Discussion Paper 2019/01 – The Climate Reporting Emergency: A New Zealand case study Discussion Paper 2019/01 The Climate Reporting Emergency: A New Zealand case study October 2019 Title Discussion Paper 2019/01 – The Climate Reporting Emergency: A New Zealand case study Published Copyright © McGuinness Institute Limited, October 2019 ISBN – 978-1-98-851820-6 (paperback) ISBN – 978-1-98-851821-3 (PDF) This document is available at www.mcguinnessinstitute.org and may be reproduced or cited provided the source is acknowledged. Prepared by The McGuinness Institute, as part of Project 2058. Research team Wendy McGuinness, Eleanor Merton, Isabella Smith and Reuben Brady Special thanks to Lay Wee Ng and Mace Gorringe Designers Becky Jenkins and Billie McGuinness Editor Ella Reilly For further McGuinness Institute information Phone (04) 499 8888 Level 2, 5 Cable Street PO Box 24222 Wellington 6142 New Zealand www.mcguinnessinstitute.org Disclaimer The McGuinness Institute has taken reasonable care in collecting and presenting the information provided in this publication. However, the Institute makes no representation or endorsement that this resource will be relevant or appropriate for its readers’ purposes and does not guarantee the accuracy of the information at any particular time for any particular purpose. The Institute is not liable for any adverse consequences, whether they be direct or indirect, arising from reliance on the content of this publication. Where this publication contains links to any website or other source, such links are provided solely for information purposes, and the Institute is not liable for the content of such website or other source. Publishing The McGuinness Institute is grateful for the work of Creative Commons, which inspired our approach to copyright. This work is available under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 New Zealand Licence. To view a copy of this licence visit: http://creativecommons.org/licenses/by-nc-nd/3.0/nz Contents Preface 1 Executive summary 2 1.0 Introduction 4 1.1 Purpose 4 1.2 Background 5 1.3 About Project ReportingNZ 6 Part 1: The New Zealand context 9 2.0 What is happening in New Zealand? 10 2.1 New Zealand’s international commitments 10 2.2 Te Tiriti o Waitangi and te ao Mäori 11 2.3 Institutions and instruments 11 2.4 Private sector leadership 17 2.5 Underlying considerations 20 Part 2: The existing reporting regime 22 3.0 Legislative reporting framework 23 3.1 Upcoming New Zealand legislation 23 3.2 Existing New Zealand legislation 23 3.3 Climate change litigation and shareholder resolutions 29 4.0 Mandatory reporting regime 30 4.1 An overview of the existing for-profit reporting landscape 30 4.2 Analysis of the for-profit reporting regime in practice 34 4.3 Review 1: The chair’s report 36 4.4 Review 2: The financial statements 41 4.5 Review 3: The independent auditor’s report 44 4.6 Review 4: The corporate governance statement 50 4.7 Observations and ideas 55 5.0 Voluntary reporting regime 57 5.1 Voluntary reporting frameworks 59 5.2 Results from analysis of Deloitte Top 200 annual reports 62 5.3 Observations and ideas 64 Part 3: Designing the solution 65 6.0 Policy knots 66 6.1 How can we obtain the appropriate information to develop a climate strategy and monitor its progress? 66 6.2 How can we break down climate risks into useful and measurable components? 67 6.3 How can we fund the transition to a low-emissions economy and ensure the polluter pays (e.g. revisiting carbon tax)? 68 6.4 How can we move beyond the ‘primary user’ and redefine the ‘user’ to include broader stakeholders? 69 6.5 How can we ensure that reports are accessible, comparable, accurate and meaningful? 72 6.6 How can we direct preparers and users to apply the best voluntary reporting frameworks for them? 74 6.7 How can we ensure consistent application of key terms such as ‘materiality’? 75 6.8 How can we ensure companies feel safe in making transparent disclosures (e.g. safe harbour provisions)? 77 6.9 How can we report emissions in a consistent and verifiable manner? 78 7.0 The international accounting and assurance context 80 7.1 What international protocols does New Zealand currently follow? 80 7.2 To what extent do these protocols set standards or guidance on climate reporting? 81 7.3 The New Zealand response 85 7.4 The Australian response 86 7.5 The United Kingdom response 86 7.6 The European Union response 88 7.7 Observations and ideas 89 8.0 Proposed design 92 8.1 Goal 1: Improve the quality and accessibility of climate-specific information in New Zealand 92 8.2 Goal 2: Ensure those who are responsible for governance in New Zealand think long-term and are future-focused 98 8.3 Goal 3: Cater to the disclosure needs of broader stakeholders in New Zealand 100 8.4 Goal 4: Improve the existing international framework of reporting standards to cover climate-related information 101 8.5 Final comment and next steps 102 Abbreviations 106 Appendix 1: Proposed legislative changes 108 Appendix 2: Z Energy’s statement of climate information 112 Appendix 3: Reserve Bank of New Zealand’s results of industry survey on the potential impacts of climate change 117 Appendix 4: Timeline of selected key reports and events regarding climate change risks 119 Appendix 5: Professional contacts and reviewers 129 References 130 Figures Figure 1: Scenarios from the Global 2000 Report to the President 5 Figure 2: Pace Layers Thinking 6 Figure 3: Linkages between McGuinness Institute policy and research projects 6 Figure 4: Comparing preparer and user views on the importance of climate-related EER disclosures 7 Figure 5: Climate change information disclosed in the 2017 and 2018 annual reports of significant New Zealand organisations 8 Figure 6: Data, information and knowledge 8 Figure 7: New Zealand climate reporting institutions 11 Figure 8: New Zealand climate reporting instruments 12 Figure 9: XRB stance on where information should be reported 13 Figure 10: Total replacement value of exposed infrastructure 14 Figure 11: Disclosure of carbon emissions information in 2016 annual reports of 2017 NZSX-listed companies 17 Figure 12: Disclosure of environmental information in 2016 annual reports of 2017 NZSX-listed companies 18 Figure 13: New Zealand’s 2017 emissions profile 25 Figure 14: Entity types that mentioned ‘NZ ETS’ in their 2017 and 2018 annual reports 26 Figure 15: Seven characteristics that inform the content of regular external reporting 31 Figure 16: Six types of audiences in New Zealand’s regulatory reporting regime 33 Figure 17: Four key components of an annual report 34 Figure 18: Z Energy’s greenhouse gas emissions 35 Figure 19: NZKS’s premature mortality as a percentage of biomass 36 Figure 20: Views on the ethics and integrity of the audit profession in New Zealand 48 Figure 21: Five tiers of tensions between key stakeholders 56 Figure 22: Voluntary reporting frameworks disclosed in the 2017 and 2018 annual reports of Deloitte Top 200 entities 63 Figure 23: New Zealand’s climate strategy landscape 66 Figure 24: Three types of climate change risk 68 Figure 25: Comparing information over time and across entities 71 Figure 26: Disclosure of Scope 1, 2 and 3 emissions in the 2017 and 2018 annual reports of the Deloitte Top 200 entities 79 Figure 27: Comparing the XRB definition of EER and IASB definition of management commentary 85 Figure 28: The double materiality perspective 88 Figure 29: Who should report and why 93 Figure 30: Comparing the tentative timelines for enactment of the Zero Carbon Amendment Bill and the development of XRB reporting standards on climate-related disclosures 196 Figure 31: Exploring ways to embed climate reporting into the existing framework 105 Tables Table 1: Comparing the current and possible future focus areas of IASB pronouncements 3 Table 2: Comparing nationwide and entity level reporting requirements 24 Table 3: Emissions by sector in kilo tonnes of carbon dioxide equivalents (kt CO2-e) between 1990–2017 26 Table 4: New Zealand’s total 2017 emissions by activity 27 Table 5: Regulatory instruments that impact and shape the content of parts of the annual report 31 Table 6: Review of principles underlying some voluntary reporting frameworks 58 Table 7: Mentions of ‘TCFD’ in the 2017 and 2018 annual reports of Deloitte Top 200 entities 62 Table 8: Comparison of voluntary reporting information disclosed in the 2017 and 2018 annual reports of significant entities 64 Table 9: Mentions of shareholder and stakeholder in legislation 70 Table 10: Purpose of the TCFD recommendations 73 Table 11: Comparing elements of the TCFD to elements of the proposed Statement of Climate Information 73 Table 12: List of major standard-setters that shape reporting and assurance practices in New Zealand 81 Table 13: Types of reporting obligations for preparers 92 Table 14: Strategic options for ‘material’ content requirements in an annual report 95 Table 15: Voluntary guidance documents 98 Table 16: Comparing the current and possible future focus areas of IASB standards 101 Preface ‘We haven’t got the money [or the time] so we’ve got to think!’ – Sir Ernest Rutherford, 1962 The issue of climate change has gained a significant amount of traction, particularly in light of the assertion in the 2018 Intergovernmental Panel on Climate Change (IPCC) report of the urgent need to cut carbon emissions by 45% in the next 11 years in order to limit global warming to within 1.5ºC (Rogelj, Shindell, Jiang et al. in press p. 95). The report was picked up widely by global media, as were the comments made by 16-year-old climate change activist Greta Thunberg at Davos at the beginning of 2019: We must change almost everything in our current societies […] Adults keep saying: “We owe it to the young people to give them hope.” But I don’t want your hope.