Climate-Related Disclosure, Early Insights and Observations

By Mathieu Hemery, Principal Consultant and Tracey Berry, Partner, Mosaic

Our world is changing.

The introduction of disclosure requirements related to climate, for certain entities, aims to drive better decisions from investors and consumers alike. While, for some, these disclosure requirements could be perceived as demanding, seeing the disclosure as a mere exercise in compliance would lose sight of the opportunity to accompany companies and their customers towards the net zero target adopted by New Zealand.  

Our Mosaic sustainability consultants have been engaged in Climate-Related Disclosure (CRD) projects across many financial institutions, including banks, insurers and MIS managers, and common themes have emerged:

• A CRD project at its core, is still a project, which means that early stakeholder engagement is crucial to increase the likelihood of a desirable outcome.  
  While we observe that a typical CRD project is spearheaded by the Sustainability team or Finance/Risk teams (depending on the nature and size of the business), it also requires involvement from the top (Board and Executives), business teams (who own the client relationships and/or products) and support teams (such as legal, IT). For instance, receiving timely feedback on a report disclosure or understanding data requirements to navigate the procurement process and enterprise stack are likely to be pivotal to ensure common views are shared on the transition planning, targets and other key components that will be disclosed. Fostering a healthy internal engagement strategy should encompass keeping climate change jargon to a minimum.

• CRDs rely on a set of requirements, laid out in the Climate Standards from the XRB (External Reporting Board), and guidance from the FMA (Financial Markets Authority) which states the principles of record keeping with examples. The prudent approach suggests that organisations will need a clear linkage from obligation to statement, and from statement to evidence; and hence documentation should be fulsome and complete: traceability matrix and checklists, due diligence processes and other registers will support the project governance and ultimately the production of the disclosure, not to mention ease the burden through pre and/or post assurance.

• One of the disclosures under Strategy, scenario analysis has been perceived as more challenging to understand and apply: instead of focusing on traditional risk management approaches, scenarios aim to look at uncertainty, driven by tail events and considering where the black (green) swans may occur. By nature, it is plausible, rather than predictive. In the course of 2023, solid narratives developed by industry bodies (FSC and NZBA for financial institutions) provided context, parameters, and drivers as a good starting point; the guidance published by the XRB offered a strong recipe to conduct scenario analysis. This developing literature supported the onboarding of this new discipline (for financial institutions), and great insights were obtained by organisations which invested time and effort through the process. However, where engagement was insufficient or late, scenario analysis has been more fraught.

• CRDs introduce the need for data points to be obtained or procured, analysed, and reported. Data availability can be challenging: for instance, scope 3 emissions are difficult to assess for some categories, and some emission factors may not match the part of the value chain to be estimated; life insurance as a product is facing a new set of transition risks which are not yet well apprehended; small and medium enterprises may not have the capacity to determine accurate emission figures. Estimations, models, and proxies are going to bridge this particular gap until public or proprietary datasets are developed and maintained – all of which are areas we expect to evolve rapidly.

• Climate change scope is wide, the subject matter is complex – the GARP SCR (Sustainability and Climate Risk) curriculum lays solid foundation knowledge covering all relevant topics, from climate science and sustainability frameworks, to net zero strategy and climate risk management. Specialists leading the charge on a CRD project have an essential duty to ensure that basic climate education materials are developed for and absorbed by key stakeholders. Sharing a common understanding (and limiting the jargon, as seen above) will go a long way in governing and managing climate risk or running an efficient scenario analysis workshop.

CRDs are now entering the final stretch of the first mandatory year, and what an adventure it has been! It is important though to note that it is not ‘complete’: adoption provisions ending will present some of the most complex problems (namely quantification of current and anticipated impacts, transition planning, scope 3 emissions); as too will monitoring progress against targets and adequacy of processes requiring entities to embrace continuous improvement.  

You are not alone, however – with your Mosaic team of experts here to help you navigate through the complex climate risk environment.