Capital markets reform submission supports reassessment of liability provisions

In December 2024 a series of proposed reforms aimed at revitalising the nation's capital markets were released for consultation by the Ministry of Business, Innovation and Employment (consultation closed on 14 February 2025). A significant aspect of these reforms centred on the climate-related disclosures (CRD) regime, with a particular focus on director liability.

In our submission we expressed strong support for mandatory climate reporting, recognising it as vital for a sustainable future and a tool to support climate action. We emphasised that while legislation is crucial for promoting transparency and accountability, it must strike a balance to avoid stifling meaningful disclosures. We emphasised that by reassessing liability provisions, policymakers can foster an environment that encourages honest, forward-thinking reporting, ultimately contributing to a sustainable future.

The reforms aim to refine the existing climate disclosure requirements to ensure they remain effective, internationally competitive, and do not inadvertently deter investment or board participation.

New Zealand was an early adopter of mandatory climate reporting, requiring listed issuers, large financial institutions, and fund managers to disclose climate risks and strategies under the Financial Markets Conduct Act 2013. These disclosures were introduced to improve transparency, strengthen investor confidence and drive corporate action on climate risks. However, as the regime has been implemented, concerns have emerged about the challenges of compliance, the legal risks for directors and the broader impact on market participation.

A key issue under review is that the existing legal framework exposes directors to significant risks if information in climate statements is later found to be inaccurate, even when based on the best available, but still evolving, climate data.

Directors have voiced concerns that uncertainty around emissions calculations, scenario modelling, and risk forecasts make it difficult to provide definitive disclosures without fear of legal consequences. This has led to a cautious approach, with some companies prioritising compliance over meaningful, strategic reporting.

The government is considering adjustments to reduce, but not eliminate, the liability burden on directors.

Proposed changes include removing personal criminal liability for directors where climate statements contain inaccuracies that arise from good faith reporting. Instead, liability would focus on deliberate or reckless misstatements, bringing climate disclosures more in line with financial reporting obligations. By refining these liability settings, the government hopes to strike a balance between accountability and practicality, ensuring that directors feel confident making disclosures without excessive legal risk.

Another driver of the reforms is international alignment, particularly with Australia, which is phasing in its own climate reporting regime. Australia's approach differentiates requirements based on company size and complexity, offering smaller businesses a more gradual transition into mandatory reporting.

The review also seeks to reduce barriers to market participation by addressing the high compliance costs associated with climate reporting. Many companies, even those with previous experience in voluntary climate disclosures, have found the mandatory regime expensive and complex, particularly due to the legal scrutiny applied to disclosures. The reforms aim to ensure that climate reporting remains credible and transparent without becoming prohibitively burdensome.