The Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 now requires large financial institutions in New Zealand to report on climate considerations, through different lenses: governance, strategy and risk, as well as quantification of those impacts and self-imposed or mandated targets. This mandatory regime will start from 2023.
Some companies in New Zealand started to report on their climate-related matters on a voluntary basis; switching to a mandatory regime means that consistent reporting for the financial sector will ease comparison and embed climate change effects in financial decision-making.
The climate standards used for the disclosures are issued by the XRB (External Reporting Board), which are mostly aligned to the global frameworks from the TCFD (Task force on Climate-related Financial Disclosures) and ISSB (International Sustainability Standards Board) – a table from the XRB located here details the areas where those frameworks fully align or differ. It is important to note that the XRB standards are principle-based – there are often multiple ways to answer specific requirements.
While New Zealand was the first country to make climate reporting mandatory, several countries are also catching up, either with similar mandatory requirements or plans to adopt mandatory requirements – this page from Responsibility Matters sums this up nicely.
What are the challenges
In a word, data.
As part of the metrics and targets section of the climate standards, the overall emissions from the reporting company need to be disclosed: scope 1 (the direct emissions) and scope 2 (indirect – electricity emissions) are in the direct control of the company. Scope 3 (indirect – everything else) is more complex. Financed emissions have their own level of difficulty.
Financed emissions would be described as the emissions directly attributed to dollars invested or lent to companies. The PCAF framework defines 6 asset classes and associated formula for them in this format:
- Emissions data: this requires the financial institution to be able to use the emissions reported from borrowers or investees or estimate them using factors or models. In order to have a good quality score on financed emissions, emissions numbers need to be actual numbers, ideally verified and assured.
- Financial data: less contentious for public-listed companies – however for private companies or smaller structures, the reporting company needs to obtain the enterprise value.
These are not easy problems to solve. But getting started on the journey is critical to identify and overcome obstacles, such as finding the right data to achieve the right outcomes.
Here at Mosaic we have business analysts and subject matter experts who can support you in the arduous journey of climate-related disclosures, acting as your Tenzing Norgay.