Assurance provides trust and confidence

The IoD made a submission earlier this month on the proposal by the Ministry of Business Innovation and Employment (MBIE) and Ministry for the Environment (MfE) to expand the scope of climate statement assurance and implement an occupational licensing regime for climate-related disclosure (CRD) assurance practitioners.

Given the size, diversity and spread of our membership, many of our directors and the organisations they govern will be directly affected by the introduction of climate-related disclosures and many more will be impacted in the future.

Formed in response to the Global Financial Crisis, the Financial Stability Board (FSB) may be a little-known international body that monitors and makes recommendations about the global financial system. However, their Task Force on Climate-related Disclosures (TCFD) has certainly made an impact. But what does this mean for New Zealand directors?

Speaking at the United Nations Climate Change Conference of the Parties in 2015 (COP21), FSB Chair Mark Carney said, “The FSB is asking the Task Force on Climate-related Financial Disclosures to make recommendations for consistent company disclosures that will help financial market participants understand their climate-related risks. Access to high quality financial information will allow market participants and policymakers to understand and better manage those risks, which are likely to grow with time.”

The TCFD produced recommendations in 2017 under four key themes: governance, strategy, risk management, and metrics and targets. What began as a voluntary set of recommendations has already become part of the regulatory framework in many jurisdictions including the EU, Singapore, Canada, Japan and South Africa. In October 2021 with the passage of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, New Zealand became the first country to pass a law ensuring financial organisations disclose and ultimately act on climate-related risks and opportunities.

Some 200 large publicly-listed companies, insurers, banks, non-bank deposit takers and investment managers covered by the Financial Markets Conducts Act are required to start making climate-related disclosures from financial years commencing on or after 1 January 2023. The UK followed suit three months later enshrining climate-related financial disclosures into legislation with mandatory reporting as of 2025, including certain large private entities as well.

Reporting standards for the disclosure statements have been prepared by the XRB using the four key themes produced by the TCFD. Under the current legislation, only the greenhouse gas emissions disclosures need to have independent assurance but it was signalled early on that that was an initial step. With a post-implementation review scheduled to begin December 2025, the IoD considered that expansion of the assurance regime to cover the full statement, while not without merit, should take into account the learnings from this review along with considerations of extending the timeframe provided for preparation and assurance of the disclosure statements (currently four months).

The other suggested enhancement to the new reporting standards is the development of a licensing regime for CRD assurance practitioners. As it stands, there are no licensing arrangements for CRD assurance practitioners in the CRD Act, and neither are there any processes for dealing with complaints or monitoring their work. For submitters on the Amendment Bill, third-party verification and assurance was one of their key concerns.

Assurance standards are by their very nature highly technical and a high level of expertise will be needed to ensure that the assurance is conducted to the appropriate standards. Like financial reporting, external assurance plays a key role in contributing to reporting reliability, consistency, comparability, trust and confidence. The evolution of the International Standards on Auditing has been an iterative process since the 1970s; similarly, it will take time to build assurance capability and competency.

Independent, appropriate and professional assurance over the full statements will provide greater trust and confidence in the climate statements for directors, as well as for those wishing to access them, and reduce the risk of greenwashing.

Business is inherently risky so risk management is a key part of any business. Awareness, understanding and preparedness in the face of risk is critical for mitigating it as well as building long-term resilience. We need to fully understand climate risk to build mid to long-term strategy and resilience. Risk management is not simply compliance.  

Read our submission