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Prison For Directors Who Fail To Report On Climate Risks Unduly Harsh, Says The Institute Of Directors

Directors should not face jail time for failing to comply with proposed new climate-reporting standards, stressed the Institute of Directors (IoD).

The IoD appeared before the Economic Development, Science and Innovation select committee today to present its submission on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. In addition to strongly opposing the severity of proposed penalties for non-compliance, the IoD encouraged the committee to consider a longer lead-time for implementing the regime and an exemption for smaller businesses.

In a world first, last year the government announced that climate-related financial disclosures (CRFD) would be mandatory for publicly-listed companies, large insurers, banks and investment managers.

Under the new rules, around 200 domestic-based entities will have to report on their exposure to climate risk based on standards devised by the External Reporting Board (XRB). CRFDs are likely to become mandatory for reporting periods that end in 2023.

IoD general manager, governance leadership centre and membership Felicity Caird said the IoD fully supported the spirit of the Bill, which should help smooth the transition to a more sustainable, low-emissions economy by ensuring reporting entities routinely consider the effects of climate change on and from their operations.

“Urgent action is required to tackle the often devastating effects of climate change which, left unchecked, will have consequences for our social, economic and environmental ecosystems. The IoD has identified it as one of our top five issues for directors each year since 2018. And the government’s proposed new climate-reporting regime is a necessary and crucial tool to help us identify and manage some of the risks.

“However, the regime is complex and a substantial development on top of existing reporting frameworks. It will take time for organisations to understand what is required, develop the reporting and regulatory structures and, crucially, build professional capability and competence. This is particularly true for smaller listed entities.

“The Bill allows organisations to apply for exemption where they’ve reasonably determined they’re not materially affected by climate change. However, they need to provide independent assurance from a qualified practitioner. Meanwhile, there are no clear guidelines for what might constitute materiality. The risk is that seeking an exemption is even more onerous than the reporting itself.

“We encourage the committee to allow a transition period for implementing the regime and to phase in assurance requirements. This isn’t unprecedented; the XRB usually allows 3-4 years for entities to implement necessary systems and processes for new reporting standards,” Ms Caird said.

The IoD also strongly opposed the severity of penalties for non-compliance with reporting standards, particularly the threat of imprisonment for individual directors.

“The penalties are unduly harsh, particularly given the information being disclosed is more future-focused, uncertain and speculative than that provided in financial reports. We should be encouraging entities and their directors to consider their climate-related issues and risks, rather than punishing them for making incorrect assessments.

“For the reporting regime to be meaningful and successful it needs to go beyond compliance, to encompass education and an ethos of continuous improvement which is critical to driving strategic thinking and organisational change,” Ms Caird said.

The full submission is available on the IoD’s website: https://www.iod.org.nz/resources-and-insights/policy-and-legal/submissions/submission-on-the-financial-sector-climate-related-disclosures-and-other-matters-amendment-bill/#

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