Jacco Moison – Understanding and using new climate-related disclosures

By Jacco Moison FMA Head of Audit, Financial Reporting & Climate Related Disclosures

What sort of information do you need about a company or a fund before you put money into it? Financial performance, forecasts, plans and strategies for the future? All are important, but over the past few years it’s become increasingly clear that there was something important missing: climate-related information.

We’re into the first period for mandatory Climate-relating disclosures (CRD) reporting, so we’ve published two new guides alongside the XRB:

Climate-related Disclosures Regime: What you need to know

Navigating Climate Statements: A reader’s guide

The end of April 2024 was the final date that climate reporting entities with an accounting period ending on 31 December 2023 were required to prepare and lodge climate statements on the CRD register. View the CRD register. The registrar also publish a list of the Climate-reporting entities (CREs) which have recently filed their climate statements.

What’s starting off as a small group of statements will increase significantly when March and June year end businesses publish their statements due by the end of July and October respectively.

Our new guides provide an overview of the CRD regime including the purpose behind disclosing climate-related Information, key legislative requirements, key considerations and context about the information in climate statements and the roles of the different government agencies.

Who are these guides intended for?

Anyone interested in understanding the basics of the CRD regime, such as primary users of climate statements, existing and potential investors, lenders and other creditors. This could include international institutional investors, local institutional investors, retail investors, or local and international banks. Journalists and other intermediaries who use or communicate climate-related information should also find them useful.

Why is this kind of disclosure important?

One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. For this, entities need to provide accurate, comparable and timely disclosure.

This is why it’s important to disclose climate-related information, since many entities do face climate-related risks and opportunities in the future, while others are already feeling the effects.

Without a common, consistent regulated approach to disclosure, an information gap had emerged, one which drove an ongoing and systemic overvaluation of emissions-intensive activities, and potentially led to poor decision making, mispricing of assets and misallocation of capital.

Along with the physical risks of climate change, this has meant macro-economic financial stability risks and barriers to investment in low-emissions and climate-resilient economic activities that are needed to meet greenhouse gas (GHG) emissions reductions targets.

And it’s why New Zealand became one of the first countries in the world to pass legislation making climate reporting mandatory for certain entities – including our largest banks, insurers, listed issuers, and fund managers. While some have previously published information in this area, now for first time they are legally required to publish climate-related disclosures.

This means that over the next few months New Zealand investors and analysts will have some new information to add into the mix when working out their investment decisions.

Whether entities put money into glossy, fancy documents or take a more low-key approach, the objective remains the same, to:

  • encourage entities to routinely consider the short, medium, and long-term risks and opportunities that climate change presents for the activities of the entity or the entity’s group;  
  • enable entities to show how they are considering those risks and opportunities; and 
  • enable investors and other stakeholders to assess the merits of how entities are considering those risks and opportunities. 

The Climate Standards say that the ultimate aim is to support the allocation of capital towards activities that are consistent with a transition to a low-emissions, climate-resilient future.

So what will these new statements tell me?

The statements will provide information about the entity’s governance, strategy, risk management and metrics/ targets.

This means they will contain information about how climate change is impacting a CRE currently and how it might so in the future and how resilient business to changes in the climate. We’ll also see how what role a board or management is playing in managing climate risks and opportunities.

So do these new requirements mean CREs must take action to mitigate or adapt to the effects of climate change?

The CRD regime requires mandatory disclosure – not mandatory action. The regime does not mandate any actions that must be taken or processes that must be followed, such as improving climate resilience, reducing GHG emissions, pursuing climate-related opportunities, or governing or managing climate-related risks in a certain manner (if at all).

But the information you’ll find disclosed in these climate statements should enable users to make their own assessment about how CREs are considering climate-related risks and opportunities, and then make well-informed decisions based on these assessments.

As more and more disclosures are published, we’re expecting their usefulness and value to build, allowing for even more effective analysis of these entities.

CRD reporting is now an accepted part of financial reporting around the world and as NZ business get better at producing these disclosures, we think investors, domestic and international, should be able to make even better decisions about where to put their money.

Related resources

/Public Release. View in full here.