Governance Briefing — December 14, 2022
New Zealand’s FMA climate governance guidance directs climate reporting entities to embed board oversight, risk management, robust controls, and assurance planning into climate-related disclosures ahead of mandatory reporting cycles.
Executive briefing: On New Zealand’s Financial Markets Authority (FMA) published Climate-related disclosures: Governance and risk management guidance, setting expectations for climate reporting entities under the Climate-Related Disclosures (CRD) regime. The guidance outlines how boards, executives, and assurance functions should oversee climate-related risks and opportunities, integrate them into governance structures, and support consistent, decision-useful disclosures aligned with the External Reporting Board’s (XRB) Aotearoa New Zealand Climate Standards. Banks, insurers, fund managers, and listed issuers captured by the regime must uplift governance, risk frameworks, and internal controls ahead of mandatory reporting periods beginning in FY2023.
The FMA emphasizes that climate reporting is more than a compliance exercise: directors must demonstrate effective oversight, accountability, and transparency. The guidance supplements the FMA’s broader monitoring approach, signalling that supervisors will review governance arrangements, board minutes, and control evidence when evaluating CRD filings. Entities should view the document as a blueprint for embedding climate considerations into enterprise governance, risk management, and assurance functions.
Board oversight and accountability
The FMA expects boards to own climate governance. Boards should understand climate risks relevant to their business model, set clear roles across committees, and ensure climate competence through training or targeted appointments. The guidance recommends formalising accountability in board charters and committee terms of reference—typically assigning oversight to risk or audit committees while keeping ultimate responsibility with the full board. Directors should receive regular briefings on climate strategy, risk assessments, scenario analysis outcomes, and performance against transition plans.
Boards should integrate climate considerations into strategic planning, capital allocation, and remuneration frameworks. When approving strategies, directors must evaluate how climate scenarios affect revenue models, asset valuations, and funding costs. The FMA encourages linking executive incentives to climate metrics to reinforce accountability. Board evaluation processes should include climate governance effectiveness, identifying skill gaps and improvement actions.
Management responsibilities and resourcing
Senior management must translate board expectations into operational plans. The FMA highlights the need for cross-functional climate governance forums bringing together finance, risk, sustainability, legal, and operations teams. Management should allocate adequate resources, including data specialists, scenario analysts, and project managers, to support the CRD programme. Roles and responsibilities must be documented to avoid fragmentation.
The guidance stresses the importance of capability building. Entities should design training programmes for directors, executives, and staff covering climate science, regulatory obligations, and emerging risk measurement techniques. Recruitment strategies may need to incorporate climate expertise, while outsourcing arrangements should address climate competence for external service providers.
Risk management integration
Climate-related risks—both physical and transition—must be embedded within enterprise risk management (ERM) frameworks. The FMA expects entities to identify, assess, and manage climate risks alongside traditional risk categories. Risk appetite statements should articulate tolerance levels for climate exposures, such as portfolio emissions intensity or exposure to climate-vulnerable sectors. Risk registers must incorporate climate drivers, and control owners should monitor key risk indicators (KRIs) tied to climate metrics.
Entities should adapt risk assessment methodologies to capture longer time horizons and uncertainty. The guidance recommends using scenario analysis to inform risk identification and quantification, with outputs feeding into capital planning, liquidity management, and underwriting. Operational risk management should consider climate impacts on supply chains, facilities, and third-party service providers. Policies and procedures must describe escalation processes when climate risk limits are breached.
Scenario analysis and strategy alignment
Scenario analysis is a cornerstone of the CRD framework. The FMA advises entities to select scenarios relevant to their business, including at least one aligned with the Paris Agreement (1.5°C) and one reflecting delayed transition or heightened physical risk. Boards should approve scenario selection, assumptions, and limitations. Management must document methodologies, data sources, and model governance, ensuring consistency with XRB climate standards.
Scenario results should inform strategic decisions, such as portfolio adjustments, product innovation, and resilience investments. Entities should evaluate how scenarios affect revenue, capital, liquidity, and solvency positions. The guidance emphasises transparent disclosure of scenario approaches, key assumptions, and management responses—enabling investors and regulators to assess resilience.
Internal controls, data, and reporting quality
The FMA stresses robust internal control environments for climate disclosures. Entities should map data flows, identify control owners, and implement validation procedures covering climate metrics (emissions, financed emissions, exposure metrics) and qualitative narratives. Controls may include reconciliations between climate data systems and financial records, segregation of duties for data entry and review, and automated validation rules. Internal control frameworks (COSO, ISO 31000) should be adapted to climate data.
Data governance is critical. Entities must document data sources, quality assessments, and limitations. The FMA expects disclosure of methodologies, calculation hierarchies, and uncertainty ranges. Where data gaps exist, entities should outline remediation plans and avoid overstating accuracy. Collaboration with industry initiatives (e.g., Sustainable Finance Forum, Toitū Envirocare) can support data collection consistency.
Assurance and audit coordination
The CRD regime requires limited assurance over greenhouse gas disclosures from FY2025; the FMA guidance encourages early engagement with assurance providers. Entities should conduct readiness assessments, align control testing with assurance standards (ISAE 3000, NZ SAE 3100), and ensure auditors have access to documentation. Internal audit should incorporate climate reporting processes into audit plans, testing governance, risk management, and control effectiveness. Audit committees should oversee assurance planning, remediation, and reporting.
The FMA highlights the role of external auditors in evaluating consistency between climate and financial statements. Entities must ensure climate assumptions (e.g., asset impairment, useful life, provisioning) align with financial reporting. Cross-functional collaboration between sustainability and finance teams is essential.
Stakeholder engagement and disclosure practices
Effective climate governance requires transparent stakeholder engagement. The FMA encourages entities to engage with investors, iwi/Māori stakeholders, customers, and regulators when shaping climate strategies and disclosures. Communication plans should explain how stakeholder feedback informs risk management and transition planning. Entities should disclose governance structures, risk processes, and scenario insights in clear, concise language, avoiding boilerplate narratives.
Boards should oversee communications to ensure accuracy and manage greenwashing risk. The FMA expects entities to substantiate claims about sustainability commitments with evidence, linking targets to credible transition plans and interim milestones. Monitor evolving regulatory expectations, including potential enforcement for misleading statements under the Financial Markets Conduct Act.
Implementation roadmap and monitoring
The guidance suggests phased implementation: assess governance gaps, design target operating models, implement controls, and perform dry-run reporting before statutory deadlines. Entities should establish programme management offices tracking milestones, dependencies, and resource needs. Key performance indicators may include completion of scenario analysis cycles, control testing coverage, assurance readiness, and stakeholder engagement metrics.
The FMA will monitor compliance through thematic reviews and targeted engagements. Entities should prepare evidence packs—board papers, risk reports, control documentation, assurance plans—to support supervisory interactions. Continuous improvement is expected; boards should periodically review governance effectiveness and update policies as climate science, standards, and investor expectations evolve.
By aligning governance, risk management, and assurance practices with the FMA’s guidance, New Zealand climate reporting entities can deliver credible disclosures, support informed investor decisions, and strengthen resilience to climate-related risks.
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