New Zealand opts for enterprise value approach to climate reporting

New Zealand’s reporting body has snubbed the theory of ‘double materiality’ in its latest plans for climate disclosure, saying it wants “to define materiality using the lens of enterprise value”.

The External Reporting Board (XRB), an independent entity set up by the government in 1993, has been working on a climate reporting standard since New Zealand’s groundbreaking commitment to introduce the world’s first mandatory TCFD requirements in 2020.

Its latest consultation, launched last week, outlines plans to focus on “information about climate-related risks and opportunities that could reasonably be expected to influence decisions by primary users about assessments of an entity’s enterprise value across all time horizons, including the long term”.

The proposal puts the standard at odds with disclosure rules being developed in Europe, which require companies to explain both how sustainability issues might impact their profitability and how their performance on such issues might effect society and/or support environmental and social policy objectives. This approach has become known as ‘double materiality’.

While the EU, France and Switzerland are among those developing reporting rules based on double materiality, the UK has opted to split the two regulatory objectives: it is introducing disclosure requirements to address climate-related risks and opportunities (enterprise value) alongside building a green taxonomy to quantify companies’ contribution to environmental outcomes.

The US is likely to throw its weight behind using enterprise value, with the Securities and Exchange Commission meeting today to reveal its plans for standards.

XRB’s latest public consultation is on the Strategy, Metrics and Targets of the climate standard and closes on 13 April. It follows a similar consultation on Governance and Risk Management that closed in November 2021.  A final standard is slated for December 2022.

If the timeframe remains in place, listed companies with a market capitalisation exceeding $60 million and financial institutions with total assets of more than $1 billion will be required to prepare a climate statement as part of their December 2023 disclosures. Emissions reports will need to be assured by the following year.

When disclosing a potential scenario analysis, XRB suggests entities should use a range of climate-related scenarios with as a minimum, a detailed explanation of both a 1.5°C and a greater than 2°C scenario.

Scope 3 emissions are also part of the suggested disclosure standards.

“These disclosures will mean information users, such as investors, will have sight of an entity’s potential risk-adjusted returns, their ability to meet financial obligations, and have a good idea of how they are managing or adapting to climate risks and opportunities,” stated XRB Board Chair Michele Embling.

The New Zealand Financial Markets Authority (FMA) will be responsible for compliance and enforcement of the reporting regime, although its Acting Director of Capital Markets, Paul Gregory, has already hinted at a flexible approach: “We recognise that reporting entities won’t achieve perfection on day one, so our compliance expectations will be focused on supporting entities to meet the new reporting requirements.”