Climate reporting and the need to avoid greenwashing

Climate-related reporting and assurance is on the rise in New Zealand, including in the public sector. From 2022, central government agencies have to report annually their progress in reducing emissions under the Government’s Carbon Neutral Government Programme (CNGP). In local government, some councils and council-controlled organisations started reporting against their emissions reduction targets in their audited performance information in their 2022 annual reports, and more intend to do so in 2023. Other public sector entities also voluntarily report climate-related information, in some cases as part of broader sustainability reporting.

As well, around 200 “climate reporting entities” that operate in financial markets have to report on their climate risks and opportunities under the XRB’s new climate reporting standards. The first climate statements are due in 2024, and climate reporting entities must get assurance over greenhouse gas emissions disclosures in their climate reporting from 2025.

This is a significant opportunity to improve transparency and accountability for climate information. Climate reporting entities can show that they are not just thinking about climate change but that they are taking real action.

The need for fair presentation and integrity in reporting

Climate change is an issue with high public interest. The public should be able to trust and have confidence in reported climate information and get a good understanding  of the climate actions that public organisations are taking. Employees of public organisations will also have an interest in this information.

My Office has new responsibilities to provide assurance over greenhouse gas emissions disclosures in climate statements prepared by public sector climate reporting entities under the mandatory reporting regime.

In my ‘watchdog’ role, I will be taking a keen interest in climate reporting by public organisations and not just in the areas of reports where my auditors will be providing assurance.

Public organisations can set a high bar and be leading climate reporters by being clear about their actions, strategies, and timeframes, and how they will measure and account for their performance. This is a new area for my Office too. We are working on filling the gaps in our emissions data and reduction opportunities.

Honest reporting builds trust and confidence. As with all that they do  public organisations should approach their climate reporting with  integrity and avoid any “greenwashing” of their achievements or activities in their reporting, whether they are reporting voluntarily or under the mandatory regime.

Greenwashing risks

In the consumer and investment context, greenwashing involves making false or exaggerated claims about the environmental impacts or benefits of products or investment funds.

There is increasing climate-related litigation, with regulators taking enforcement action against greenwashing claims.

These risks could also arise for climate reporters through:

• having commitments that are vague or undefined, lack integrity, or cannot be backed up;
• over-reporting their greenhouse gas emissions reductions;
• being selective about which emissions to report, for example, only reporting where there are significant reductions to report, and not being transparent about omitting significant supply chain emission sources from their reporting; or
• reporting in an unbalanced or biased way.

There are also risks in over-stating the benefits of informal voluntary initiatives such as staff tree planting, especially as a contribution to offsetting corporate emissions. Although worthwhile, these are not likely to be a measurable offset.

It is early days for some climate reporting entities, including public organisations, when describing their emissions reduction plans under the CNGP. Several note their commitment to reviewing and improving targets and making them more specific in the years ahead. As reporting evolves, clarity will be needed about credible ways to offset emissions and what the rules are. This could be a potential risk area for greenwashing if the rules are unclear.

The XRB’s climate reporting standard notes:

Climate-related disclosures are balanced when they do not overemphasise positive news or impacts, in a manner that could be interpreted as ‘greenwashing’. Balanced narrative explanations require that climate-related risks as well as climate-related opportunities are portrayed in a manner that is free from bias.

The Financial Markets Authority will have regulatory oversight of climate reporting for climate reporting entities, and will no doubt be alert to any greenwashing.

Guidance for report preparers

There is useful international guidance for accountants involved in preparing sustainability reports that aims to address concerns about greenwashing. The guidance covers the risks involved and gives tips on how accountants can manage them. Here, recent guidance from the Sustainable Business Network stresses the importance of being honest about progress with sustainability and actions planned to address any shortcomings.

Assurance

Improved and more structured climate reporting should be a strong counter to greenwashing, especially when combined with assurance by suitably qualified practitioners. As for financial reporting, climate reporting entities and their directors are exposed to legal consequences if climate statements do not comply with disclosure requirements.

Assurance providers will have an important role in maintaining trust in the integrity and reliability of the disclosures, especially if there is any uncertainty involved in commitments or measures, or misleading or exaggerated information.

We look forward to playing our part in ensuring the integrity of climate information to provide value to users of the reports, including Parliament and the public. We encourage climate reporting entities to make the most of the opportunity to provide meaningful information to users about their climate actions and to have robust systems in place to ensure the integrity of their reports and manage any risks of greenwashing.

New Zealand is taking a leading role in climate reporting. It is important that we do it well.