Some relief in sight for mandatory climate reporting after a rocky first year, but it’ll be short

New Zealand businesses ran up big costs and assurance headaches in first year of mandatory climate disclosures.

An outcry of frustration from businesses that have grappled with the first year of mandatory climate disclosures appears to have won some relief – but it’ll be breathing space only.

A call by reporting standard setter the External Reporting Board (XRB) for submissions on proposals to delay four disclosures by one year has yet to attract responses, but judging by the weight of complaints to the XRB and the Institute of Directors (IoD), a flood is expected by the closing date of October 30.

The main complaints by large businesses and financial entities captured by the disclosure obligation is that forecasting for future climate impacts is inherently uncertain, and that the job of verifying climate disclosures – particularly by downstream entities in their sphere – is costly, for some far exceeding the costs of financial reporting.

Many have had to bring in external advisers – lawyers and assurance and climate experts – to better understand the disclosure regime.

Most of those captured by the disclosures requirement have recently filed with the Companies Office and are now into their second year of the reporting obligation under the climate and assurance standards secondary legislation.

And while they’re likely to have welcomed XRB’s announcement earlier this month that some short-term relief is being considered, many have hardly had time to draw breath from their first challenging experience with the regime, and have only been given a month to get a submission together.

It could have been worse.

Listed companies were among those captured by the first year of the climate disclosure regime, which proved costly and difficult for some financial entities.

The XRB, an independent Crown entity, said because the parliamentary process window for any second year reporting amendments closes at the end of November, it was faced with only being able to allocate a two-week window for submissions.

Director of sustainability Dr Amelia Sharman told the Herald the XRB had acted immediately it became aware of the reporting challenges, and had “worked really hard” to get affected parties longer to comment.

The reporting standards apply to for-profit entities including listed companies, banks, insurers, state-owned enterprises and overseas companies; the public sector; and not-for-profit registered charities and incorporated societies. About 170 entities are required to prepare annual climate statements.

IoD said while it supported the requirement for businesses to make climate disclosures, “the experience of the first year of mandatory disclosures for large financial entities was that forecasting for future climate impacts was inherently uncertain, and verifying climate disclosures was costly, for some far exceeding the costs of financial reporting”.

“We have had significant feedback from our members regarding the complexities of complying with these climate reporting standards. The primary concerns relate to the increasing burden of due diligence, particularly with respect to forward-looking disclosures and the costs associated with ensuring compliance,” the IoD said in a statement to the Herald.

“Many members have expressed that while they are committed to meeting these standards, they feel that greater guidance and more streamlined processes would assist in balancing the need for transparency with the practicalities of compliance. There is also a call for reducing duplications between financial and climate-related reporting and for closer alignment with Australian reporting regimes.”

The IoD will make a submission.

“We will also highlight the need for more clarity around certain reporting aspects and the importance of ensuring the compliance burden remains proportionate.”

The XRB’s Sharman said due to the short public consultation window, the XRB had kept its proposed amendments for relief tightly focused to certain aspects of the disclosure regime and “very precise”.

It is proposing: Delaying mandatory scope 3 greenhouse gas (GHG) emissions disclosure to give an additional year to report on these; delaying mandatory assurance of scope 3 emissions disclosure to give an additional year to report; delaying reporting of anticipated financial impacts from climate change one year; delaying transition planning.

“In essence, these proposals give an additional one-year extension to some of the more difficult aspects of the regime, like scope 3 GHG emissions disclosures and transition planning,” the XRB said in a statement to the Herald.

The XRB said transition planning was the “so what?” of the climate reporting regime. After the business has done all the work understanding its risks and opportunities reporting entity, what was it going to do about it?

The main issues the XRB heard after the first year of reporting were related to the availability of high-quality and reliable data particularly for scope 3 information, and the cost of obtaining information and assurance over that information.

The increase in cost from businesses having to bring in external advisers was not unexpected, it said. MBIE in 2019 had flagged cost implications.

“However, the intended impact of the regime is that avoided costs will outweigh direct costs. For example understanding climate risk so that more resilient supply chains are established, meaning disruption from weather events is minimised.”

‘We also heard issues relating to directors’ duties and the supply of assurance practitioners, which cannot be resolved by the XRB.”

The XRB is not a regulator. It develops and issues financial reporting, auditing and assurance and climate standards. It has an annual Crown-funded budget of $8.3 million and employs 27 fulltime-equivalent staff.

Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.