“The changes I am announcing today will bring climate risks and resilience into the heart of financial and business decision making. It will ensure the disclosure of climate risk is clear, comprehensive and mainstream... What gets measured, gets managed – and if businesses know how climate change will impact them in the future they can change and adopt low carbon strategies. COVID-19 has highlighted how important it is that we plan for and manage systemic economic shocks – and there is no greater risk than climate change.”
This move towards transparency, accountability, and incorporating climate impact into the heart of decision making, is a critical step in addressing climate change and fostering a sustainable and resilient economy.
About 200 entities are captured under the Climate-related Disclosures (CRD) regime, these organisations are known as Climate Reporting Entities (CREs), and mainly capture large listed entities and financial services.
CRE’s are required to publish their climate disclosures from financial years commencing on or after 1 January 2023, in accordance with Aotearoa New Zealand Climate Standards published by the External Reporting Board (XRB).
What about SMBs?
That’s a good question. The majority of businesses in New Zealand are below the CREs thresholds and therefore, there’s no compliance obligation to report.What many people don’t realise is that despite small and medium businesses not having an obligation to report they may still be impacted indirectly.
The fact is, around 90% of a company‘s emissions come from those they buy from or invest in, this is what we call Scope 3 emissions. For CREs, they’ll need their suppliers and portfolio companies to provide emissions data in order to understand their own footprint, and they will need that data to be prepared to the same audit-ready standard that CREs have to comply with (i.e. following Aotearoa New Zealand Climate Standards).
The pressure on SMBs won’t be from compliance, but rather, their customers. If you’re a business in the supply chain of a big organisation, they will be asking for your emissions data in the coming few years. With the pressure on the big guys to comply and reduce their emissions to meet their net zero targets. They’ll need this data to make decisions, such as“will continuing to purchase from this supplier help us to meet our net zero targets? If not, we will need to find another supplier that aligns with our emissions reduction plans”. The risk SMBs face is losing valuable customers and getting squeezed out of the supply chain.
In the end, every business, regardless of size, will be reporting on their emissions to someone in the value chain.
An entity must disclose metrics for each of the categories below (see paragraph 21(a)): (a) greenhouse gas (GHG) emissions: gross emissions in metric tonnes of carbon dioxide equivalent (CO2e) classified as (see paragraph 24): (i) scope 1; (ii) scope 2 (calculated using the location-based method); (iii) scope 3; (b) GHG emissions intensity;
An entity must disclose the following in relation to its GHG emissions (see paragraph 22(a)): (a) a statement describing the standard or standards that its GHG emissions have been measured in accordance with; (b) the GHG emissions consolidation approach used: equity share, financial control, or operational control; (c) the source of emission factors and the global warming potential (GWP) rates used or a reference to the GWP source; and (d) a summary of specific exclusions of sources, including facilities, operations or assets with a justification for their exclusion.
BC59. The XRB Board recognised that there are existing globally accepted and commonly used GHG emissions measurement and reporting standards, including the GHG Protocol Corporate Accounting and Reporting Standard (GHG Protocol) and ISO 140641 – Greenhouse gases. The XRB Board noted that this Standard is a disclosure standard rather than a measurement standard and confirmed it does not replicate any measurement methods in this Standard. In addition, the XRB Board did not mandate a single approach for measuring GHG emissions, but instead decided that an entity must disclose the standards it used to measure its GHG emissions. In the XRB Board’s view, based on the consultation and analysis undertaken, the outcome of measurement will be close to the same regardless of the measurement standard used.
How does Aotearoa New Zealand Climate Standards compare to IFRS’s Sustainability Standards?
A few notable points in relation to carbon accounting (See page 19-20, and Appendix 10 for the rest):
IFRS S2 Climate-related Disclosures requires using the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) (What is the GHG protocol?) to measure GHG emissions, whereas NZ CS does not prescribe which measurement standard to use to measure its GHG emissions, instead it requires disclosure of the standards used - which per BC59 noted the GHG Protocol and ISO standards. What do we think? With IFRS requiring the GHG Protocol, and other jurisdictions following suit, they’re all calling for global alignment and interoperability (so we don’t have to put together so many different types of reports!). Although many voluntary climate disclosure reports released in the last few years in New Zealand have adopted the ISO standards, we expect these New Zealand companies, especially those that participate in international markets, will prefer to transition to the GHG Protocol to be globally aligned.
IFRS S2 requires the disclosure of emission factors used to calculate GHG emissions, NZ CS requires the disclosure of the source of the emission factors.
What do we think? Disclosing the emission factors (EFs) used in the calculation of GHG emissions can provide a significant level of transparency, clarity, and credibility to the process. It is useful for users of reports to understand where the EFs have been sourced from e.g. from New Zealand's Ministry for Environment, or alternative emission factor databases. Disclosing the specific numbers used rather than just the emission sources offers clarity on adjustments that are integral to the calculation process. This is especially true where EFs that have been adjusted for foreign exchange rates or the Consumer Price Index.
The Financial Markets Authority (FMA) has already made it clear they will be monitoring closely - they’ve stated in the first few years they will be taking a “broadly educative and constructive approach, with an initial focus on issuing high-level guidance on compliance expectations, and moving to a more proactive regulatory role as the regime becomes established.” See FMA’s Climate-related Disclosures Monitoring Plan 2023-2026
Getting ready - what’s next:
If you’re an advisor, you may consider supporting your clients to get ready by:
Reading through this guidance and the relevant sections
Proposing a baseline emissions assessment to comply with emission reporting requirements
Identifying the source of data that would enable the client to assess risks across other categories covered by the standards
Making a plan to gather data that does not exist in anticipation of reporting requirements
Creating a target timeline for data collection, revisions, assessment and reporting from now until mandatory disclosures are forecast to impact your client.
The first climate reports under this regime are expected to be published in April 2024, we’re looking forward to seeing how New Zealand’s companies will be presenting these.