NZ climate disclosure legislation to affect Australian entities

The New Zealand government has introduced world-first legislation that will require listed companies, banks, insurers and fund managers to make public climate risk-related disclosures.

The legislation will affect not just New Zealand-domiciled entities, but also companies that are dually listed on the ASX and NZX, as well as regional and global fund managers who have operations in NZ that meet those thresholds. This raises the question as to whether an entity that operates in both Australia and New Zealand will make stronger, legally required climate-related disclosures in New Zealand than in Australia.

The Financial Sector (Climate-related Disclosure and Other Matters) Amendment Bill will require around 200 entities in New Zealand to produce climate-related disclosures. This includes all registered banks, credit unions, and building societies with total assets of more than NZ$1 billion, all managers of registered investment schemes 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 the NZX.

"It is important that every part of New Zealand's economy is helping us cut emissions and transition to a low carbon future," said Commerce and Consumer Affairs Minister David Clark in announcing the bill. "This legislation ensures that financial organisations disclose and ultimately take action against climate-related risks and opportunities.

"Becoming the first country in the world to introduce a law like this means we have an opportunity to show real leadership and pave the way for other countries to make climate-related disclosures mandatory."

The legislation would lead to reporting against standards that would be issued by New Zealand's External Reporting Board (XRB). These standards would be developed in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

"Large Australian investors with trans-Tasman operations will also be required to report on the risk they face relating to climate change - those over the $1 billion in assets under management threshold, the same as that for New Zealand financial entities," said Nicolette Boele, executive manager, policy and standards at the Responsible Investment Association Australasia. "RIAA understands that the proposed laws are currently being read in parliament and the details of how they are implemented will rest with the Ministry for the Environment (MfE) and the Ministry for Business, Innovation and Employment (MBIE) with possible input from XRB. With proposed laws likely being enacted for 2022, the first reporting period will be 2023."

By making the finance sector lead the way on mandating climate reporting, the New Zealand government is leveraging the way the finance sector shapes the total economy, noted Jane Rennie, general manager external affairs, CPA Australia.

"Although the direct application of the law is limited to around 200 organisations initially, it will have knock-on effects across the whole economy," Rennie said. "As providers of capital, the finance sector are intermediaries to other sectors. New Zealand lenders will be more likely to seek assurances that corporate borrowers understand and manage their climate risk exposure before financing major projects."

Australia does not have mandatory laws covering climate-related disclosures. The ASX Corporate Governance Council's Principles and Recommendations, fourth edition, notes that the Council "would encourage entities to consider whether they have a material exposure to climate change risk by reference to the recommendations of the Financial Stability Board's TCFD and, if they do, to consider making the disclosures recommended by the TCFD."

"Companies that have their primary listing on another exchange and an exempt listing on ASX must adhere to the listing rules of their home exchange and are exempt from complying with most of ASX's listing rules (e.g., companies with a primary listing on NZX would be reporting in accordance with the NZ requirements)," said an ASX spokesman. "Companies listed in NZ that have a standard listing on ASX will have to report in accordance with both ASX's reporting requirements, as well as those of NZ.

"Generally, dual listed companies will publish announcements across both exchanges in the interests of transparency and as a requirement of the listing rules."

Australian regulators have weighed in on the need for climate change disclosure. In February 2020, APRA released a letter to all APRA-regulated entities entitled "Understanding and managing the financial risks of climate change", in which APRA outlined that they would develop on a climate change financial risk prudential practice guide (PPG) to assist entities in complying with existing prudential requirements.

ASIC also recommends the TCFD framework as a means for companies to disclose material climate risks, including in guidance on prospectuses and operating and financial reviews in annual reports.

"In Australia, the big banks and insurers have got much better at identifying and managing climate-related vulnerabilities," Rennie from CPA Australia noted. "The missing piece of the puzzle here is the regulatory stick which the New Zealand law creates. While there's no impediment to implementing a similar law in Australia, what we need first is a clearly articulated, long-term climate change strategy from government."

With New Zealand moving ahead on passing this legislation requiring climate related disclosures, companies that are listed on both the ASX and NZX will adjust accordingly.A2 Milk Company, one company that is listed on both the ASX and NZX, said it would disclose to the standard of the NZ law and disclose that information to both markets.

Climate change and climate risk has become an increasingly important topic of engagement for investors in A2 Milk, with a spokesman for the A2 Milk Company noting that asset owners are instructing their fund managers to engage with companies, and that there has been a strong uptick in asset managers engaging with investor relations on the topic.

A2 Milk Company has begun using the TCFD guidelines for its climate risk measurement and disclosure and feels comfortable that they will be aligned with the legislation and subsequent regulatory standards by the time they come into effect.

Similarly, Australian banks, insurers and fund managers with more than NZ$1 billion TAUM will also be in a position where they will be required to report more to New Zealand clients than the Australian law explicitly legislates.

"We're supportive of the TCFD recommendations and are pleased that the government has decided to adopt global best practices," said Matthew Arnold, director, NZ Institutional, Russell Investments. "The challenge for the industry is to agree on the taxonomy and work together to ensure that investors clearly understand what it all means. We've worked with some of New Zealand's largest investors to develop appropriate implementation strategies to support this and other climate-related initiatives.

Russell provides a number of reporting services for clients around climate risk, Arnold said.

"Today we include climate risk integration through our assessment of fund managers, engage regularly with management teams on climate issues and continue to undertake research on a range of climate-related topics such as water and resource efficiency," Arnold noted. "We have also developed a range of bespoke strategies designed to help our clients incorporate global best practice into their carbon investment strategies. Our clients are actively working to incorporate responsible investing and make significant reductions in the carbon footprints of the portfolios.  We also note that much of our reporting to our clients already incorporates carbon metrics and ESG ratings."

Similarly, Australian banks, insurers and fund managers with more than NZ$1 billion TAUM will also be in a position where they will be required to report more to New Zealand clients than the Australian law explicitly legislates.

"We're supportive of the TCFD recommendations and are pleased that the government has decided to adopt global best practices," said Matthew Arnold, director, NZ Institutional, Russell Investments. "The challenge for the industry is to agree on the taxonomy and work together to ensure that investors clearly understand what it all means. We've worked with some of New Zealand's largest investors to develop appropriate implementation strategies to support this and other climate-related initiatives.

Russell provides a number of reporting services for clients around climate risk, Arnold said.

"Today we include climate risk integration through our assessment of fund managers, engage regularly with management teams on climate issues and continue to undertake research on a range of climate-related topics such as water and resource efficiency," Arnold noted. "We have also developed a range of bespoke strategies designed to help our clients incorporate global best practice into their carbon investment strategies. Our clients are actively working to incorporate responsible investing and make significant reductions in the carbon footprints of the portfolios.  We also note that much of our reporting to our clients already incorporates carbon metrics and ESG ratings."

Read more: New ZealandASXAPRACPA AustraliaMatthew ArnoldRussell InvestmentsTask Force on Climate-related Financial DisclosuresDavid ClarkJane RennieNicolette BoeleResponsible Investment Association Australasia