More climate-reporting guidance for MIS Managers

The External Reporting Board (XRB) has finalised its guidance for Managed Investment Scheme (MIS) Managers on the Aotearoa New Zealand Climate Standards (NZ CS). A lot has changed.

The XRB is clear that MIS Managers need to keep their business model and investors in mind when preparing their climate statements. The final guidance is more detailed and tailored than last year‘s draft, which is welcome, but MIS Managers still need to engage with the challenging work of producing data and disclosures at the fund level.

The guidance is relevant to all managers of registered investment schemes that are “large” (with greater than NZD1 billion in total assets under management) or for MIS Managers who intend to publish climate-related disclosures voluntarily. While the guidance isn‘t binding, it is valuable and recommended reading.

We set out our thoughts on the pressure points for MIS Managers and outline the key changes in the guidance below.

 

“Pressure Factors”: What is the purpose of the MIS Guidance?

The MIS Guidance acknowledges the unique challenges for MIS Managers in climate-reporting. Unlike other reporting entities, MIS Managers don‘t report on their own activities, but on their separate funds and schemes.¹

The funds management sector faces the following challenges with climate-reporting:

• Risks of patchy reporting – MIS Managers often must consolidate information from multiple underlying investment managers, each with their own independent processes and procedures, or ensure consistency with reporting on investments in funds operated by other reporting entities;
• Assessing materiality – the intended audience for MIS Managers‘ climate statements are existing and potential investors, lenders and other creditors. Often the audience will be a mixture of retail and wholesale investors (as well as commercial lenders and creditors), and therefore it can be challenging drawing the line on what is material information that should be disclosed to achieve “fair presentation”;
• Identifying climate risks and opportunities across diverse investments – assessing physical and transition climate risks and opportunities across multi-country and multi-security funds can be challenging given the variation across assets and jurisdictions;
• Data – scope 3 financed emissions are the greatest part of MIS Managers‘ Greenhouse Gas (GHG) emissions. While emissions data is generally available for listed assets, many New Zealand schemes have funds where a significant portion of the portfolio is in unlisted assets (such as agricultural property). Obtaining downstream GHG emissions data from unlisted investments that is both accurate and timely can be difficult in practice, requiring an infrastructural and financial commitment from the investee;
• Scenario Analysis – scenario analysis focusses on creating hypothetical future climate states to help entities better understand the impacts of climate change. Establishing relevant risks and opportunities for a specific fund that may arise in a scenario can be challenging (and will be an area of focus by the Financial Markets Authority (FMA) in early monitoring).

 

What does the MIS Guidance say and how has it changed from the draft?

The overall message of the MIS Guidance is to approach NZ CS thematically with two focal points: business model and primary users. Of particular note:

• Materiality – what is material depends on the expectations of the “primary user”. Specific questions have been added to the guidance to encourage MIS Managers to engage qualitatively in their assessment of whether gathered information is “material” per NZ CS 3. If primary users would “expect” the information to be included then this points to the information being material;
• Value chain – the information on how to assess fund exposure to climate-related risks and opportunities in the context of the MIS Manager‘s value chain has been substantially re-written. The guidance now explicitly states that the underlying securities or investees companies are part of the value chain including in climate statements. The added diagrammatic example of a value chain for a fund covers almost all aspects of the MIS Manager‘s business, from product and service developments to distribution and advice.
• Metrics and Targets – the GHG emissions section has been substantially rewritten. Examples of sector-specific targets have been added. These examples may be a useful steer to MIS Managers when describing the targets that are used to manage identified climate-related risks to, and opportunities for, funds.
• Scenario analysis – the strategy section has been substantially rewritten, notably in relation to scenario analysis. Business model and investment strategy are considered “highly relevant” in terms of MIS Manager resilience/ongoing ability to manage climate risk to their funds under management. XRB states they expect approaches to scenario analysis will improve over time and encourage MIS Managers to apply their own judgement on the best approach to take.
• Identifying current impacts – “categories of events” can now be considered by the MIS Managers when a discrete event is too “granular to meaningfully assess”. This seems to imply that a thematic discussion for the disclosure in clause 11(a) could potentially be used.
• Identifying and assessing risks – additional material has been included on risks of relevance to MIS Managers, including numerous added examples (including those from international entities).
• Financial Statements and coherence – a new section has been added which explicitly states MIS Managers need to closely consider how climate disclosures speak to the information provided in financial statements. According to XRB, climate-related matters may affect financial statements in terms of the fair value measurement of assets and liabilities.

 

Where to from here?

• The guidance is effectively XRB‘s “final word” to MIS Managers – the XRB does not intend to publish further information that is of specific relevance to MIS Managers.²
• MIS Managers will always need to look beyond the NZ CS and guidance to international guidance, frameworks and protocols (for example TCFD, ISSB, SBTi, GHG Protocol and so on).
• The FMA has said its initial compliance monitoring focus will be on entities‘ record-keeping of their scenario analysis and on completeness of statements generally.³
• Scenario analysis is in progress across the sector. A recent Reserve Bank survey shows that the majority of respondents were yet to undertake climate-related scenario analysis but plan to do so within the next 12 months.
• We expect the MIS Managers‘ first-year climate statements to be mostly qualitative (over quantitative) with supplementary explanation. The use of the exemptions in NZ CS 2 is likely to be high.
• Market practice by MIS Managers will develop and converge from 2024 as reporting entities compare published climate statements.

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¹The MIS Manager‘s obligation is to produce climate statements in respect of each separate fund in the scheme where there is not common information across funds. If each fund within a scheme has common governance and risk management disclosures then the disclosures can be presented at a scheme level. Even if there is common governance and risk management, fund reporting may nevertheless occur if fund information would be material to primary users i.e., from a fair presentation lens.
²Note that, in relation to scenario analysis, XRB propose to publish a second process or method guidance by the end of 2023, called Entity scenario development: Getting started at the entity level.
³Note that scenario analysis is not subject to the first time adoption provisions.