Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill

Members, we come first to the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill, Part 1. This is the debate on clauses 3 to 20 and Schedule 1—Amendments to Financial Markets Conduct Act 2013 to come into force by first anniversary of Royal assent. The question is that Part 1 stand part.

It is a pleasure to bring proceedings on Part 1 of the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill. The bill forms a key part of the Government’s commitment to addressing climate change, and I would like to make at the outset a number of points as I thank the Economic Development, Science and Innovation Committee for its consideration of the bill, and intend to seek perhaps one or two calls at the beginning just to cover off some of the changes that are proposed as a consequence of the work of that committee and other matters that have come to light. I do want to thank at the outset also not just the committee but the Hon James Shaw for the work that he has done alongside the Prime Minister in the background to get this bill to the House.

I’d like to highlight some of the key features of Part 1 of this bill. New Part 7A, inserted by clause 7, inserts new climate-related disclosures provisions into the Financial Markets Conduct Act. New Zealand is the first country in the world to introduce legislation to require all large listed companies and large financial institutions to report on their climate-related risks in accordance with global standards. Others are following fast behind. We’ve seen the UK make progress in that regard, and I’m sure many other countries will too, but New Zealand is the first to bring this legislation into the House, so it is world leading.

The legislation ensures that financial organisations disclose and ultimately take action against climate-related risks and opportunities. It will do that by requiring the largest and most important businesses in the New Zealand context and those that participate in the financial markets to disclose clear, comparable, and consistent information about the risks and opportunities presented by climate change.

The original scope of the climate-reporting entities is unchanged in the bill. Some submitters had suggested that the disclosure regime should cover a wider range of entities including public sector organisations and large companies that are not listed on the NZX. The definition of climate-related entities in the bill is sector neutral. Approximately 15 public entities are climate-related entities. Four Crown financial institutions including ACC and the New Zealand Superannuation Fund, with more than $1 billion under management, will be required to make climate-related disclosures, and that will be done through the letters of expectation process. The Minister of Finance will write to those entities in the usual process, stating that they must prepare climate statements in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, and that, of course, is the same advice that informs this regime and produced advice, I believe, in 2017. So those are kind of well understood parameters.

There are potential reasons for extending the disclosure obligation to large non-issuer companies. However, requiring these companies to do so does not fit within the scope of the bill. Furthermore, climate-related disclosures are intended to be read in the context of an entity’s financial reports, and, of course, large non-issuer companies are not required to make their financial statements available to the public, so it’s questionable how useful stand-alone climate statements might be to investors.

New section 461OA excludes small listed issuers and issuers on growth markets, and that’s kind of a pragmatic response. The select committee recommended excluding small listed issuers with market capitalisation below $60 million and entities listed on growth markets, like Catalist, from the mandatory disclosure regime. Small issuers—to give some context to the committee—are less than 1 percent of total NZX market capitalisation. So that gives you a sense of the scale of those issuers. The exemption of small issuers and growth markets still means that the majority of the financial sector are captured by the bill.

New Subparts 2, 3, and 5: to keep climate-related disclosure records, prepare and lodge climate statements—so climate-related entities will be required to prepare statements in according with climate standards issued by the External Reporting Board (XRB). Climate statements have to be lodged with the Registrar of Financial Service Providers within four months of the climate-related entity’s (CRE’s) balance date, and CREs also have to keep climate-related disclosure records and make them available for inspection. There’s a new Subpart 7: climate-related contraventions are added to the Financial Markets Conduct Act’s existing civil liability regime. That means that contraventions will attract pecuniary penalties not exceeding $1 million for individuals or $5 million in other cases.

Schedule 1, new section 92, which concerns transitionals—I’m mindful of concerns around the industry’s preparedness to comply with the disclosure requirements while the standards are being prepared. The transitional provisions clarify that the disclosure and record-keeping requirements do not come into force until after the XRB has published and issued at least one climate standard. The XRB standard, of course, as I’ve mentioned already, will be based on the recommendations of the Task Force on Climate-related Financial Disclosures, and that material has been available for some time. None the less, there is a due process consideration here. The XRB therefore is required to adequately consult with those likely to be affected by the standards before those standards are issued. That’s a part of due process.

The XRB has already started consulting with affected entities. On 20 October, which is tomorrow, it will launch its consultation on the governance and risk management sections of the proposed climate-related disclosure standards. Climate reporting entities will have ample opportunity to provide feedback on the proposed climate standard that may apply to them. That is the fundamental point. Once the XRB has issued a climate standard that applies to that entity, the disclosure obligations apply to accounting periods that commence on or after the date that standard is issued.

Now, there’s also been a removal of the disclose-or-explain provision. The bill originally provided an exception if a climate reporting entity reasonably determined that it is not materially affected by climate change, but what was recognised was that that would’ve created a two-tier reporting system. Far better to have a simple, single standard for reporting and then investors can compare, even if those that are not materially affected—well, that will be clear in their disclosure that that is the case. It ensures that the records are easy to compare and that all climate reporting entities are analysing the climate risks and opportunities in the same way.

There’s been a removal of the assurance practitioner accreditation and licensing regime. The select committee recommended removing the licensing regime proposed in the bill as introduced because it would not be effective, and that removal responds to concerns that non-accountants would be excluded from carrying out greenhouse gas assurance engagements. The Financial Markets Authority (FMA) also supported removing the proposed licensing regime. Now, despite removal of the licensing regime, the greenhouse gas assurance engagements that are carried out up to three years after Royal assent will still be robust, and that’s because new section 461ZDA would require assurance practitioners to “comply with all applicable auditing and assurance standards” when carrying out an assurance engagement.

Now, in respect of assurance of greenhouse gas emissions required three years after Royal assent, to allow entities and the assurance industry time to build assurance capability, assurance engagements for climate statements that are required to disclose greenhouse gas emissions will only be required three years after Royal assent.

Now, I want to speak also briefly to the Government’s Supplementary Order Paper (SOP). I’m going to be tabling a Supplementary Order Paper which makes three small changes to two provisions in Part 1 that implement the select committee changes. The first change is to close a loophole in the definition of market capitalisation. The definition was added to the bill as part of the decision to exempt small listed issuers from climate-related disclosures. For listed debt issuers the current test is based on the net assets of the issuer and its subsidiaries. That’s not a measure suitable for economic significance of debt instruments. It’s the amount of debt that the issuer is seeking to raise that matters most, not the size of the issuing entity. I’m not disagreeing with the fundamental principle introduced by the select committee but making an amendment. The current provision could also have the effect of excluding issuers that raise debt through a special purpose entity, and that’s not an uncommon practice. The SOP therefore changes the test for a listed debt issuer from net assets of the issuer and its subsidiaries to the aggregate dollar value of all of the entity’s quoted debt instruments when they are issued. That is the face value.

The second and third changes both relate to an assurance practitioner’s report on parts of climate statements relating to greenhouse gas emissions. This provision was changed at select committee to address the legal consequences for assurance practitioners when their report does not comply with the requirements of all applicable auditing and assurance standards or if a qualified report is not sent to the FMA, XRB, and the supervisor within seven working days. There will still be a fine if instead it doesn’t meet the new 20 working day deadline. As it stood, though, assurance practitioners if convicted would have been liable on conviction to a fine not exceeding $50,000 for either of those requirements as they stood in the legislation. The SOP amends the bill so it’s not an offence if an assurance report fails to comply with applicable auditing and assurance standards. The risks of criminal conviction could deter high-quality assurance practitioners from taking on greenhouse gas assurance engagements. Assurance standards for greenhouse gas emissions is new territory for the industry. We want to make it permissive for folks to turn their hand to it. Practitioners may not want to risk, as the bill currently stood, committing an offence by not meeting the standard. So that’s why we have made that change.

In closing, the refinements and changes that we’ve made will help the bill to achieve its aims of ensuring that climate change risks and opportunities are routinely considered in business and financial market decisions. It will also support intergenerational equity through informed investment decision making. We are seeking here to make sure that New Zealand’s financial markets disclose clear, comparable, and consistent information about the risks and opportunities presented by climate change and believe that that transparency will enable the efficient allocation of capital and effective markets. I commend this bill to the House.

Mr Chair, thank you very much. I want to thank the Minister for his intervention there, which ran for almost 13 or 14 minutes. I do commend him for that, because I remember, during the second reading, members opposite—members of the Government, his backbenchers—standing up and saying how very important this is and the amazing things, the important things, it will do to address climate change, and saying that they are a responsible Government and they take this seriously, and they spoke for about a minute and 14 seconds each, each time, it was so important to them. I did have a constituent email and it said, “Well, I suppose they’re not adding to greenhouse gases through their long speeches.” But I do want to thank the Minister for taking the time to actually set out the reason that he’s brought the bill, the importance of it.

Can I start by saying how I feel for him. I remember when I was a Minister and things were passed to me when I got a new portfolio after an election, and I would look it at and think, well, it doesn’t actually achieve what the last person—the last Minister—said that it would; it feels like it’s overhyped, but you’ve just got to grin and bear it and get through it and keep reading from the paper, and he’s done that admirably. I think, actually, if the Minister had been here with his portfolio in the last term of Government, he would have actually done a proper job of it, and I think the previous Minister, of course, as support partners they needed before—they don’t need the Green Party now, but, of course, they’re still nice to them in case they need them in the future. You’ve got to pay credit to the former Minister James Shaw, but, actually, this Minister knows, as we do, that whilst it sends a signal to the world, it doesn’t achieve anything else and doesn’t do anything more than that. It does run the risk of burdening business in areas that it shouldn’t, because every time there’s a regulation, there is a cost of that to business. In some cases, I suppose, for the very large insurance companies, the banks, it’s not significant, but it is getting them to do something they do already, and for those companies that are listed on stock exchanges in New Zealand or around the world, they already need to do these sorts of things.

National is supporting this, but we have three Supplementary Order Papers (SOPs); two are tabled to this part, they’re on the Table already, and they are in my name. We think that, actually, there needs to be things done here to address this so that any unreasonable burden that’s placed upon businesses and companies is met, it’s not there, it’s not unreasonable—we want to give them good time frames to get through this—and that Government entities and private sector entities are treated the same.

The Minister mentioned earlier in his intervention that there’s another way to deal with public sector entities. Well, if it’s good enough for the private sector, it has to be good enough for the public sector, and it’s not enough to say, well, public sector companies are under a duty of care when Ministers write to them with their expectations every year, and we could go further—actually, of course the Government can go further, but if you are going to have a requirement on a like-minded, same business in the private sector, why is the Government exempting itself? It’s not reasonable, it sends the wrong signal. That’s an SOP that I’ve put down to include public sector entities in this, and I will speak to that in Part 1A. Is that right? The Minister wants to respond to that—yeah, go ahead.

I do thank the member for his contribution. Whilst I don’t agree with some of the sentiments he expressed at the beginning, I sincerely do believe this is a very important piece of legislation, actually. This is about the fair, transparent, and efficient running of public markets, and if we believe in the efficient allocation of capital and we believe that there’s also a climate crisis, we do want to see that capital used in a way that doesn’t endanger markets because the information is not clear or transparent or comparable and creates risks in our market—volatility and so forth. Those who believe in the value of markets want to see an efficient market with good information, and so consistency of information is important.

So I do think this is incredibly important, and, equally, as to the allocation of capital, those who are concerned about climate risk, and they are many, will also want to see that they are supporting companies that don’t have risks in the future on their balance sheet that are climate related and/or that are taking appropriate mitigation where they do have risks on their balance sheets that are climate-related. So I think this is incredibly important legislation. I pay, again, tribute to the Hon James Shaw for the work that he’s done to develop this legislation, working with the Government during the last term.

What I also want to respond to the member on is in respect of his SOP to require public entities to make climate-related disclosures. Here he is suggesting a whole lot more red tape when there are other measures. There are 4,000 entities that qualify as public entities in the Public Audit Act. He is wanting them to, essentially, go through two processes. For a Minister that claims that “We don’t want red tape.”—and I have heard him say that before—I’m just a bit bemused by that desire. There are 15 public climate-reporting entities that are captured under the bill: Kiwibank, Air New Zealand, some port companies, some energy companies, and so on. So these companies are captured, and it’s a matter of scale and it’s a matter of public markets working efficiently. This is a bill that is focused on public markets. I expect investors in the future will demand more climate-related disclosure from private equity companies and concerns as well. But this bill is targeted, clearly, at those that are public reporting entities.

I thank the member for that. In fact, my Supplementary Order Paper is very specific. It doesn’t deal with all of those. Of course, he mentioned Air New Zealand. Air New Zealand’s already on the stock exchange, and it actually wouldn’t be deemed under the scope of the bill to be covered anyway because it’s not a lender or borrower or insurance company. But there are five that I have mentioned here. So it’s not all; it’s Crown financial institutions.

If we take the example the Minister’s just given of investors wanting to know about any liability or effect that climate change might have upon the investments or conduct that a business has, an issuer or a lender, well, the New Zealand Superannuation Fund or ACC corporation, whilst they’re Crown entities, are actually not owned by or benefit the Government. They are taxpayers. They are New Zealanders. If it is good enough for the private sector to have to meet these requirements, then it should also be good enough for like-minded or similar or the same entities that are Crown financial institutions, the Super Fund or the ACC, to also be covered.

The point that we’re making here is—and I agree with him—too much red tape, bureaucracy, is a cost. His Government is bringing this forward and saying to the private sector that they must do this, but there are entities that are the same, and if they are covered by the scope of $1 billion or the $60 million—everything else that’s in here—then they too should have to comply. If a Minister wants them to go further, they get to instruct them to do that. Although, in the case of the New Zealand Superannuation Fund or ACC, there is some direction, but there is independence when it comes to investment, unless a law is passed in this Parliament. They get to decide what the investment is. If the Government doesn’t like the way they’re investing, they can change the board, but they don’t get to sit there and decide upon every single investment. They can ask them to do levels of reporting, I suppose, or bear things in mind each year, but, actually, they don’t get to do it by statute—and this is statute.

So we’re saying to the private sector, to a bank or an insurance company, “You must do the following things because of climate change and to see the impact of climate change on your company—not your activities but on your investments and the liability, perhaps, or the effect it might have in the future.” If it’s good enough for them, why not the Superannuation Fund or ACC, because in the end, to the investor or the taxpayer, they are the same. If there is a requirement and if the Minister says he thinks that the private sector investors will ask more in the future of private companies in as far as climate change is concerned, well, I guess the New Zealand public doesn’t get to do that as taxpayers unless the Government wants to. But the Government can only go so far, because this statute, this piece of legislation, won’t apply.

I have other interventions, but I’ll allow the Minister to respond.

I’ll spell it out, perhaps, as clearly as I can. The four Crown financial institutions that have more than a $1 billion of assets under management, which are the ones the member’s referring to, will be required to make climate-related disclosures. The decision’s being implemented through letters of expectation, and I give the member my undertaking that this Government will implement that. If ever in the future he and his members were on this side of the House, I would anticipate they would do similarly, because this is the rhetoric he is putting forward—that he thinks they should be making those same disclosures.

So rather than broadening the scope of this legislation, which is quite specific, ACC, New Zealand Superannuation Fund, Government Superannuation Fund Authority, and the National Provident Fund will be required, through the letter of expectation process that Ministers have legislatively to use, to make climate-related disclosures. Further, I give him an undertaking that if the Earthquake Commission fund reaches $1 billion, it too will be required through the letter of expectation process to do the same thing. This is the direction of travel.

I thank the Minister in the chair for that, that his Government has given an undertaking, but this is legislation that specifically sets things out. Now, unless the letters of expectation—that he doesn’t get to write but other Ministers do—set out the exact same requirements as will be agreed at some time in the future via the External Reporting Board (XRB), then, actually, there will be a difference. So it’s good that the Minister has said he wants to do that, but it actually is an exemption. Those businesses, those Crown entities, that he is speaking of are exempt from a piece of legislation when you have two companies that are identical, are the same, the only difference in this case is the ownership—and one is owned by the Crown, one is not owned by the Crown; it is owned by the private sector. Why has he decided to treat them differently?

If his argument is that the Government wants to go further and doesn’t want to place those requirements—or that burden, perhaps—upon the private sector, then that’s reasonable, but he hasn’t said that. He said it will be the same, although he doesn’t know what the reporting requirements will be yet because they are not yet set. He said that the XRB is consulting, but we don’t know what they will be and how that will happen. It could be that in the future, the Government says, in their letters of expectation, “You must abide by the following:”, but, actually not by law, because if they decide not to, the Minister or the Government has to call them and tell them off or would have to sack a board member, and that’s not necessary.

Now, I know that the boards are responsible. They act and react to letters of expectation. But there have been many occasions where the letter of expectation—the interpretation between the Government and a board of a Crown-owned entity is different. In the case of this law that’s being passed, that has support of the House, it is very, very clear, the obligation, the intention, and the requirement, and the XRB will make a decision.

So, ultimately, I’m actually not arguing for more regulation and more red tape; I think there should be less cost. But if it is fair enough for the Minister to say that there is an exemption for Crown entities from this legislation, then he should say why, not: “Well, we’re doing it anyway and we can write letters.”, because he’s writing a letter, or his Government is as the owner, but he is not giving the same ability to the private sector owners; he is requiring something by law. He should treat the private sector and the public sector the same in as far as this legislation is concerned. If he wants to take it further, his Government, he has the ability to do that through letters of expectation.

But, ultimately, where a company in the private sector is covered by this legislation and they don’t meet the requirements, they break the law, there is a fine; well, that’s not actually going to happen. If anything—and I’ve seen how these things work because it is very, very political; it’s a slap on the hand, or a telling off, or a “fix it next year”—actually, they should be treated the same.

Obviously, I mean, the member’s argument is becoming fairly repetitive, so I won’t respond to the same points that I have responded to again. But what I will do is I’ll just give the wider piece of context, which, of course, is that the Government has a carbon-neutral programme from the 2021-22 financial year. All departments, departmental agencies, and non - Public Service departments will be required to measure and publicly report on their emissions, and offset any emissions necessary to reach carbon neutrality by 2025.

On this side of the House, we are ambitious for achieving carbon neutrality. So we are setting expectations that are significant on our Public Service departments and those things that report into the Government. So that is the wider piece of context which I think is very important that the member conveniently omits or neglects to mention in his arguments.

Look, I thank the Minister, but this legislation has nothing to do with the Government’s target of being carbon neutral by a certain date. It doesn’t do that; it asks the private sector to report upon climate change upon their balance sheet and risk to them. It doesn’t make a single private sector company change how they act, just report, and so they are two very different things.

So the Government may, in their letters of expectation to these Crown institutions, say to them, “We want you to be carbon neutral by a certain date.”, but they don’t get to say to the superannuation fund, “And we want all your investments to be carbon neutral or to be the following to do with climate change.”, unless they change the law. They don’t get to direct them in that way, because it’s important there is independence in as far as the super fund and ACC and how they go about their investments. There are times when this House has passed a law that says, “We don’t want these entities, these Crown entities, to invest in a certain way.” That has happened previously around weapons and so on. But the Minister is trying to confuse things by saying that the Government has a target of all Crown entities or the Government being carbon neutral by a certain date and suggesting that that is the same here. It’s not.

Ultimately, what the Government is doing is putting a legal requirement upon businesses, a number of businesses, to report the impact of climate change upon their business, not what they’re doing about climate change, but upon their business. In the same breath, they’re saying that businesses that are the same, with the same size assets that invest in the same ways but are owned by the Government, don’t have to do that and this Government knows better and will just direct them themselves.

The case that I’m making is that that’s not right. If it is good enough for the private sector in this case, there should not be an exemption from this legislation for certain Crown financial institutions. The Minister has mentioned that, you know, my arguments are repetitive. It’s because he hasn’t actually addressed the reason that there isn’t a difference yet.

Thank you, Mr Chair. I wonder if I may assist in this and perhaps accelerate moving through this point by talking about the relationship between the Carbon Neutral Government Programme and the legislation that’s being debated today. So, as the Minister has said, the Carbon Neutral Government Programme includes reporting requirements for all public entities. Those reporting requirements are intended to be similar to or as close as possible to those that will be the reporting requirements under this legislation. However, as the member who’s been on his feet a lot recently has mentioned, you know, private entities do have slightly different requirements. They have shareholder requirements and allocation of capital requirements that are different from public entities, and so the precise nature of the reporting won’t be, you know, a perfect apples for apples comparison. But the intention is that all Public Service departments—all departmental agencies, the New Zealand Defence Force, the Police, the Parliamentary Counsel Office, etc.—will be required to report on their metrics and targets from 2021-2022, which is a year ahead of where the private sector will be required to report under this piece of legislation here.

Now, entities under this amendment bill, of course, are required from 2023, according to the standards in the External Reporting Board. Now, it may be that the member would be more comfortable if the Carbon Neutral Government Programme itself had legal backing, and so it would be good to hear if they would support legislation that, essentially, took what is currently a governmental requirement on every single Public Service agency to report to a similar standard—if they would be prepared to support legislation that would require that of the public sector so that the public sector entities are required under the law, just as these large reporting entities are under this legislation.

The member has put forward a Supplementary Order Paper. I think it’s good that he’s thinking this way, that it’s obviously important for the public sector and publicly owned funds and other entities to take the lead. That is why, under the Carbon Neutral Government Programme, we said that they had to report earlier than under this programme, because we agree with the member on that point and look forward to his wholehearted support for the Carbon Neutral Government Programme and the reporting requirements therein.

Thank you, Mr Chair. Well, the first thing I would say is—I think my learned colleague has just raised the issue of consistency, and I think that’s a fundamental principle that should be adopted: what is good for the private sector should be good for the Government sector. I think the argument that if you’re going to make a distinction, then the best way to do that is to make the legislation which we are talking about today consistent, and it’s not. I think he makes a very valid point.

I haven’t sat on this committee, so I’m a little bit new to it, but I was just looking at the new Supplementary Order Paper 63 that the Minister’s put up, which is the one that deals with the issue of value of $60 million, which, from what I understand, less than 1 percent of companies have on market listings, so the proposition’s been that a small number of companies will be affected by that. The first thing is I’d just be keen to get some clarification from the Minister: when the figure of $60 million is quoted, what does that include? Is it merely equities and does that mean share capital? Does it mean debt? Does it mean pseudo or quasi-capital—auctions, warrants? Are they part of that valuation? That’s my first point. So maybe we’ll deal with that and then we’ll deal with the billion-dollar question in a minute.

I’ll come back to the member with more detail on that point. I’m happy to deal with his next question.

Thank you. Well, I am a little bit surprised, because the Supplementary Order Paper is in your name. So let’s maybe go back. First point is why $60 million, which is the—and I see that you’ve changed that clause in the bill. You’ve replaced new section 461OA in clause 7, which previously just talked about a large issuer, and now you’ve defined it as being $60 million.

So the second question, while we’re waiting for an answer from the Minister: the big question I’ve got around the use of value is at what point is the value determined? Because as we all know, listed companies, and with all companies, have to value their assets, and normally on a mark-to-market basis. Is this only at the end of the financial year? Or what happens if the value of the assets goes up during the course of the year but declines, and therefore it’d be under the threshold at, say, 31 March, which is the normal balance sheet? So how are those inconsistencies or irregularities or increases and decreases in value actually accounted for?

I want to make sure that I come back to the member with the appropriate technical answers to his questions. I imagine the normal process will apply, as with other accounting provisions, but I will come back to him with the further technical advice on that. I expect that’s what he expects too, but it’s always good to have these things clarified.

I must admit, Mr Chair, I’ve only spent the past 15 minutes looking at the bill. I don’t proclaim to be an expert but it was an issue that sort of seemed blindingly obvious to me. So, hopefully, we’re going to get an answer quickly.

So the second aspect I was going to talk about is we’ve now got a $1 billion threshold. So we’ve got the change that Supplementary Order Paper 63 put up by the Minister—that was talking about $60 million. Then we’ve also got this issue around a $1 billion, which I think assumes that relates to fund managers. I don’t know and I’m hoping I’m going to get clarity from the Minister on that.

Again, it is interesting from a fund manager’s perspective. First of all, maybe we’ll just clarify some scenarios. So if I’m a private fund manager, but I have $1 billion and $1 in listed entities, am I captured? Secondly, am I going to be captured if I’m still that private entity with a mixture of investments in equities listed on the stock exchange and a mixture of bonds listed on the stock exchange, and then a range of private bonds and private equities, which are not listed and, obviously, there’s not a readily available market price for? So, again, I’d be quite interested in that scenario.

For listed debt issuers, the current test is based on the net assets of the issuer and its subsidiaries.

OK, so I don’t quite understand that and I’d be hopeful that the Minister might be a little bit—when you talk about the net assets, presumably, is that total investments, and is it total market investments or does it include non-market related investments? Secondly, does it include non - quasi-equity instruments such as warrants, options, whatever, that do have a true value but are not readily valued? So, again, I’d be keen for some update on that.

OK, well, while we’re waiting for that, the issue—just going back to our $1 billion, because, hopefully, we’re going to have some answers soon on this. The issue around the fund manager: I’ve put up a proposition where you’ve got a private fund manager with a range of investments, both listed and unlisted—so I see the adviser’s come back, so maybe I’ll just wait for a response before I carry on.

Thank you, Mr Chair. Perhaps I can fill a little time in while the Minister does some homework. Look, I think we have to be clear about what this bill is about. I think it was all laid out by the Minister in his opening statement, where he said we are world leading—others are following, and they’re following fast, but we are world leading. That’s what this is all about. We’re trying to get ahead of the game and do something around climate change, because, actually, we haven’t done anything other than declare a climate emergency. The only urgency that’s been shown around climate has been the declaration of a climate emergency, and nothing else has followed.

It would seem strange that this would be the bill that would seem to be their “get out of jail free” card, particularly when we don’t actually have the standards, and we won’t have the standards until 2022—December of 2022, actually, is when we’ll get the standards—and the Minister said that public entities are going to have to report in 2021-22, which will be ahead of the standards that will be set for the private companies and public companies. So the public entities are going to report—what? What exactly are they going to report, because we don’t know what the standards are? Are we going to have a whole lot of a hotchpotch of reporting and the Government entities sitting back there congratulating themselves on how well they’ve done, but how well against what? That will be the question.

I note also that the one thing the licensed insurers and the banks and the credit unions are in the business of is actually measuring risk. Everything they do is measured against risk, and climate change is just another one of those risks and they are very well aware of it, so I think this is just another needless impost on business.

I would like to know what assessments were done by officials into the costs of reporting to these standards. Are we expecting that all that will be required will be the normal risk, which will probably cover all this anyway? Will it be acceptable if they’re lifted off their records and collated into a form to meet their standard, or are we going to have to go back through and reinvent the wheel and actually come up with the same result but do it in a different way, which will add significant costs to business?

Actually, all business at the moment is struggling when we have something really real and present out there that we need to deal with in a business sense, when businesses that are going to be captured by this are already doing probably way more than they’re going to be required to—and way more, I suspect, Minister, than the letters of expectation that will go to the public entities. They understand risk, but they also understand what their customers want and need, and their customers are interested in climate change and in seeing that the people that they deal with on a day-to-day basis are living up to their expectations.

So I just see this as a solution running around looking for a problem, and I think, as I said in the beginning, it’s all about having something to announce in Glasgow so that the Minister can puff his chest out, as he walks around in Glasgow, saying, “Well, we’ve actually done something. We’re world leading.” Yeah, we’re world-leading—at what, exactly? So I look forward to the Minister’s answers to the questions. Hopefully, he’s got the very insightful questions that Andrew Bayly has asked; he should have the answers to those. And, given that they revolve around the Minister’s own Supplementary Order Paper, I would have thought they would have been top of mind. So we look forward to hearing the Minister in his response to those questions. Thank you.

Mr Chair, I’m just waiting to—

CHAIRPERSON (Adrian Rurawhe): Andrew Bayly.

OK. I was just hoping the Minister was going to take the opportunity, but maybe we’ll move on to a new topic. I just want to talk about the change around the assurance practitioner licensing arrangement. This relates to clause 7, of course, in Part 1. There’s been quite a change to this, as I seem to read here, and it’s around the question of who is a qualified assurance practitioner, to be able to do what’s called CRDs, which are climate-related disclosures. I suppose there’s been quite a change in the bill, moving away from the concept of having approved climate assurance practitioners to one that really revolves around more of a process—that reports are tabled and lodged within, I think, 60 working days, from what I could see here.

So my issue is, first of all—maybe the Minister can just help us—who can be a qualified assurance practitioner now. I just read the commentary, and it talked about accounting firms and whether they were actually precluded from being an assurance practitioner. So, one, is I’d quite like to understand who can’t be one, and, secondly, who might be one and what is the process for them to do it other than what may be suggested? I don’t know if my assumptions are right about whether you just put yourself out as someone suitably qualified and the company makes sure it files your report in 60 days, but I’d just like a bit of clarity around that assurance practitioner arrangement.

There are already greenhouse-gas assurance practitioners, but it won’t be till the third anniversary before any standard around that needs to be lined up. We’re expecting new people to take this on, as I outlined in my introductory comments.

I do want to come back to a couple of other questions that have been raised. The member Stuart Smith raised a question around what standards would be applied to the public reporting entities—to those listed on public markets; prior to that what were public entities. Again, as I mentioned in my introductory material, the standards will be based on the recommendations of the task force of climate-related financial disclosures, and that material, of course, was confirmed in 2017. So this is not a new area. There’s not going to be great surprises in here, and at the same time, the External Reporting Board, of course, is obliged to give those who it’s issuing the standard to a chance to be comfortable with the standard, to go through due process and raise any concerns.

In respect of the previous question of the member opposite, the new section 461OA(1), set out in clause 7, is amended so that the size of a listed issuer of quoted debt securities is measured by the face value of their quoted debt securities at any time during the last two accounting periods, instead of the value of their net assets as at the balance date of those two accounting periods. A listed issuer of both quoted debt securities and quoted equity securities will be a large listed issuer if they are large in terms of the value of their equity securities or in terms of the face value of their debt securities or both. But you cannot combine equity and debt securities for that total, and the amount that must be exceeded is $60 million.

The member will appreciate that many of these matters are technical and I want to be absolutely spot on when I report back to the House. Unfortunately, many of our officials who have worked away on this are out in a back room because we have some COVID restrictions on how we operate in the House today. So if members are patient, if they do have technical questions, I will come back to them because I regard them as important and I do want to make sure that we are providing that technical information. Most of the rest of the argument, obviously that raised by Mr McClay, is more of a rhetorical nature. Happy to respond to those arguments one by one, but obviously where’s there’s repetition, we’ll just let the argument and debate continue.

Thank you, Mr Chair, and I thank the Minister of Commerce and Consumer Affairs for his explanation of the officials in the back room—I was worried they’d gone fishing or something, but they’re still here.

There’s another part of the legislation I want to come to—sorry, this part but another section of it—and that’s around the comply or explain provision. Very clearly, for people listening in, where an entity is of the view that, actually, they have no exposure or risk from climate change, they could explain why they were not reporting. That was in the original legislation at first reading, as tabled in the House. During committee, that was changed based on perhaps a submission, but advice from Government. I have a Supplementary Order Paper in my name to put that back in, and the reason I think this is very important is, look, we want entities to meet their obligation, to do what the legislation says, but in the case that there is an entity, a private sector entity, that actually does not have any effect of climate change upon it for whatever reason, it’s unreasonable and unnecessary for them to have to go through this procedure—a very long procedure—to report on something to say “We have nothing to report.”, when they could just explain why it is they’re not reporting.

Now, the legislation says you must comply. In the case that a business says “We explain that we’re not affected by this.” and they are, they have broken the law. It’s not an exemption from meeting their obligation; it just says there’s a shortened procedure in a case that you are not affected by climate change. I would say that it was in the original legislation the Minister brought to the House and spoke of, and then it was changed. I think it’s a mistake that we’ve made that change. It doesn’t lessen the impact of the bill—although the bill doesn’t have a lot of impact anyway, but it doesn’t lessen the impact. It doesn’t alter the requirements of the entities that are covered by this legislation to report properly based on the standards that are being set, but if there is an entity that has no obligation, no consequence of climate change upon them as a result of the legislation, then, actually, we shouldn’t be asking them to go to the extent of what would be a very costly and long procedure to come back and say, “Nothing to see here.”

I don’t think it would be used very often, but it’s actually good lawmaking to say, “If this doesn’t apply to you, we’re not going to burden you with it.” The Minister did say in his introductory remarks it would create a two-tier system. It wouldn’t. It actually wouldn’t be a two-tier system; it would be a one-tier system where if somebody’s not covered, they could explain why, and if they got the explanation wrong, then they’ve broken the law under this legislation and they’d be held to account.

Well, obviously, I did cover this off in my introductory remarks, as the member notes. I stand by the view that a system that enables two records to be compared with each other is better than one that has two different types of records. The whole point here is to have comparable records. So if somebody is a climate reporting entity and they don’t believe they have substantial matters to disclose, they still would have to, as the bill was originally worded, demonstrate that. That was believed to be quite onerous, actually, because they would have to go through a process of providing an alternative type of report. We would have two different types of report then: one which demonstrates and seeks assurance around not needing to disclose, and one which is around disclosure. So it was deemed to be much more sensible to have a system where all reporting entities prepare the same climate statements, and those that identify minimal climate risks will have less to disclose.

Thank you, Mr Chair. Hopefully, we’re going to get some answers before this debate gets closed down, unless the honourable members opposite are, hopefully, standing up to ask some questions, which they haven’t to date.

CHAIRPERSON (Adrian Rurawhe): That’s entirely the Chair’s decision, so you should carry on.

I just don’t understand the explanation the Minister provided before; I’m grateful he attempted to.

So let me give you a scenario. There’s a listed investment company. It has $50 million of equities on the market and it has $9 million of debt securities on the market. It actually has a portfolio of investments that have a value of $900 million, but alongside it, outside the listed debt bonds that are issued on the market, it has a huge amount of bank borrowings. During the course of a year, the value of the business goes up. The value of the equities goes up from $50 million to $60 million; therefore, breaching the $60 million test—if I understand it—but by balance sheet, it comes down to being within the $60 million cap. Is that company captured under the rules?

That was my point before around at what point in a year over the two-year period—is it a balance date or is it at a different date, because the value of the assets, not only its own value of its equity or debt instruments but also the value of its investments, might have gone up and down during the course of the year. So, hopefully, we’re going to get an answer.

I move, That the question be now put.

Thank you, Mr Chair. Minister Clark, the final Supplementary Order Paper (SOP) of the three that I’ve put in there is around when these obligations will be placed upon the businesses covered by the scope of the legislation. As I understand, as it’s currently written, it will be 12 months after Royal assent—so, entering into force. However, the External Reporting Board (XRB), although the Minister has said they’re currently consulting, they haven’t set the standards yet, and there isn’t a requirement in the legislation as to when they might do that. Look, I think the XRB will take its responsibility seriously, but I am concerned that there won’t be enough time for companies to take their responsibility seriously and meet these requirements. So this isn’t about not having to meet the requirements; it’s about a fair period of time. What I’ve suggested is a—

CHAIRPERSON (Adrian Rurawhe): Is that in the commencement clause?

So there are two parts. I think it’s in Part 1 and Part 1A, is my understanding.

CHAIRPERSON (Adrian Rurawhe): OK.

Part 1 amends a date and then Part 1A also does, but maybe the Clerk can clarify that for me. I understood that—[Chairperson seeks advice]

CHAIRPERSON (Adrian Rurawhe): Yeah, you can actually have that debate under clause 2, but I’m happy that you’ve mentioned it in passing. It is a little bit irrelevant.

Yeah, so, well, I’m at your guidance, Mr Chair, but with the exception of 1A, my colleagues finding it erroneous, we probably won’t debate much longer since we’re supporting. But in this respect, the suggestion is that, actually, the dates be changed so from when the XRB brings forward the reporting requirements, companies have two years to be able to meet those requirements. Look, it’s actually not about an extended period of time, because these companies will take it seriously; in many respects, they’re probably already considering this. It is good that the XRB is talking to them, but, ultimately, for some of these very large businesses, particularly when one considers they do have investments around the world, it could be quite some amount of work, and we don’t want undue pressure to come on them, or unreasonable cost, because whether they meet it in the first year or two years afterwards actually means the same to the climate. The reason for that is this legislation doesn’t make them alter anything they’re doing, in meeting lower levels of climate emissions or anything else.

So I’ll have one more question after this, but, to the Minister, the SOP suggests allowing more time—not unreasonably, I think—for the entities covered by the scope of this legislation to meet the requirement once the XRB publishes the standards.

This is a new point the member’s raised. In addition to climate standards, the XRB intends to issue an adoption standard which lays out a pathway for climate reporting entities to adopt some of the more challenging disclosure requirements. Adoption standards offer various provisions to entities when a new standard or new requirements are to be applied for the first time and can include practical expedience, phased adoption, or relief from providing comparative information. It’s a recognition that for those who are doing it the first time, a more pragmatic approach will be taken.

Thank you, Mr Chair. I just remind the Minister that I’m still waiting for some answers that were to be provided, and I appreciate the officials who are out the back doing their bit. But there was a difference between—I gave him a scenario about the value changing over the course of a year and at what point is it valued. It’s the same with the fund manager, the $1 billion one. There’s a fundamental question about when do you assess the value, and the second element of that was if you’re a fund manager, for instance, do you have to value non-listed investments as part of getting to your total of $1 billion. So, hopefully, we’re going to hear a response on that, and, hopefully, we’re getting a response back now.

But in the meantime, I did ask about the assurance practitioner arrangements. I think, from the Minister’s response, all this is to be decided in due course, and maybe he can confirm that, but who’s going to be deciding? Is it the Financial Markets Authority or was it going to be a recommendation, and to what extend can the Minister assure businesses that they’re not going to be lumped with exaggeration and excessive requirements around regulations imposed on businesses—so that we actually get to an outcome that means that the practitioners who can operate and have due skill are not exposed unduly to liability, because, frankly, trying to quantify climate change impacts on certain industries and businesses would be a pretty heroic mission in some cases.

So I’m just understanding the framework that’s being proposed, and when might the framework be available, because given the due date—and I just acknowledge my colleague’s suggestion, which on the face of it sounds a good one, which is to delay the commencement date for three years, rather than one year. That might give sufficient time to put those arrangements in place, because if people do want to become a climate change assurance provider, then, obviously, they’ve got to set up the processes, get the right skills in place, talent, and all that sort of stuff, and you don’t do that overnight.

So, again, those two key questions. Hopefully, we’re going to get a response.

I’m happy to answer those two specific questions. Working through, I confess I misheard the member’s example the first time, and the officials have, rightly—because I couldn’t make his numbers add up, but the officials tell me they do. So—

💬 Andrew Bayly: They do add up.

So they do add up, on this occasion.

So in respect of the equity securities listed of investment $50 million equity, $9 million debt, a portfolio of $9 million, and huge bank borrowings, the company goes over $60 million. So the entity must be above one of the thresholds, is the answer: $60 million equity debt or $1 billion assets under management at their balance date for two consecutive years.

The second question was around who can be a climate-related disclosures assurance practitioner. Anyone who is independent from the entity may assure their disclosures, as long as they assure against the Expert Reporting Board’s standards for auditing and assurance.

Thank you, we’re just about there. What about the unlisted components? So we’ve got a classic example, New Zealand super, that, obviously, has, I think, $59 billion of investments but is now increasingly investing in private sector, so in the unlisted. And also related to that, I keep talking about quasi-equity instruments—are they part of the $1 billion, are they part of that calculation?

I’m advised that they’re not.

I move, That the question be now put.

The question is that the Minister’s amendments to Part 1 set out on Supplementary Order Paper 63 be agreed to—no, not that one. The question is that the question be now put.

Motion agreed to.

The question is that the Minister’s amendments to Part 1 set out on Supplementary Order Paper 63 be agreed to.

Amendments agreed to.

The question is that the Hon Todd McClay’s amendment to Part 1 set out on Supplementary Order Paper 65 be agreed to.

The question is that the Hon Todd McClay’s amendments to Part 1 set out on Supplementary Order Paper 66 be agreed to.

The question is that the Hon Todd McClay’s amendments to Part 1 set out on Supplementary Order Paper 67 be agreed to.