Impressions of the first Aotearoa New Zealand Climate Standards-compliant disclosures

Implementation seems to have focused on compliance, but deeper engagement is needed to uncover the full extent of climate-related challenges and opportunities.

Comments we are hearing from preparers, investors and board members about the first reporting in accordance with the new climate standards can be grouped into four key themes:

1. The Standards are time intensive. Organisations are grappling with many other pressures, and integrating complex climate considerations into their business requires resourcing they don’t necessarily have available. 
2. Focusing on disclosure requirements can detract from the real progress made on climate change. Those in sustainability roles have indicated that they are spending more time on reporting and collating information than on making real change in their business. 
3. Organisations are capturing and providing a lot of information, but that doesn’t automatically equate to insight for themselves – or for the market. 
4. While these first disclosures are published as a result of world-leading (at the time) legislation on mandatory climate reporting, the market seems underwhelmed with the impact. 

Having reviewed 19 of the first climate statements prepared in accordance with the new climate standards, we would add a fifth – missed opportunities.

While it is still early days for the new regime, organisations don’t appear to be leveraging the strategic opportunities that this effort presents. Instead, what we have seen is that a ‘reporting first’ approach has been taken, focused on compliance. Organisations seem to underestimate the extent and potential speed of change as well as the investment needed to support strategic resilience. This is at the core of what the standards set out to achieve.

Investing the right amount of resource, at the right time, and at the right level to drive a strategic response is critical. This starts with the board being engaged with the process from the outset, setting the strategic direction for identifying and embracing the change that is needed. 

Information does not necessarily equal insight

Organisations have clearly invested time to tick off the requirements of the standards, but in many cases the detail lacks substance. This raises questions about the investment in setting up the right processes and structures, and the level of engagement with the board on the real strategic risks and opportunities that the organisation faces. 

The level of board engagement is not clear from the disclosures. These generally provide little information as to how the board was actually engaged throughout the year to provide the right level of challenge to management, and to help surface the most important issues. What we have seen is that the disclosures have largely been limited to mechanical descriptions or diagrams of the roles and responsibilities of those involved in climate reporting oversight and management. 

Business shouldn’t be as usual 

Similarly, it seems organisations have not invested in the transformation of strategy and risk management processes. These have been treated as a ‘tick box’ exercise. Scenario analysis has been used to identify risks and opportunities, as required by the standards. However, it seems this was generally a standalone exercise, while organisations continue to use traditional risk management processes which are not necessarily fit for purpose when it comes to assessing and managing climate risks. 

There is no doubt that climate risk is complex, and it stretches beyond the timeframes typically associated with traditional risk management processes. It’s likely that climate change poses significant strategic risks and opportunities to organisations, but these aren’t surfacing perhaps because the board has not been involved at the right time through the risk and opportunity identification and assessment process. 

The climate standards require a big step up in the second year of reporting, when organisations will need to quantify both the current and anticipated financial impacts of risks and opportunities. If the management processes for strategic climate-related risks and opportunities are not fit for purpose, they may focus their quantification on risks or opportunities that are not significant. It is possible that this will delay meaningful action because attention is focused on the wrong impacts – or underestimation of the impacts of climate change.

Looking at the molehill, not the mountain

Perhaps due to the apparent lack of investment in governance, and risk and opportunity identification, there has been a lack of clarity around organisations’ aims and their positioning when it comes to transitioning to a low-emissions, climate-resilient future. 

Although many organisations included tactical responses to identified risks and opportunities, it was unclear if, and how, these will impact their strategy and business model, and how they connect through to the metrics and targets disclosed by the organisation.  

As we progress with transition planning in the second year of reporting, it is important to make clear which risks and opportunities may have a material impact on strategy and the organisation’s business model. In turn, metrics and targets should demonstrate how the organisation is measuring progress towards mitigating the risks or capturing the opportunities. Boards can lead this by setting a clear strategic direction for meaningful change.

Where to from here?

Climate disclosures are complex and challenging, and we know that it will take time to fully embed the required change into an organisation. However, it seems that organisations aren’t being strategic enough in how they approach the work that is needed, and are at risk of they are not only missing a critical opportunity but may also be caught out given the Year 2 requirements go deeper and expect more. 

There is a reason organisations have been afforded adoption provisions in the first year; what comes next is both difficult and important. Boards need to have confidence in the structures and processes set in place in order to ensure the next steps – quantification of financial impacts and transition planning – are focused on areas of strategic importance to the business. 

The second year of reporting will require a significant step-up in resource requirements to generate real value from the investment made. The time for planning is running out. Now is the time for board-led action through early engagement and setting a clear strategic direction for meaningful change.