reporting
30 June 30 June 2024 reporting
30 June 31 December 2023 reporting



The climate-related disclosure framework

The Consultation Document outlines that the XRB’s current intention is that the climate-related disclosure framework will comprise at least two standards and one authoritative notice, all of which will have mandatory status:

  • Aotearoa New Zealand Climate Standard 1: Climate-related Disclosures (“NZ CS 1”)
  • Aotearoa New Zealand Climate Standard 2: Adoption of Climate-related Disclosures (to be referred to as “NZ CS 2”)
  • Aotearoa New Zealand Climate-related Disclosures Concepts (to be referred to as “NZ CRDC”) - this authoritative notice will contain climate-related disclosure concepts.

The proposed standard NZ CS 1 will be based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”).  These recommendations are a leading international framework for climate-related disclosures and were endorsed by the New Zealand Government in 2019.

The TCFD’s original 2017 report outlined four thematic areas (Governance, Risk Management, Strategy, and Metrics and Targets) and 11 supporting recommendations, per the figure below (which is taken from the Consultation Document):

The XRB currently intends to structure NZ CS 1 around the four thematic areas in the TCFD’s 2017 report and include each of the 11 recommendations from the report in NZ CS 1. However, the Consultation Document notes that, for the XRB, basing NZ CS 1 on the TCFD’s recommendations has required utilising several additional TCFD resources, such as guidance documents, as well as taking into consideration documents that the TCFD is currently consulting on and other documents that identify investor needs and international best practice. The references that the XRB has utilised are listed in the Consultation Document.

At this stage the XRB intends that NZ CS 1 will be short and succinct and focus on high-level areas for disclosure, rather than being overly prescriptive, thereby enabling it to be sufficiently flexible to allow reporting entities to provide more or less information depending on the extent to which they are impacted by climate change. At this stage, the XRB intends that, if additional detail is needed to apply NZ CS 1, that detail will be provided in additional material, such as guidance documents, rather than in NZ CS 1 itself (largely because such guidance could be more regularly updated than NZ CS 1, which is likely to be important in such a rapidly evolving area). 


Proposed structure of the first standard

As outlined above, the first standard to be developed will be NZ CS 1 and the XRB is proposing that it will be structured in fours section corresponding to the thematic areas in the TCFD’s 2017 report - Governance, Risk Management, Strategy, and Metrics and Targets.

The proposed structure for each of the four sections is per the table below:

Heading: Content:
Disclosure objective(s) Explains the disclosure objective(s) of the section.

The purpose of the disclosure objective is to describe why the information disclosed is useful to primary users of the climate-related disclosures.

The disclosure objective assists entities when making materiality judgements, so that relevant material information is provided to primary users.
Explanatory paragraph   Reminds entities to apply judgement when applying the disclosure requirements and not to obscure relevant information by the inclusion of insignificant detail.
Disclosures These are the information to be disclosed by an entity that is expected to enable the entity to meet the stated disclosure objective(s).

The 11 TCFD recommended disclosures (from the original 2017 report, as outlined above) form the basis for the disclosures in NZ CS 1.

The disclosures should not be used as a checklist; rather entities will need to apply judgement to determine what information is material and whether the information provided satisfies the disclosure objective.

In addition to the information to be disclosed under the four sections, the XRB proposes including the following overarching requirements in NZ CS 1:

  • A description of the overall objective of the standard
  • Requirements on the application of materiality (including a definition of the term “material”)
  • Presentation requirements, including requirements on cross-referencing
  • Requirements in relation to the reporting entity and reporting period
  • Requirements around stating compliance with NZ CS 1
  • Requirements on the provision of comparative information and consistency of reporting (note that, although it is not yet confirmed, at this stage the XRB anticipates that comparative information will not be required in year 1 reporting)
  • A basis for conclusions summarising the XRB’s considerations in developing NZ CS 1.


Proposed sections of the first standard

The Consultation Document also includes two proposed sections of NZ CS 1 – Governance and Risk Management.

Proposed section of NZ CS 1 – Governance

The intent of the Governance section of NZ CS 1 is to provide primary users of climate-related information with an understanding of both the board and management’s role in overseeing, assessing and managing climate-related issues.

The proposed Governance section is as follows:

Disclosure objective(s) 1. The objective of these disclosures is to enable primary users to understand both the role an
    entity’s board plays in overseeing climate-related issues, and the role management plays in
    assessing and managing those issues. Such information supports evaluations by primary
    users of whether climate-related issues receive appropriate board and management
    attention.
Explanatory paragraph  2. An entity must consider the level of detail necessary to satisfy the disclosure objective and
    how much emphasis to place on each of the various requirements. If the disclosures
    provided, applying paragraphs 3–5, are not sufficient to meet the objective in paragraph 1,
    an entity must disclose additional information necessary to meet that objective. However,
    an entity must ensure that relevant information is not obscured by the inclusion of
    insignificant detail.
Disclosures 3. To achieve the disclosure objective in paragraph 1, an entity must disclose the following
     information:
     a. a description of the board’s oversight of climate-related risks and climate-related
         opportunities (see paragraph 4); and
     b. a description of management’s role in assessing and managing climate-related risks
         and climate-related opportunities (see paragraph 5).

4. An entity must include the following information when describing the board’s oversight of
    climate-related issues (see paragraph 3(a)):
      a. processes and frequency by which the board and/or board committees are informed
          about climate-related issues;
      b. how the board sets and monitors progress against goals and targets for addressing
          climate-related issues;
      c. how the board holds management accountable for the implementation of
          climate-related policies, strategies, and targets, including whether and how related
          performance metrics are incorporated into remuneration policies;
      d. whether and how the board accesses expertise on climate-related issues, either from
          its own internal capacity and/or from external sources in order to provide appropriate
          oversight on climate-related issues; and
      e. whether and if so, how, climate-related issues are incorporated into governance
          processes and decision making.

5. An entity must include the following information when describing management’s role in
    assessing and managing climate-related issues (see paragraph 3(b)):
       a. whether the board has assigned climate-related responsibilities to management-level
           positions or management committees; and, if so, whether such management positions
           or committees report to the board or a committee of the board;
       b. a description of the related organisational structure(s) showing where these positions
           and committees lie; and
       c. processes by which management is informed about, makes decisions on, and monitors,
           climate-related issues.


Proposed section of NZ CS 1 – Risk Management

The intent of the Risk Management section of NZ CS 1 is to provide primary users of climate-related information with an understanding of the quality of the processes an entity uses for identifying, assessing and managing climate-related risks, and how these are integrated into an entity’s overall risk management processes.

The proposed Risk Management section is as follows:

Disclosure objective(s) 1. The objective of these disclosures is to enable primary users to understand how an entity’s
    climate-related risks are identified, assessed and managed, and how those processes are
    integrated in existing risk management processes. Together with the Strategy disclosures,
    such information supports evaluations by primary users of the entity’s overall risk profile
    and the quality and robustness of the entity’s risk management activities.
Explanatory paragraph  2. An entity must consider the level of detail necessary to satisfy the disclosure objective and
    how much emphasis to place on each of the various requirements. If the disclosures
    provided, applying paragraphs 3–5, are not sufficient to meet the objective in paragraph 1,
    an entity must disclose additional information necessary to meet that objective. However,
    an entity must ensure that relevant information is not obscured by the inclusion of
    insignificant detail.
Disclosures 3. To achieve the disclosure objective in paragraph 1, an entity must disclose the following
     information for both transition risks and physical risks:
     a. a description of its processes for identifying and assessing climate-related risks (see
         paragraph 4);
     b. a description of its processes for managing climate-related risks (see paragraph 5);
         and
     c. a description of how its processes for identifying, assessing, and managing
         climate-related risks are

4. An entity must include the following information when describing its processes for
    identifying and assessing climate-related risks (see paragraph 3(a)):
      a. the tools and methods used to identify, and to assess the scope, size, and impact of
          the climate-related risk;
      b. the short-, medium-, and long-term time horizons considered, including specifying
          the duration of each of these time horizons;
      c. the value chain stage(s) covered; and
      d. the frequency of assessment.

5. An entity must include the following information when describing its processes for
    managing climate-related risks (see paragraph 3(b)):
      a. how it determines the relative significance of identified climate-related risks;
      b. how it determines the relative significance of climate-related risks in relation to
          other risks; and
      c. how it makes decisions to mitigate, transfer, accept, or control those climate-related
          risks.


In addition to the matters identified above, the Consultation Document also discusses a number of other matters, including climate reporting developments internationally, provides more detail on the overall structure of New Zealand’s proposed climate-related reporting requirements (including when future opportunities for feedback will occur) and maps the TCFD recommendations for Governance and Risk Management to the proposed disclosure requirements in NZ CS 1.

The XRB is seeking feedback on the Consultation Document by 22 November 2021. 

The Consultation Document and information on making a submission to the XRB can be found here.

 

For more information on the above, please contact your local BDO representative.

 


This publication has been carefully prepared, but is general commentary only. This publication is not legal or financial advice and should not be relied upon as such. The information in this publication is subject to change at any time and therefore we give no assurance or warranty that the information is current when read. The publication cannot be relied upon to cover any specific situation and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact the BDO member firms in New Zealand to discuss these matters in the context of your particular circumstances.
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