Saturday, December 2, 2023

FMA sets out new climate reporting regime

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Draft guidelines issued for disclosure framework.
The first reports from the climate disclosure regime are expected in 2024.
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The Financial Markets Authority has laid out its expectations on how organisations should comply with new climate-related reporting requirements.

It has issued three draft guidelines on record-keeping, third-party consultants, and how the Financial Markets Authority (FMA) plans to monitor compliance.

The main intention of the climate disclosure regime, which kicked in on January 1 2023, is to support the allocation of capital towards a low-emissions and climate-resilient society. 

The FMA is responsible for the independent monitoring and enforcement of that climate regime.

With the climate disclosure system still at a very early stage, the FMA said it will change its monitoring and enforcement methods as the system beds in. 

The first reports from the climate disclosure regime are expected in 2024. The External Reporting Board (XRB), which drew up the reporting standards, is aiming to release the first guidelines on independent assurance in July or August.

The climate disclosure regime affects around 200 organisations, including most companies listed on the NZ stock exchange (NZX), large insurers, banks and fund managers.

They are collectively known as climate reporting entities (CREs), and will need to publish an annual climate statement. The CREs will also have to obtain independent assurance on their greenhouse gas emissions, but not on other parts of their climate disclosures.

The FMA’s manager for climate-related disclosure, Jenika Phipps, said the annual climate statements need to be backed by proper records if they are to be relied on.

“We also accept that this reporting regime is new, and the market’s ability to manage data sources and systems for collecting and reporting on climate-related information will improve over time.”

Because of the extra expertise and data needed to compile annual climate reports, many CREs will be looking for outside help, including from climate scientists, lawyers and data services. 

One of the FMA’s draft documents covers how CREs should go about getting the right outside help and advice. Those third parties have to be able to identify and reveal their data sources and explain any limitations or uncertainties around data.

A second draft document outlines the FMA’s plan for monitoring compliance with the climate disclosure over the first three years. 

In the early stages of the regime, the FMA will mainly focus on serious misconduct, such as failing to produce records, or producing records that are incorrect or falsified.

Beyond that, the FMA intends to take a “broadly educative and constructive approach” for the first few years, when it will concentrate on communicating its expectations. As the climate reporting regime becomes established, it will take a more proactive approach.

Any enforcement action will be looked at on a case-by-case basis, which is the FMA’s standard approach to enforcement.

In the first year, the FMA will check if climate reports are transparent, and distinguish between actual performance and aspirational performance.

Once annual reports appear for reporting years starting on or after October 27 2024, the FMA will check whether they come with independent assurance reports.

In the second year of reporting, the FMA will be checking whether organisations are making reasonable efforts to comply with additional disclosure requirements, most importantly their Scope 3 emissions.

These are the emissions in an organisation’s upstream and downstream value chains, but are outside their direct control.

By year three, the FMA aims to settle into what it calls a “steady state” level of monitoring. That will include regularly checking the underlying records used to produce annual climate statements. 

The third document is the most detailed, with proposed guidance on record-keeping. It has been released for consultation until August 4.

The FMA said the climate disclosure regime is a novel one. The market has a low level of maturity for managing the data sources and the systems needed to collect and report on climate issues. 

CREs will need to explain what information isn’t available and they plan to address incomplete data. 

Because climate disclosure records could affect the decisions of investors and others, organisations have to consider if information is material to those investors.  Under the XRB standards, information is “material” if omitting, mis-stating or obscuring it could influence the decisions of investors and others.

Correction: A previous version of this article indicated “The climate disclosure regime affects around 200 organisations, including most companies listed on the NZ stock exchange (NZX), large insurers, banks and fund managers, along with the NZ Super Fund and ACC. This was incorrect and has subsequently been removed.

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