Reporting climate impacts

The Productivity Commission’s 2018 Low Emissions Economy report noted that climate-related financial disclosures can be a powerful mechanism to focus reporting entities on the impacts of climate change on their own activities, and that disclosure can enable investors to make decisions across investment opportunities that accurately reflect the climate risk of those choices.

Some organisations in New Zealand are already expected to disclose climate-related financial information and others are reporting voluntarily in a rapidly evolving space. Following early adopters overseas, the government has signalled that it intends to implement a mandatory disclosure regime.

The Ministry for the Environment and the Ministry of Business, Innovation and Employment consulted in December 2019 on introducing a mandatory, principles-based climate-related financial disclosure regime (on a “comply or explain” basis) for listed issuers, banks, general insurers, asset owners and asset managers.

It has been proposed that the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework could be used as a default framework. Other suitable frameworks such as Integrated Reporting and the Global Reporting Initiative could also be used.

The TCFD is mainly concerned with the impacts of climate change on companies rather than impacts of the companies on the environment.

In 2015, the Financial Stability Board established the Task Force on Climate-related Financial Disclosures and asked it to develop a set of voluntary climate-related financial disclosures that companies could use when providing information to stakeholders.

The TCFD identified two types of climate-related risks:

• Transition risks (policy risk, litigation risk, technology risk, market risk and reputational risk).
• Physical risks (both event driven (eg extreme weather) and driven by long-term shifts in climate patterns).

The TCFD recommends 11 areas of disclosure within four thematic areas:

• Governance – disclosing the organisation’s governance and management around climate-related risks and opportunities.
• Strategy – disclosing the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material.
• Risk management – disclosing how the organisation identifies, assesses, and manages climate-related risks.
• Metrics and targets – disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

Our view

In our submission on the proposed new regime, we agreed that the TCFD framework would be appropriate for climate-related financial disclosures in New Zealand. We note that the proposed “comply or explain” approach to implementing the TCFD framework can support good governance and provides flexibility and proportionality for organisations to report in a way that is appropriate and meaningful relevant
to their circumstances. We also:

• raised questions about how the proposed mandatory requirements will fit with the principles-based nature of the TCFD framework, and how it is intended to be implemented, monitored and enforced
• agreed that disclosure should apply to listed issuers, banks, general insurers, asset owners and asset managers but we consider that there should be exemptions for some smaller organisations below a certain size (eg assets/revenue) given the existing disclosure burden (particularly for
  listed companies) and costs associated
  with complying
• agreed that mandatory assurance obligations should not be imposed at this stage
• encouraged government guidance, education and support to help organisations report effectively.

Corporate reporting is continuing to change and there are many different reporting frameworks in place globally. It is important that any mandatory
climate-related financial disclosure regime
in New Zealand provides a foundation framework that:

• is flexible enough to allow organisations to evolve their reporting as needs and demands in this area change, including if other entities are included in the regime at a later date
• is cohesive for organisations intent on
  developing more holistic reporting and aligns with other common reporting
  frameworks (eg integrated reporting)
• aligns (and can be integrated) with any other reporting obligations that organisations may have to the government (for example under the Climate Change Response (Zero Carbon) Amendment Act 2019) and the frameworks and requirements of other agencies such as the External Reporting Board. This will also be important if mandatory assurance
  is introduced at a later date
• can be incorporated into companies’ annual reports in a cohesive way that avoids unnecessary repetition
• ensures there is alignment with the roles and responsibilities of existing reporting and regulatory bodies (such as the Financial Markets Authority).

This article is featured in Boardroom issue Feburary March 2020