With Aotearoa New Zealand’s goal to become carbon neutral by the year 2050, the NZ government has been taking major steps to reduce our carbon footprint through climate legislation for businesses across the country.
One of the first crucial steps in attaining this goal is for individual companies to have clear and reliable data to reflect their carbon emissions. Armed with this information, governing bodies will have a more complete view of where we currently stand, and be in better position to take the steps that must be taken to get to where we need to be.
Climate change and climate reporting requirements are of global concern, not just here in NZ. In the past few years, we have seen a worldwide shift from voluntary climate-related disclosures to the mandatory climate reporting requirements that are enforced by domestic and international governments today.
With many nations, including NZ, following the climate reporting recommendations outlined by the Task Force on Climate-Related Financial Disclosures (TCFD), we can look to these other countries and their new climate legislations for direction as to what will likely be in store for us in Aotearoa.
What are the mandatory climate-related disclosures here in NZ?
The External Reporting Board (XRB) has issued a set of climate reporting requirements for around 200 companies across the country. These rules are based largely upon the recommendations of TCFD, and as of January 2023, require these businesses to release information regarding their climate-related risks and opportunities, as well as disclose reports of their greenhouse gas emissions.
This new regime will be gradually phased in, and by October 2024, these businesses will not only be required to disclose their greenhouse gas emission, but to have these disclosures and the underlying data assured by an independent auditor.
Who is directly impacted by these regulations?
Around 200 large financial organisations are required to produce climate-related disclosures as of January 2023. These companies include:
- All registered banks, credit unions, and building societies with total assets of more than $1 billion.
- All managers of registered investment schemes (other than restricted schemes) with greater than $1 billion in total assets under management.
- All licensed insurers with greater than $1 billion in total assets or annual premium income greater than $250 million.
- Listed issuers of quoted equity securities with a combined market price exceeding $60 million.
- Listed issuers of quoted debt securities with a combined face value of quoted debt exceeding $60 million.
However, while only 200 businesses will be impacted directly by the legislation, there are flow on effects for other businesses that either supply these companies with products or services, or rely on these finance companies for business and/or funding.
Who is indirectly impacted by these regulations?
The 200 financial entities required to make climate-related disclosures must disclose both their direct and indirect emissions (AKA Scope 1, Scope 2 and Scope 3 emissions). This may include the emissions of the businesses they choose to do business with as suppliers, any businesses to which they provide capital, or where they have insured assets or operations.
This is where we start to see the true impact that these new laws will have on a great many companies throughout NZ.
What are Scopes 1, 2 and 3 of Carbon Emissions?
The Greenhouse Gas (GHG) Protocol Corporate Standard classifies a company’s GHG emissions into three scopes.
- Scope 1 emissions are direct emissions from owned or controlled sources. An example of this is petrol used for company cars or fuel used to run company machinery.
- Scope 2 emissions are indirect emissions from the generation of purchased energy, primarily electricity or gas. This may be in the form of power used to run a company’s fleet of electric cars or to illuminate their buildings.
- Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company. An example of this is the greenhouse gases generated by employees commuting by public or private transport. Another is the waste of the company and its staff, such as landfill and water waste.
In requiring these 200 large institutions to disclose their climate-related data, every company that works with them to provide external services may also be required to disclose their own carbon emissions data.
These services include:
- waste disposal,
- production-related products (e.g. construction materials), and,
- non-production-related products (e.g. office supplies and furniture) and more.
The new legislation also requires the reporting of financed emissions. These are the emissions generated by the businesses that lenders fund or insure. In other words, if any business, small or large, requests funding via a business loan from a bank, they may be required to provide an overview of their own emissions for the bank’s own reporting requirements.
Failing to provide these emissions in enough detail may result in being unable to secure funding or get insured.
What can we expect by looking at other countries and their climate-related legislation?
Some of the other countries and regions influenced by the TCFD’s recommendations, along with New Zealand are Australia, the United Kingdom, the United States, Japan, and the European Union. There are observable trends among these countries —as well as others— when it comes to climate reporting legislation.
Mandatory reporting of climate-related data for financial institutions is usually just the first step a government takes toward their carbon net neutrality goals. Laws are sometimes later amended to include many or all large corporations and LLCs of the given country.
Here are a few examples:
- In Australia, at the commencement of the 2024/2025 financial year, large, listed entities and large financial institutions will be subject to climate reporting requirements. This includes scopes 1, 2 and 3 of carbon emissions.
- As of April 2022, Japan moved from voluntary to mandatory reporting. All companies listed on the Tokyo Stock Exchange’s ‘Prime’ market are obligated to comply with mandatory climate risk disclosure requirements. This directly affects over 1,800 companies.
- In the UK, as of April 2022, businesses with over 500 employees must comply with climate-related disclosure regulations. This includes reporting on scopes 1, 2 and 3.
- Countries throughout the EU have been spearheading the movement toward dramatically reducing their carbon footprint for years. Many countries require mandatory reporting by large companies in all industries. Again, this includes reporting of scopes 1, 2 and 3 of carbon emissions.
Following these trends allows us to predict what is likely to eventuate for other large NZ businesses in the future. This is why every company should be preparing to report on their carbon emissions now. The likelihood is that any company —small, medium or large— may be required at some point to provide this information to either the government itself or to a partnering business that is building a report on its own carbon emissions.
How overseas climate legislation changes are set to affect NZ businesses
It isn’t only NZ’s new laws which may affect you as a business owner. If you deal in international trade, you may be expected to accommodate foreign emissions reporting laws, as well as incur new costs.
A current example is an incoming carbon emissions law within the EU, known as the Carbon Border Adjustment Mechanism (CBAM). NZ businesses that export iron, steel, aluminium, cement, fertiliser or hydrogen to the EU may now be required to declare their emissions data, as well as pay the difference between the EU and NZ carbon prices.
While the CBAM is currently focused on carbon intensive products and industries, the expectation is that the EU will steadily expand the remit to include other imports. This is really a first step to get a system in place before aggressively expanding.
Again, this has further flow on effects for businesses that supply these exporters. Depending on the requirements of the CBAM, supplying businesses may be expected to provide their own emissions report for the purposes of the exporters carbon declaration.
- New legislation under the XRB requires 200 financial businesses in New Zealand to report on their carbon emissions.
- However, there are flow on effects for businesses that supply, are financed, or insured these companies via Scope 3 reporting requirements and financed emissions reporting by the banks and insurance companies.
- Further, overseas examples have shown that legislation rarely stops at just the larger entities, and with current emissions performance, it’s likely that the existing legislation will be expanded to include more enterprises.
- Lastly, exporters and those that work with exporters will be affected by international legislation, such as the Carbon Border Adjustment Mechanism in the EU, which also requires carbon disclosures.
- Businesses must prepare now for a future that will require carbon reporting across the board.
Forming a complete understanding of our role in climate change and our business’ role in climate reporting requirements won’t happen overnight. It’s not only familiarising yourself and your team with this vast topic that takes time; setting up the mechanisms to ensure your company is ready for what the future may hold is a considerable process. Begin the journey of calculating and managing your carbon footprint today so that you can be ready for tomorrow.
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