On 8 October 2024, the External Reporting Board (XRB) released an exposure draft of the proposed 2024 amendments to NZ CS 2 Adoption of Aotearoa New Zealand Climate Standards and NZ SAE 1 Assurance Engagements over Greenhouse Gas Emissions Disclosures, along with an accompanying consultation paper (Consultation).
The Consultation contains four proposals to provide additional relief for climate reporting entities (CREs) through extending for an additional year the adoption provisions for scope 3 GHG emissions, anticipated financial impacts and transition planning, as well as establishing an additional adoption provision allowing a further year before assurance over scope 3 emissions is required.
The Consultation and the proposed amendments derive from feedback received by the XRB from CREs regarding their challenges with obtaining reliable data, high costs and making certain disclosures without comprehensive guidance. The Consultation closes on 30 October 2024.
What has happened?
NZ CS 2 establishes adoption provisions allowing temporary exemptions from, or alternative information disclosures for, climate statements prepared by CREs. NZ SAE 1 sets standards for assurance engagements over GHG disclosures. The Consultation proposes amendments to NZ CS 2 and NZ SAE 1 with the following effects.
Proposal 1: Delaying mandatory scope 3 GHG emissions disclosure
The Consultation proposes to extend the term of the following adoption provisions from one accounting period to two accounting periods:
- Adoption Provision 4: Scope 3 GHG emissions, in relation to the requirement to disclose scope 3 GHG emissions (under paragraph 22(a)(iii) of NZ CS 1)
- Adoption Provision 5: Comparative information for scope 3 GHG emissions, in relation to the requirement to disclose comparative information for the immediately preceding two accounting periods (under paragraph 40 of NZ CS 3)
- Adoption Provision 7: Analysis of trends, insofar as it relates to the analysis of scope 3 GHG emissions, in relation to the requirement to disclose an analysis of the main trends evident from a comparison of each metric from previous accounting periods to the current accounting period (under paragraph 42 of NZ CS 3).
This Proposal recognises feedback from CREs that many CREs have not previously reported scope 3 GHG emissions and do not have appropriate systems and controls in place to disclose accurately in year 2, as well as responding to concerns regarding availability of sufficiently accurate information on scope 3 GHG emissions from external data providers.
Proposal 2: Delaying mandatory scope 3 GHG emissions assurance
The Consultation proposes to establish a new Adoption Provision 8 that allows a CRE to exclude its scope 3 GHG emissions disclosures from the scope of the assurance engagement for accounting periods ending before 31 December 2025 (under paragraphs 25, 26(a)(iii), 26(b) and 26(c) of NZ CS 1). In addition, XRB has proposed to amend NZ SAE 1 to state that a CRE may use Adoption Provision 8 so that scope 3 GHG emissions disclosures are excluded from the scope of the assurance engagement in relation to accounting periods ending before 31 December 2025.
If an entity elects not to use Adoption Provision 4 to delay the disclosure of scope 3 GHG emissions, it may still use Adoption Provision 8, but the entity must clearly identify that its scope 3 GHG emissions disclosures have not been mandatorily assured.
This Proposal reflects feedback from both CREs and assurance practitioners that the assurance of scope 3 emissions is challenging, including obtaining information from third-party providers as well as concerns regarding evidencing data, controls and methodology. XRB also noted developing reporting and assurance of scope 3 emissions in other jurisdictions and expectations that systems around the world, including external data providers, will develop rapidly as more entities capture and report scope 3 GHG emissions.
Proposal 3: Delaying anticipated financial impact disclosure
The Consultation proposes to extend the availability of Adoption Provision 2: Anticipated financial impacts from one accounting period to two accounting periods. This adoption provision relates to the requirement to disclose anticipated financial impacts (under paragraph 15(b) to 15(d) of NZ CS 1).
As international best practice and user expectations on disclosure of anticipated financial impacts continues to evolve, and with little suitable guidance domestically or internationally, XRB has recognised the significant concern among CREs about disclosing anticipated financial impacts. In addition, there are still significant uncertainties associated with such forward-looking figures as CREs are just beginning to understand how they may be financially impacted by climate change.
Proposal 4: Delaying transition planning disclosures
The Consultation proposes to extend the availability of Adoption Provision 3: Transition Planning from one accounting period to two accounting periods. This adoption provision relates to the requirement to disclose information about the transition plan aspects of a CRE's strategy and the extent to which transition plan aspects of its strategy are aligned with its internal capital deployment and funding decision-making processes (under paragraphs 16(b) and 16(c) of NZ CS 1).
Due to limited guidance on transition planning available to CREs, and XRBs ongoing work to encourage international alignment on best practice transition planning, the XRB has recognised more time may be needed to enable disclosure of compelling transition plans after CREs have identified their climate-related risks and opportunities. Extending this Adoption Provision will provide time for CREs to conduct a suitable strategic process to embed climate-related risks and opportunities they have identified and to achieve high quality disclosure.
XRB's other proposals to support the CRD regime
The proposals outlined above do not replace but are in addition to the changes that may come out of the XRB's post implementation review of the climate-related disclosures framework, which is scheduled for 2025. In addition, XRB intends to publish guidance for assurance of GHG emissions disclosures, anticipated financial impacts and transition planning during 2025.
Our view
Our CRE clients have expressed similar concerns to those identified by XRB and provided as justifications for these changes in the Consultation document. In particular our CRE clients and their assurance providers have relayed challenges in obtaining timely scope 3 GHG emissions data, including from third party data providers, particularly in relation to financed emissions, as well as challenges in rapidly scaling up reporting, systems and controls to meet scope 3 GHG reporting challenges. Adding to the challenge is lack of international maturity in scope 3 GHG emissions reporting and assurance, as the requirements continue to develop in other jurisdictions.
In addition, CREs have told us that a lack of appropriately qualified assurance practitioners presents practical and cost challenges, and that insufficiently reliable data and evidence could result in scope limitations or qualification on assurance reports, which is an unacceptable outcome for many regulated entities.
We consider that the Consultation provides a pragmatic approach to address CRE's concerns, and hopefully provides sufficient breathing space to allow comprehensive and compliant reporting once the adoption provisions expire – although we expect that similar, albeit hopefully more limited, concerns will be raised again in a year's time.
What do I need to consider?
All CREs should read the exposure draft and accompanying consultation paper and if relevant, consider preparing a submission, either individually or through appropriate industry groups, as soon as possible, noting that the deadline for submissions is 30 October 2024.
If you would like assistance with preparing a submission, or have any questions about the consultation or any aspect of the mandatory climate-related disclosures regime, please contact a member of our financial services regulation team.
This article was co-authored by Andrew Suggate (senior associate) and Nicole Tan (solicitor).
