Why climate planning beats disclosure compliance

A recent webinar hosted by the Sustainable Business Council brought together experts from the Financial Markets Authority (FMA), the External Reporting Board (XRB) and legal firm Chapman Tripp to explore the merits of transition planning in climate-related disclosure. Their message was clear: while NZ CS 1 is a disclosure regime, proactive planning remains preferable.

FMA Manager, Climate Related Disclosures Jenika Phipps reminded attendees that NZ CS 1 allows reporting entities to disclose the absence of a transition plan and still remain technically compliant. 

However, the panel stressed that while this may meet regulatory requirements, it does not reflect good governance practice. Transition planning offers more than compliance – it defines a strategic pathway to resilience, performance and long-term value in a climate-impacted economy.

The panel then expanded on the broader context for incorporating transition planning into core strategy – not only to reduce emissions but actively manage exposure to physical climate risks, in line with NZ CS 1’s objectives.

They emphasised that effective climate risk management is not just about mitigation, but also about unlocking opportunities. Undertaking robust due diligence helps boards better understand and respond to both risks and value-creating opportunities in a low-emissions economy.

Below are some of the key considerations for reporting entities to keep in mind when addressing climate risk management, including transition planning. 

Strategic approach for future success

Incorporating transition planning into core strategy ensures an entity’s operating model accounts for climate-related risks and opportunities. By focusing on both value protection and value creation in a climate-changed world and a low-emissions economy, transition planning defines a strategic pathway to resilience, high performance and competitive advantage.

Consideration of international climate regimes

Reporting entities may be required by other international frameworks to disclose actions being taken to manage climate risks. Specifically, dual listed entities, or tier 1 [under New Zealand accounting standards] suppliers to customers captured by other regimes, may need to provide evidence of resilience planning, emissions reduction, climate risk management and transition planning. 

Accountability and primary user considerations

Where climate events result in asset impairment, entities may be exposed to material misstatements if current or historical climate statements and underlying evidence are deficient – or absent. Such deficiencies in due diligence would likely be challenged by shareholders and investors and could potentially expose the entity to litigation.

Access to credit and insurance, and risk-based pricing

Domestic and international banks, institutional investors and insurers leverage risk-based pricing to reduce the level of risk carried in their portfolios, as well as to achieve sustainable finance targets and manage their scope 3 (category 15) financed emissions. They will therefore likely favour entities that demonstrate proactive management of climate risk (both transition and physical). Entities that are actively managing climate risk exposure will also likely benefit from a stronger credit rating, continued access to credit, continued access to insurance, and potentially more stable premiums and interest rates.

Legal considerations

Entities that have a strategy for managing climate risk exposure (both transition and physical risk exposure) are more likely to have processes and controls in place to manage risk. Where organisations are subject to media scrutiny or legal risk, those able to provide evidence of due consideration, planning, processes, and controls, will be better positioned to provide a robust defence, even where impacts may have been underestimated. 

Conversely, reporting entities disclosing that they have no governance processes to provide effective oversight of climate risk, no processes in place to manage climate risk, and no strategic plan to mitigate exposure to climate-related risk are likely to be challenged by investors, auditors, consumers and lobby groups – whether or not they are technically compliant.

Climate-related litigation is on the rise. Current and recent cases involve individuals suing companies – refer to Smith v Fonterra & Ors; advocacy groups suing companies – refer to Consumer NZ Inc v Z Energy and Stand.Earth v Lululemon; the state suing companies – refer to People v JBS Food Co; and the people suing the state – refer to KlimaSeniorinnen v Switzerland. 

In view of the above, even where action is not explicitly mandated by legislation, standards or regulation, it always pays to have a plan.