Chapter 3: The context

The implementation of the new climate-related disclosures regime is progressing well with the first climate standards expected to be issued by the XRB in December 2022 and the first climate statements likely to be produced in early 2024.

This is an opportune time to consider if a regulated assurance profession and expanded assurance requirement are desirable for the future of the regime.

3.1 The government has introduced a climate-related disclosures regime

The CRD Act introduced a new climate-related disclosures regime in New Zealand for large financial market participants. The purpose of the Act is to:

  • ensure that the effects of climate change are routinely considered in business, investment, lending and insurance underwriting decisions
  • help climate reporting entities better demonstrate responsibility and foresight in their consideration of climate issues
  • lead to more efficient allocation of capital, and help smooth the transition to a more sustainable, low emissions economy.

The CRD Act requires climate reporting entities to disclose their climate-related risks and opportunities in annual climate statements. Climate-reporting entities under the CRD Act comprise large listed issuers, banks, insurers, credit unions, building societies and investment scheme managers. We anticipate that approximately 200 large financial market participants will be required to make disclosures under the new reporting regime.

Climate statements must be prepared in accordance with climate standards issued by the XRB. The XRB has been developing climate standards based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The TCFD is widely acknowledged internationally as the best practice framework for climate-related disclosures. Climate-reporting entities will make disclosures under 4 thematic headings proposed by the TCFD recommendations: governance, strategy, risk management, and metrics and targets.

The disclosure requirements are triggered when the XRB issues the first climate standards, which is expected to be in December 2022. Climate reporting entities will prepare climate statements in relation to their first financial year commencing on or after 1 January 2023. Climate statements must then be lodged within 4 months of the end of the financial year. The first climate statements are therefore expected to be filed in early 2024.

For example, a climate-reporting entity with a 31 December balance date will prepare its first climate statements in relation to the year 1 January 2023 – 31 December 2023 and must lodge those statements by 30 April 2024.

The FMA has been given the regulatory function to independently monitor and enforce compliance with the CRD regime.

3.2 The assurance requirement

The CRD Act introduced a new assurance obligation in the 'Financial Markets Conduct Act 2013' (FMC Act). New section 461ZH(1) of the FMC Act states that:

Every climate reporting entity must ensure that the climate statements or group climate statements that are required to be prepared under any of sections 461Z to 461ZC are, to the extent that those statements are required to disclose greenhouse gas emissions, the subject of an assurance engagement.

These ‘assurance engagements’ must be carried out in accordance with all applicable auditing and assurance standards issued by the XRB. (See section 25 of the CRD Act inserting, in particular, section 461ZHA of the FMC Act.)

The assurance obligation will come into force by October 2024.* This means that the first climate statements with GHG emissions assurance will be produced in the second year of reporting, i.e., in 2025.

* The assurance obligation will come into force by the third anniversary of Royal Assent of the CRD Act, unless introduced earlier by Order in Council. The CRD Act received Royal Assent on 27 October 2021.

3.3 What does assurance mean?

Assurance is a general term that refers to an expression of a conclusion by a qualified practitioner that is intended to increase the confidence that users can place in a given subject matter. Independent assurance can support trust and build confidence in information to support decision making by shareholders, investors, and other stakeholders. See 'A guide to understanding auditing and assurance: FMC Reporting Entities in New Zealand', CPA Australia, Nov 2019.

Audit and assurance(external link) — CPA Australia

Assurance is useful to the extent to which it will enhance users’ confidence in the information. A climate statement assurance engagement (or any other sustainability assurance engagement) will be carried out by an “independent assurance practitioner”.

There are differing levels of assurance which result in different types of conclusions. An assurance engagement in relation to climate or other sustainability information is either a “reasonable assurance engagement” or a “limited assurance engagement”. See 'A guide to understanding auditing and assurance: FMC Reporting Entities in New Zealand', CPA Australia, Nov 2019.

Audit and assurance(external link) — CPA Australia

The terms “audit” or “review” are only used in relation to assurance over historical financial information.

The key difference between a reasonable assurance engagement and a limited assurance engagement relates to the activity undertaken by the assurance practitioner and the conclusion that is drawn. A reasonable assurance engagement is expressed in positive terms (e.g., “in our opinion, the subject matter information presents fairly…”) and requires a higher level of work effort than limited assurance. A limited assurance engagement is expressed in negative form. For example, “based on the work performed, as described in the report, nothing has come to our attention…”. See 'A guide for prescribers of assurance engagements', undated, available on the XRB website.

Climate statements will include a range of information, including historical and future-oriented information. An assurance engagement could consider whether some or all of the disclosures in the climate statements have been prepared in accordance with the climate standards. An assurance engagement could also relate to an entity’s processes and controls, i.e., an opinion could be expressed on the design and effectiveness of an entity’s controls and on an entity’s methodologies and their application.

3.4 Background to the assurance requirement

Occupational licensing

The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill (CRD Bill) originally contained CRD assurance practitioner licensing and accreditation provisions that set out who could carry out the assurance engagements. These provisions would have introduced a form of co-regulation for CRD assurance practitioners but with less stringent monitoring by the FMA when compared to the provisions in the Auditor Regulation Act.

Two key concerns were raised by the Economic Development, Science and Innovation Committee (the Select Committee) during consideration of the CRD Bill. The first was that non-accountants could be excluded from carrying out assurance engagements. The second was that the licensing regime might be ineffective because the FMA would have limited oversight of practitioners and approved bodies. The Select Committee considered that the licensing regime proposed in the CRD Bill would not be effective and recommended the sections be removed.

Scope of assurance

In August 2020, the Government made policy decisions on the new CRD regime, agreeing that it should not impose mandatory assurance obligations in relation to the whole climate statement. This was primarily due to demand and supply-side uncertainties. There was uncertainty about the content of climate statements, and assurance standards setters had not yet responded to user demand for new or amended standards and guidance material. Instead, broader mandatory assurance was proposed to be reconsidered in the future when there was more clarity over these uncertainties.

In this regard, section 461ZHC of the FMC Act, as amended by the CRD Act, does not prevent a climate reporting entity from voluntarily obtaining an assurance engagement covering either the whole climate statement, or other parts of the climate statement in addition to GHG disclosures.

Where are we now?

We now have a much clearer picture of what climate reporting entities will be required to disclose under the new reporting regime. The XRB has released the exposure draft of the climate standards and will issue the first climate standards in December 2022. The XRB is also working on the development of assurance standards for the purposes of the climate-related disclosures regime. It is therefore an appropriate time for us to consider whether a regulated assurance profession and an expanded assurance requirement is desirable for the future of the regime.

3.5 The international context

We are currently witnessing rapid change in relation to climate and wider sustainability reporting* internationally. Our consideration of the assurance requirements for the climate-related disclosures regime is informed by this international context. There are 2 emerging trends:

  • International standards setters are responding to demand from markets, governments and regulators for new or improved climate and wider sustainability reporting frameworks and standards, and assurance standards in relation to non-financial reporting.
  • Governments and regulators are introducing or expanding climate and wider sustainability reporting requirements.

Further information about international reporting frameworks and standards, and reporting requirements, is set out in Appendix 1.

* See “sustainability reporting” in the glossary.

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