FMA releases first monitoring report on climate-related disclosures

Materiality

NZ CS 3 provides that information required by the NZ CS must be disclosed if it is material.^[1]

• CREs need to strike the right balance between disclosing too little and too much information (i.e. omitting versus obscuring material information).
• The FMA identified some cases where CREs may have obscured material information (e.g. providing long lists of generic information, or repeating information without a clear rationale).
• The FMA identified some climate statements that did not disclose any information required by some paragraphs of the NZ CS, for example because the CRE considered them to be immaterial or could not comply. In these cases, the CRE must undertake a robust process to determine materiality and carefully record in their underlying CRD records any assessments about materiality and/or inability to comply.

Fair presentation

NZ CS 3 contains an overarching principle of fair presentation, which requires CREs to apply a range of information and presentation principles.

The FMA has identified the following issues from climate statements that it considers may have undermined the fair presentation principle:

• Over-emphasising positive news or impacts (e.g. in relation to the placement or repetition of positive information).
• Disclosures which may not be understandable or complete (e.g. omitting legends or axes to explain charts and not defining terminology).
• Unclear disclosures or disclosures lacking context (e.g. disclosing a process without describing whether it was followed in the reporting period, and lack of contextual detail around how realistic or ambitious targets are).
• Omissions of helpful information, including in some cases not disclosing any information regarding certain disclosure requirements.

Using vague terms and descriptions where referring to services from, or reliance on, third party opinions (e.g. using assurance-related terminology to describe non-assurance services). 

Methods, assumptions, and data and estimation uncertainty

NZ CS 3 requires disclosure of the methods and assumptions used in the preparation of climate-related disclosures, and material sources and nature of data and estimation uncertainty.

NZ CS 3 also contains specific requirements for methods and assumptions for scenario analysis and greenhouse gas emissions disclosures.

• In some cases, the FMA considered that these disclosures were either limited or absent.
• In addition, in some cases it was not apparent to the FMA how the information had been produced (i.e. the methods and assumptions) and/or the CRE did not identify whether data and estimation uncertainty was involved (e.g. in relation to the "vulnerability" metrics required by NZ CS 1, paras 22(c)-(e)). 

How processes are undertaken

NZ CS 1 requires certain Governance and Risk Management disclosures to include information about processes or how they are undertaken.

Some disclosures were missing the "how" part of the process (e.g. disclosing that the governance body monitored progress against targets but not describing how this monitoring occurred).

Frequency of processes – Governance and Risk Management

NZ CS 1 requires certain Governance and Risk Management disclosures to include information about the frequency by which processes occur.

Some climate statements used non-prescriptive language such as "periodically" or "regularly".  The FMA encourages CREs to reflect on the use of this language and suggests that more specific language such as "monthly" or "six times during the reporting period" may better support understanding of the frequency of relevant processes.

Connections between climate and other activities

NZ CS 1 requires certain Governance, Strategy and Risk Management disclosures to explain how climate-related processes or matters are connected to other organisational activities.

In some cases, CREs disclosed that a process or climate-related matter was connected to other organisational activities without explaining the nature and extent of the connection (e.g. disclosing that the governance body considers climate-related risks and opportunities when developing and overseeing implementation of the CRE's strategy, without providing further detail about what is involved in that consideration).

"Current" climate-related impacts

NZ CS 1, paras 11(a) and 12 require CREs to disclose their current climate-related impacts.

The FMA identified instances where:

• climate-related events (e.g. Cyclone Gabrielle) were referred to but the CRE did not explain how these events affected the CRE; or
• the description of current impacts was in fact a description of short-term risks.

Climate-related risks and opportunities

NZ CS 1, para 11(c) requires CREs to disclose the climate-related risks and opportunities identified over the short, medium and long-term.

The FMA identified instances of disclosures that may have been too generic. This included:

• Long-lists of industry wide risks without clearly explaining how these were relevant to the CRE.
• Broad descriptions of climate-related risks (e.g. flooding events) without providing contextual information (e.g. severity, frequency, exposure and vulnerability).
• Not identifying the relevant time horizons over which the risks might materialise.

GHG emissions targets

NZ CS 1, para 23(e) requires CREs to describe specific information in relation to any greenhouse gas emissions targets.

• The FMA identified instances where details were not included relating to (for example) the scope of emissions included, the extent to which the target relies on offsets or information about whether offsets were verified or certified.
• The FMA identified statements such as "grounded in science", "science based" or "alignment" with third-party methodologies, which may not have provided sufficient context for primary users to understand the basis for the CRE's view.

Scenario analysis

NZ CS 1, para 13 requires CREs to disclose the scenario analysis they have undertaken (further specific requirements are set out in NZ CS 3).

The FMA noted a number of areas for improvement in scenario analysis disclosures including:

• Ensuring that CREs include information about both how they constructed their scenarios and the subsequent process to analyse them to help identify climate-related risks and opportunities, and assess strategic resilience.
• Disclosing scenario narratives that explain how the future develops in each scenario by detailing a series of events unfolding over time with a cause-and-effect relationship.
• Considering whether the scenarios used are sufficiently plausible and challenging.
• Ensuring that CREs clearly explain any scenario archetypes or sector analysis used and whether additions, modifications or adaptations were made to make them more relevant and specific to the CRE's business model and strategy.

Location of disclosures

NZ CS 3, paras 14-15 permit CRDs to be provided within another document, although a table must be included identifying the location of the disclosures required by the NZ CS.

• Where disclosures are fully integrated into another document, the table identifying the location of the disclosures should include disclosures required by all of the NZ CS (not just NZ CS 1).
• Where disclosures are in a discrete section of another document (e.g. a standalone section of an annual report), CREs must include a table identifying the location of all climate-related information (including any climate-related information outside of the discrete section). 

Cross-referencing

NZ CS 3, paras 16-19 permit disclosures to be included by cross-reference, however information included by cross-reference becomes part of the climate statements.

• Where links to other documents are included in climate statements, CREs should be clear about what primary users can understand from that information and whether it is material in relation to the disclosures required by the NZ CS (i.e. including disclosures by cross-reference) or whether it is simply additional non-material information.
• Information included in the CRDs by cross-reference needs to be lodged with the Registrar at the same time as the CRDs.

Adoption provisions

NZ CS 2 sets out a number of adoption provisions and requires CREs to describe the adoption provisions used in conjunction with their statement of compliance.

Reporting basis, dating and signing

Part 7A sets out the legislative requirements relating to which entity or entities need to report, dating and signing of the CRDs, and inclusion of certain information in annual reports

• If disclosures are in a discrete section of an integrated report, directors should separately sign and date that section.
• If disclosures are dispersed throughout an integrated report, include language to the effect that where the directors have dated and signed the report, they do so for the purposes of, and to satisfy the requirements of, Part 7A of the FMC Act.
• Some CREs' annual reports did not include the required information about their status as a CRE or their climate statements in their annual report.

Consistency with other disclosures

NZ CS 3 includes the "coherence" principle, which means presenting disclosures in a way that explains the context and relationships with other disclosures of the entity.

Assurance

Part 7A of the FMCA sets out assurance requirements for financial periods ending on or after 1 October 2024 for greenhouse gas emissions, but CREs may also voluntarily have disclosures assured.

• If CREs refer to assurance obtained voluntarily over any disclosures, they should make the associated assurance practitioner's report publicly available and lodge it on the CRD Register.
• Assurance engagements for financial periods ending on or after 27 October 2024 need to comply with SAE 1 Assurance Engagements over GHG Emissions Disclosures.

Reporting periods beginning after 1 January 2024

While the FMA will continue its educative and constructive regulatory approach, it will focus on additional areas including:

• Compliance with assurance requirements.
• Whether reasonable efforts have been made to disclose current financial impacts and transition plan aspects of strategy.
• Whether any commitments disclosed in the first year of reporting have been followed through, and if not, that this is disclosed and explained.
• Whether disclosures are broadly consistent and coherent with those in the first year and if not, any material differences are disclosed and explained.
• Continuing to monitor financial statements for consistency with other disclosures such as the annual report and climate statements.