New Zealand Proposes First-of-its-Kind Mandatory Climate-Related Financial Disclosure Regime
On April 13, 2021, the Government of New Zealand announced that it has become the first country in the world to introduce legislation requiring certain financial sector participants to disclose the impacts of climate change on their businesses. The legislation will also require those in the financial sector to explain how they will manage climate-related risks and opportunities. This climate-related disclosure regime is included in the Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill (the “Bill”), which will receive its first reading this week. If passed in its current form, the Bill will require climate disclosure for financial years commencing in 2022, to be published in 2023.
The Government of New Zealand has stated that the climate-related disclosure regime has three goals, each in furtherance of the country’s target of zero carbon emissions by 2050:
- to ensure that the effects of climate change are routinely considered in business, investment, lending and insurance underwriting decisions;
- to help climate reporting entities better demonstrate responsibility and foresight in their consideration of climate issues; and
- to lead to more efficient allocation of capital, and help smooth the transition to a more sustainable, low emissions economy.
To achieve these goals, the Bill is comprised of four main components that:
- introduce mandatory climate-related disclosures for most listed public issuers, as well as large registered banks, licensed insurers and registered managers of investment schemes;
- require the disclosures to be made in accordance with climate standards that will be issued by the country’s External Reporting Board (“XRB”);
- give New Zealand’s Financial Markets Authority responsibility for the independent monitoring and enforcement of the new reporting standards; and
- give the XRB the authority to issue guidance material on environmental, social and governance (“ESG”) reporting and other wider aspects of non-financial reporting.
The Bill is the latest development in a global movement to increase ESG disclosure obligations in the financial sector. Earlier this year, the European Union’s Sustainable Finance Disclosure Regulations came into force. Our review of those disclosures can be found here on the McCarthy Tétrault Canadian Securities Regulatory Monitor.
Who is subject to the climate-related disclosure regime?
The climate-related disclosure regime is expected to apply to approximately 200 financial sector entities in New Zealand. These entities include:
- all registered banks, credit unions, and building societies with total assets of more than NZ$1 billion;
- all registered investment managers with greater than NZ$1 billion in total assets under management;
- all licensed insurers with greater than NZ$1 billion in total assets under management or annual premium income greater than NZ$250 million; and
- all equity and debt issuers listed on New Zealand’s Exchange, NZX.
Notably, the Bill would require registered investment managers to make disclosures on a per-fund basis, ensuring that investors will understand the impact of climate change on their particular investment. Further, overseas incorporated organizations will need to make the mandatory disclosures if their business operations in New Zealand meet the thresholds set out above. The Government of New Zealand has stated that the thresholds will be subject to change reflecting movements in the country’s consumer price index.
What must be included in a firm’s climate-related disclosures?
It remains to be determined what precisely will be required by the climate-related disclosure regime. The XRB, one of New Zealand’s independent Crown entities, will be responsible for issuing the reporting standards for the disclosure regime. The Government of New Zealand did, however, indicate that the reporting standards would be developed in line with the recommendations of the Task Force on Climate-related Financial Disclosures, which are considered an international best practice for climate-related financial reporting.
The bottom line
New Zealand’s proposed climate-related disclosure regime continues the global march towards comprehensive ESG reporting requirements. Similar to the EU Sustainable Finance Disclosure Regulations, the Bill specifically targets the financial industry, which may be a recognition by regulators of the essential role being played by allocation of capital in the fight against climate change – as well as the opportunities it creates. As investors continue to demand transparency and standardization of reporting, both private and public sectors are likely to respond.
As with the recent developments in the EU, Canadian firms would be wise to monitor how market and regulatory consensus emerges around reporting required by these disclosure regimes. Canadian firms should begin to proactively consider what such disclosures would entail in the event that similar reporting obligations were imposed in Canada. On that front, it is likely not a matter of “if”, but “when”.
We’re here to help
McCarthy Tétrault has a multidisciplinary ESG and Sustainability team that is equipped to provide clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we are well-suited to provide contextualized guidance. Please contact Sonia Struthers, Laure Fouin, or Will Horne to learn more – we would be happy to assist you.