On 3 December 2024, the Financial Markets Authority (FMA) released its monitoring report, Climate-related Disclosures: Insights from our reviews (Report), setting out its key insights following the completion of the first year of climate-reporting entities (CREs) producing climate statements. Less than a fortnight later, a package of possible reforms to change thresholds and director liability settings has been released, adding the prospect of yet more change to the fledgling regime.

In this Financial Law Insight, we take a look at the FMA’s key findings in the Report and the implications of those findings and of the possible reforms for CREs who are currently in the process of preparing climate statements for the second year of reporting under the climate-related disclosure (CRD) regime.

Purpose and scope of the Report

The Report was produced for the purpose of providing useful feedback to CREs and their directors going into the second year of reporting. The FMA intends for CREs to take the learnings from the Report and apply them, together with the feedback provided by the FMA in individual letters, as a benchmark for future years.

In preparing the Report, the FMA’s stated focus was to:

• ensure compliance with the requirements in the External Reporting Board’s (XRB’s) Aotearoa New Zealand Climate Standards (NZCSs) 1, 2 and 3
• ensure compliance with the requirements contained in Part 7A of the Financial Markets Conduct Act 2013, and
• determine whether the disclosures made by CREs were materially coherent and consistent with any other documents or statements published by the CREs.

The FMA did not request or assess any underlying CRD records as part of its review. The insights provided by the FMA were therefore limited to the quality of the disclosures made, without checking the substantiation of those disclosures. That was a pragmatic approach, but it would have been interesting to understand the extent of any issues with CREs’ underlying records. A treat being saved for future monitoring reports, perhaps.

The Report covered 70 climate statements prepared by CREs for the periods ended between 31 December 2023 and 31 March 2024. That included a review of the climate statements provided by 21 large managed investment scheme managers who lodged climate statements in relation to funds in 106 registered schemes with reporting periods ended 31 March 2024.

FMA’s general outlook

The headline view from the Report? The FMA was pleased overall with the efforts made by CREs in producing their first set of climate statements. The FMA acknowledged the amount of time and resources spent in the development of climate statements for this first year of reporting.

Despite this generally positive reception to the efforts of CREs, the FMA identified a shopping list of common issues within the Report which the FMA expects to be picked up in future reporting periods. So, something of an A for effort, but a B or a B- for the outputs: ‘could do better’.

Areas of improvement for CREs

The Report includes 10 significant areas of improvement for CREs to consider, as well as some additional technical aspects. Most of the key areas summarised below will have come as no surprise for those involved in the challenges presented in bringing the XRB’s requirements to life.

Materiality

CREs should consider both the characteristics of primary users and their own unique facts and circumstances when assessing whether information is sufficiently materiality to be included in their climate statements. CREs were urged to strike the right balance, whatever that might be, but with clear criticism of some CREs over-disclosing and obscuring actual material information.

Fair presentation

CREs should apply the information and presentation principles of the CRD regime when considering how to best present information in a useful manner for primary users. This involves a holistic view of the principles together with applying a materiality lens.

Disclose material information regarding methods and assumptions, and data and estimation uncertainty

The FMA wishes to see all material information disclosed about the methods and assumptions, and data and estimation uncertainty, underlying CRDs. This includes the specific requirements for scenario analysis and greenhouse gas (GHG) emissions disclosures.

Describe or explain processes

CREs need to fully describe or explain how climate-related processes are undertaken, specifically in relation to the Governance and Risk Management thematic areas.

Explain the connection between climate-related matters and other activities

CREs need to do a better job at explaining connections between climate-related matters and other organisational activities where such connections exist, rather than simply disclosing the existence of a connection.

Understand the meaning of ‘current climate-related impact'

CREs must do better at explaining how climate change is currently impacting the CRE. In this reporting period, some CREs simply identified climate-related events which had occurred during the reporting period.

Disclose material information required to explain climate-related risks and opportunities

CREs must disclose all material information required to explain the climate-related risks and opportunities they have identified in their climate statement.

GHG emissions targets

CREs should provide further detail about any GHG emissions targets to enable primary users to understand the underlying elements required by the climate standards (e.g., if a CRE has a net zero target).

Scenario analysis

The FMA identified four main improvements that can be made in relation to the inclusion of appropriate scenario analysis:

• CREs must ensure their disclosures provide all material information required to describe both how their scenario analysis was constructed and how it was analysed
• climate statements should include all material information to explain how the future develops in each scenario
• scenarios should be sufficiently distinct from each other and challenging to test the resilience of the CRE’s business model and strategy to a range of plausible future pathways, and
• CREs should disclose all material information required to explain the extent to which scenario archetypes have been used to inform the CRE’s entity-level scenarios.

Consistency and coherence

CREs should ensure that all material climate-related information published by CREs in their other documents is also disclosed in their climate statements and as much as possible, information should be presented in a consistent and coherent manner across publications.

Our view of the identified areas of improvement

The insights provided in the Report are not groundbreaking. Many CREs will view the areas of improvement highlighted not as reflecting wholesale deficiencies in their current disclosures, but rather identifying touch ups at the edges of their disclosures, to be considered for their second year climate statements.

The one jarring note was in relation to the criticism of CREs not being more discerning in weeding out what not to disclose, but then going on to identify a raft of aspects where the FMA felt more disclosure was required. Perhaps the omissions identified were simply examples of CREs making conscious assessments as to what is actually useful to disclose for primary users?

Climate statements are, of necessity, highly technical pieces of work and are never going to be an easy read. Until the regime has become more settled – and potentially, director liability concerns addressed through future reforms – the right-sizing of disclosures is going to remain a challenge, with scope for differing points of view. Taking a risk-averse approach, many CREs will continue to take the view that they are better to disclose information that the FMA may not regard as material, than be accused of omitting something relevant. The extent of the additional information the Report suggests needs to be included will be pointed to as support for that approach.

The relatively high-level areas of improvement noted by the FMA reflect the amount of work CREs have put into providing compliant climate statements. As a collective there has not been a fundamental gap observed between the regulator’s expectations and industry practice. Although some individual CREs may have more work to do than others, the overall scorecard seems to read quite well as the CRD regime moves toward full implementation, and the relief afforded by the NZ CS 2 adoption provisions begins to fall away.

What was particularly pleasing about the Report was the FMA emphasising its ongoing commitment to taking an educative and constructive approach, for the time being at least. That doesn’t mean CREs can completely relax, but it takes some of the heat out of the challenges faced and encourages the collaborative approach that has been a welcome feature of the regulator’s approach to date.

Assurance

In addition to the areas of improvement noted above, the Report includes a dedicated section on assurance.

While there was no mandatory requirement for CREs to obtain assurance over their climate statements for the first reporting period, 39% of the climate statements reviewed by the FMA included voluntary assurance over their scope 1 and 2 GHG emissions inventory (which excludes any supporting GHG emissions disclosures in climate statements).

The FMA also identified 20 CREs which stated they had obtained voluntary assurance over either all or part of their scope 3 GHG emissions.

The existing relief provided under the adoption provisions relating to obtaining assurance over GHG emissions is set to fall away for the second reporting period (save for scope 3 GHG emissions which are now covered off under the new adoption provision 8, with assurance becoming mandatory for reporting periods ending on or after 31 December 2025). For reporting periods ending on or after 27 October 2024, CREs will be required to obtain, at a minimum, a limited assurance engagement over the following information:

• their GHG emissions in metric tonnes
• the additional information relating to GHG emissions under paragraph 24 of NZ CS 1, and
• GHG emissions methods, assumptions and estimation uncertainty.

The Report acknowledges the high cost and resources associated with obtaining assurance over GHG emissions (especially scope 3 GHG emissions). This acknowledgement, and the higher-than-expected costs observed with producing compliant disclosures, makes the XRB’s recent decision to limit the optional relief from the requirement to obtain assurance over scope 3 GHG emissions for just one additional year even more curious.

The issue with this approach is reflected in the voluntary assurance metrics. Of the limited pool of CREs who obtained voluntary assurance over their scope 1 and 2 GHG emissions inventory, only 51% were able to obtain a reasonable level of assurance over their data. Scope 3 GHG emissions disclosures require data from both up and down stream entities and will likely impose a significantly more difficult process of obtaining and assuring data for CREs and assurance practitioners.

The requirement for CREs to obtain ‘limited assurance’ over their GHG emissions for next year creates a situation where assurance reports may be accompanied by so many caveats that the assurance provides no practical benefit for primary users. Hardly ‘useful’. And the FMA is now pushing for assurance reports that are obtained to be made publicly available and lodged on the CRD register. This is one area we do not think the regime has got the right-sizing of requirements and regulatory expectations quite right.

Individual feedback

The Report briefly discusses the individual feedback provided to some CREs as part of the FMA’s review process. While the Report provides general comments and insights, the individual feedback letters provide guidance where the FMA’s comments were:

• required to be communicated earlier than the release of the Report to achieve the FMA’s desired outcome
• material or significant and not common across other reviews
• related to a legislative requirement having not been met or interpreted incorrectly, or
• specific to the individual CRE.

CREs who have received an individual feedback letter from the FMA are likely to find those letters more ‘useful’ than the more generic feedback in the Report. The areas identified in these letters will no doubt be a focus for the FMA when reviewing year 2 climate statements.

FMA’s future focus

With the first year of reporting now completed, CREs will be looking to the production of their second climate statements. Importantly, the Report sets out the FMA’s future monitoring plan for the CRD regime over the near future.

Reporting periods beginning on or after 1 January 2023

The FMA intends to continue reviewing as many climate statements as possible for those reporting periods ending 31 March – 30 September 2024. In its Report, the FMA signalled that where it deems it appropriate, it will provide CREs with individualised feedback or provide direction to the relevant insights contained within the Report.

Reporting periods beginning on or after 1 January 2024

The Report states that the FMA will continue to take the educative and constructive approach to monitoring that underpinned its first year review. However as reporting processes and CRD programmes mature, the expectations for CREs are set to increase. The FMA now expects CREs will make improvements to their disclosures covering off the areas noted in both the Report and the individual feedback letters received.

For the upcoming reporting period, the Report signposts a number of additional focus areas for CREs to consider. These include assessing whether:

• CREs have obtained assurance over their GHG emissions disclosures
• CREs have made reasonable efforts to comply with the requirement to disclose current financial impacts and transition plan aspects of their strategy
• any commitments or stated actions disclosed in a CRE’s first climate statement have been completed, and if not, that this is disclosed and explained, and
• disclosures are broadly consistent and coherent with those in the first year and, if not, any material differences are disclosed and explained.

The FMA’s monitoring of climate statements for reporting periods beginning on or after 1 January 2024 will begin in May 2025, with initial feedback to be given directly to CREs with future monitoring reports only to be published if the FMA deems it appropriate.

Class exemption

The Report also reiterates previous statements made by the FMA that it is currently considering class exemption relief for one year for CREs who disclose all or part of their scope 3 GHG emissions but elect not to have them assured for reporting periods ended before 31 December 2025 (i.e. those climate statements that rely on Adoption Provision 8 but not Adoption Provision 4 contained in NZ CS 2). The FMA is currently undertaking targeted consultation on the proposed exemption.

A class exemption being given in this regard to provide certainty would be welcomed.

Upcoming reforms – MBIE discussion document

On 13 December 2024, the Ministry of Business, Innovation and Employment (MBIE) released a discussion document titled ‘Adjustments to the climate-related disclosures regime’. This document voices the concerns expressed by many – that the cost of reporting under the regime is excessive and disproportionate and the regime is encouraging a focus on compliance, rather than positive actions to prepare businesses for the impacts of climate change.

If anything, the Report adds further fuel to the fire of those concerns. Despite recognising the massive effort CREs have invested in their inaugural climate statements, the underpinning message from the Report is that they need to put even more effort into meeting the FMA’s expectations on the details. Whether the effort required is proportionate to the perceived value for the hard-to-define ‘primary users’ of climate statements depends on your perspective. But taking on board the feedback in the Report and the individual letters received will inevitably add to the compliance burden faced by CREs.

Interestingly, the focus of MBIE’s discussion document is not on reforms that will reduce the compliance burden for those caught within the regime’s net. Instead, the key options being considered are to increase the thresholds – so widening the gaps in the net to allow more entities to slip through – and options for reducing the liability exposure for CRE directors.

Those entities on the cusp – thinking here of fund managers with between $1 billion and $5 billion in retail funds under management, in particular, and those approaching the $1 billion threshold – are now in something of a no-man’s land. Do you put resources into responding to the Report and upgrading systems to enhance climate-related disclosures, or minimise additional investment in the expectation that you will escape the net? Irrespective of your views on the merits of changing threshold levels, any extended period of uncertainty is unhelpful. Even if the legislative change required takes a couple of years to work its way through the system, an early call on the headline decision is essential once the consultation period has closed in February.

What we do welcome is the revisiting of the settings for director liability under the regime. The penalties faced by directors, and the circumstances in which liability might arise, have long been a concern. While being a director of a CRE should not be an occupation for the faint-hearted, given the highly technical nature of the requirements we see the current liability settings as disproportionate, and promoting an unduly risk-averse approach which does not necessarily aid the quality of decision-making.   

Conclusion

The Report is welcomed. While it may have benefitted from some more concrete examples of what good looks like (and what not good looks like), the overall thrust of the way the findings have been reported should be seen as highly encouraging for CREs. There is still a lot of grey in how best to address some of the requirements, but the Report provides some useful touchstones for CREs to latch onto to help guide them through the next round of reporting. The fact that the only proposals on the table for future reform involve options to reduce costs and liabilities faced by market participants sends a clear signal as to where things are heading. Combined with the FMA’s commitment to being educative and constructive, there is cause for CREs to head into the Christmas break with some optimism.

Start a conversation

If you would like to discuss the FMA’s report, or would like assistance with responding to MBIE’s discussion document or any aspect of the CRD regime, please contact David Ireland on +64 4 498 0840, Catriona Grover on +64 4 498 0816, Tom McLaughlin on +64 9 892 5215, or Mark Schroder on +64 9 375 1120 or email the team at bankingandfinancialmarkets.nz@dentons.com