Carbon targets and ambiguity: The scrutiny to expect from an auditor

18 June 2024: This article clarifies the Auditor-General’s expectations and the auditor’s approach to statements about greenhouse gas targets and emissions reduction progress reported by public organisations.

We’ve provided auditors with guidance in response to concerns about “greenwashing” and public organisations including potentially misleading information in their accountability documents. This article summarises that guidance so staff in public organisations can be better prepared and avoid the use of misleading terms or practices.

As assurance practitioners, auditors have been questioning these statements to ensure that the information reported is transparent and credible and not misleading to users of that information. There is a professional ethical requirement (see Professional and Ethical Standard 1) to avoid being knowingly associated with information that the auditor believes contains a materially false or misleading statement, a statement provided recklessly, or a statement that omits or obscures necessary information.

Specifically, auditors consider the climate change-related information in:

  • councils' long-term plans and the consultation documents about those plans; 
  • public organisations’ annual reports; and 
  • any other document containing an audit or assurance opinion.

Terms that auditors are unlikely to accept

Some of the terms used in talking about carbon reduction targets or progress are too vague and lacking in meaning to be used in a public organisation’s accountability documents. Other terms need to be used carefully and supported by meaningful data.

We have asked auditors not to accept these terms in documents they audit without first consulting with and getting approval from the Auditor-General:

  • carbon (or climate) positive – as a statement of an organisation’s current status;
  • carbon neutral or net zero – as a statement of an organisation’s current status; and
  • any terms similar in meaning when applied to an organisation’s current status.

Auditors will question the use of these terms in accountability documents, regardless of any certification from a third-party certifier.

What to include in disclosures about carbon/emissions reduction targets and progress

Auditors will have expectations about the claims or disclosures made about carbon or emissions reduction targets and progress regardless of where the information sits in an accountability document.

The auditor will expect more detailed information when the disclosure is associated with a material performance measure. They’ll review the relevant disclosure and ensure that the minimum disclosure requirements (see below) are met.

Carbon reduction targets

Carbon reduction targets may be expressed in a range of ways, for example:

  • carbon neutral by 2050;
  • 30% reduction in gross emissions by 2030; or
  • 30% reduction in scope 1 and 2 emissions by 2035.

We expect clear disclosures that let a user understand what the target means. This includes:

  • saying which emissions are included and excluded (at a high level);
  • being clear whether the target is for gross emissions reductions or a target that can be met through the purchase of offsets;
  • where a target is described as a science-based target, then there must be clear explanation of what this means and how it has been determined (at a high level);
  • if the target involves certification, or similar, from a third party, an explanation at a high level of the nature and scope of the certification;
  • saying whether the entity has a plan for achieving the carbon reduction target or is working on a plan (we don’t expect the plan to be included in the disclosure);
  • explaining any technical terminology so it is understandable to a non-expert but informed reader; and
  • for long-term plans that include a carbon reduction target, clarity as to whether significant costs of achieving the target are included within the financial forecasts.

“On track” to meet an emissions reduction target

Some public organisations that have set targets for emissions reduction or carbon neutrality by a future date include statements that they are “on track” to meet these targets.

We expect the disclosures to be clear enough that a user can understand what “on track” means, including:

  • how “on track” has been assessed;
  • the high-level plans for the remaining emissions reductions required to meet the target; and
  • whether offsets or credits will be needed to meet the target.

If a public organisation makes an “on track” statement, the auditor’s scrutiny will depend on the location of the disclosure. If it’s a material (important) measure of the public organisation’s performance, the auditor will be asking for evidence to support that statement, then subjecting it to audit scrutiny.

If the measure isn’t considered material, the auditor will want to discuss it with the public organisation’s management team to understand what sits behind that statement. The auditor will need to be satisfied that any “on track” statement is reasonable and balanced, and consistent with what the auditor knows about the public organisation’s business.

If the “on track” statement is included in a section of an accountability document that is looked at but not audited, the auditor’s professional obligations and responsibilities are covered by an auditing standard - ISA (NZ) 720 (Revised) The Auditor's Responsibility Relating to Other Information.

The risk of “greenwashing”

There is an increasing risk associated with using terms like those discussed above. The terms have a wide range of definitions and can be interpreted differently by different people.

Readers can assume that having such a target means that a public organisation has a plan and is actively working to achieve the target. If that isn’t true, the public organisation can be accused of “greenwashing”.

Climate-related statements are being increasingly questioned by the public and regulators. If the terms used are vague and/or unsupported, public organisations leave themselves open to legal and reputational risk.

There have already been cases where complaints have been laid with the Advertising Standards Authority about the use of the term “climate positive”. One public organisation used the term based on being certified by an external party that required only a subset of emissions to be offset. The complainant interpreted “climate positive” to include all scope 3 emissions. The public organisation chose to remove the term from its advertising.

In summary, to maintain the trust and confidence of New Zealanders, public organisations need to provide clear, transparent, and accurate information about their activities. This is increasingly important for statements about climate change targets and progress.

We encourage staff in public organisations to talk to their auditor, to be better prepared and avoid the use of misleading terms or practices.