On 18 July 2023, the Financial Markets Authority (FMA) released an information sheet (Information Sheet) on their expectations for disclosures made in relation to scenario analysis in accordance with the climate-related disclosures regime (CRD Regime). As a part of the CRD Regime, climate reporting entities (CREs) will be required to prepare and lodge climate statements that comply with the three Aotearoa New Zealand Climate Standards (Climate Standards).
As a part of the first Climate Standard (Climate-related Disclosures) (NZ CS 1), CREs are required to undertake scenario analysis and disclose how the scenario analysis process was conducted. In short, scenario analysis is a process where a CRE analyses the resilience of their business model and strategy against a range of different climate-related scenarios. The minimum requirement of NZ CS 1 is that CREs have analysed the resilience of their business model and strategy against a 1.5°C average increase in global temperature, a 3.0°C average increase in global temperature and one additional climate-related scenario.
For further information on the background of the climate-related disclosures regime, details of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021, the Climate Standards and relevant guidance on the CRD Regime please see our Mandatory climate-related disclosures in New Zealand article.
What has happened?
The Information Sheet outlines the FMA's compliance expectations for CREs making scenario analysis disclosure in line with the requirements of NZ CS 1. The Information Sheet breaks down the FMA's expectations in relation to both the process employed for scenario analysis and the climate-related scenarios analysed.
The process employed for scenario analysis means the steps the CRE takes to construct climate-related scenarios and then analyse the resilience of their business model and strategy against these climate-related scenarios. The FMA expects that the process to construct climate-related scenarios should be exploratory rather than prescriptive, such that a CRE is able to identify potential risks and opportunities from their analysis.
As mentioned above, CREs are required to, at a minimum, conduct scenario analysis against three climate-related scenarios, including both a 1.5°C and a 3.0°C average increase in global temperature. CREs are additionally required to include a brief description of their climate-related scenarios, and the FMA expects these to include a 'narrative' of how the climate-related scenario came to occur. Further the FMA suggests that CREs should avoid terms such as "may" or "could" in describing their climate-related scenarios. This is because a climate-related scenario description should describe a plausible future, rather than a series of possibilities.
Who does this effect?
The Information Sheet is relevant to all businesses that are CREs. If you are unsure if your business is a CRE, please see our Mandatory climate-related disclosures in New Zealand article or otherwise contact our financial services regulation team to discuss any obligations you may have under the CRD Regime.
What do I need to consider?
The Information Sheet contains a range of guidance and expectations about a CREs requirements in relation to scenario analysis. If you are a CRE, we recommend taking a close read of the Information Sheet and in particular the range of examples provided by the FMA in order to guide your compliance with the CRD Regime. The Information Sheet also contains a range of 'FAQs' that may help to clarify any questions about specific compliance requirements.
It is important to remember that the Information Sheet does not impose any requirement on CREs and instead explains the FMA's expectations about scenario analysis disclosure. The Information Sheet should be seen as a valuable piece of guidance and insight and as a first port of call in determining how to comply with your scenario analysis disclosure requirements.
If you have any questions about the Information Sheet, the requirement to conduct scenario analysis or about any aspect of the CRD Regime, please contact a member of our financial services regulation team.
