Nicola Swan.
ANALYSIS
Climate risk, greenhouse gas emissions reduction targets, and transition planning have gained increasing fluency around boardrooms in New Zealand and offshore in the past 18 months.
But as a business focus on climate change is demanded by key export markets and global regulators, so too has greater focus been expected of corporate climate claims.
High-profile withdrawals and restatements of corporate climate targets have made global headlines, while climate litigation is targeting the credibility of familiar claims such as net zero or “carbon neutral” targets.
With research showing only a small proportion of public companies have robust transition plans to meet their emissions reduction goals, lenders, investors and regulators are increasingly requiring the disclosure of transition planning.
“Transition plans” are emerging as key strategy statements that explain how a business will transition to a low-carbon economy, recognising the risks and opportunities inherent in that process.
For New Zealand banks, insurers and listed businesses (“climate reporting entities”) that are now obliged to publish annual climate statements, this transition planning will be mandatory between FY25-FY26.
Two of the key variables impacting actions by, and scrutiny of, corporates navigating this “new net zero” are:
In Australia, energy company Santos is subject to litigation currently being heard in the Federal Court of Australia which claims it misled investors by stating it had a “clear and credible path” to net zero 2040 when allegedly it did not.
In the US, a claim that Evian water could not use the phrase “carbon neutral” where that position relies on purchased carbon offsets has been allowed to proceed.
Claims against corporate “net zero” claims and targets are expected to be an emerging frontier in climate litigation. Climate targets may be the subject of allegations of misrepresentation or claims based on inadequate response to an entity’s climate-related risks. In New Zealand, the first private legal action concerning alleged greenwashing in a climate change context is progressing through the courts.
Greater scrutiny on corporate climate targets and narrowing technological or market option pathways to enable transition has put more pressure on corporate emissions reductions targets.
In July 2024, Air New Zealand made headlines around the world when it elected to withdraw its 2030 emissions reduction target and from the Science Based Targets initiative (SBTi) (while maintaining its target relating to use of sustainable aviation fuels).
But it has not been the only company to change its climate approach. In June 2023, Nestle announced it would stop using carbon offsets and withdraw its pledges to make certain brands “carbon neutral”, in favour of investing in absolute emissions reductions. Closer to home, other brands, including The Warehouse Group, have followed suit.
Others are reassessing planned or historic targets as expectations of transparency and achievability have increased.
The SBTi, a key international body that assesses and validates corporate climate targets as being consistent with a 1.5C pathway, has reported an exponential increase in applications. However, earlier this year, hundreds of companies (including large multinationals such as Unilever) were removed from the SBTi target validation process for not having submitted a target by the required deadline.
What is driving these changes, and what does it mean for the risk environment for companies who are setting and communicating climate goals?
Understanding of the detail of corporate climate claims, including emissions reduction targets and greenhouse gas inventories, is quickly evolving. This is supported by companies disclosing more detailed information on climate-related risks and performance, including in response to New Zealand’s mandatory climate-related disclosures (CRD) regime.
Similar regimes are being implemented in many countries: analysis we conducted for the Aotearoa Circle in April 2024 showed that more than 80% of New Zealand’s exports by value now going to markets with mandatory CRD regimes in place or proposed. In the six months since that report was released, that number has risen to 85%.
Australia passed legislation in September introducing mandatory CRD, with the first reporting required from 2025. As a result, stakeholders are developing a much more sophisticated understanding of claims being made than even 12 months ago.
While the impact of the US election may result in a pull-back on climate-related disclosures at federal level, much of the action to date has been at the state level (particularly in California and New York where climate reporting and supply chain diligence regimes are already legislated).
For example, new regulation has been introduced in the European Union, California and Canada, regulating “green claims”.
The EU and California have both legislated to prohibit claims such as “net zero” or “carbon neutral” where carbon offsets are relied on.
Here, the Office of the Auditor General has recently issued guidance to auditors to question terms like “net zero”, “carbon neutral” or “climate positive” and related statements by public organisations. This type of guidance reflects the significant shift in expectations and understanding as the transition to “net zero” has become a common reference point.
The past several years has seen significant growth in the number of businesses setting emissions reduction targets aligned to a 1.5C pathway (including, as noted above, through SBTi). Coupled with the inclusion of 1.5C in the purpose of New Zealand’s Climate Change Response Act 2002 and by the Climate Standards in the requirements for descriptions of emissions reduction targets, private sector climate action aligned to a 1.5C pathway is increasingly common.
Attention is now squarely turning to whether companies have credible transition plans to deliver those targets and are investing to achieve them.
In New Zealand, more than three-quarters of climate reporting entities have disclosed emissions reduction targets, with transition planning still a work in progress — our analysis shows that only around a fifth of entities voluntarily elected to disclose transition planning aspects of strategy in their first reporting year.
How can companies best navigate this changing landscape?
Transition planning is emerging as a critical tool to enable companies to stay the course on their long-term climate goals while communicating with the nuance needed to mitigate the emerging risks associated with climate targets. In 2022, a group of experts, including New Zealand’s Rod Carr, were charged by the UN with evaluating how entities like companies can avoid greenwashing when setting net zero goals.
They found “while no entity can predict the path to 2050, frequently updated transition plans make pledges concrete while highlighting uncertainties, assumption and barriers.”
In addition to being a tool to mitigate some emerging legal risks associated with disclosing climate targets, transition planning will soon be mandatory for many: the New Zealand Climate Standards require, from the second year of CRD (which for most entities is FY25), disclosure of transition planning aspects of their strategy.
A recent consultation floated the idea of delaying obligatory reporting of Transition Plans from FY25-26 in part because of the complexity of preparing good transition plans.
However, some in the finance sector, including Westpac, have sought to retain the current Transition Plan disclosure timing citing the crucial role that transition plans play in guiding businesses “in their planning for the uncertainty of climate change”.
Internationally, a range of frameworks exist to guide transition planning, such as the Transition Plan Taskforce Disclosure Framework. Local organisations have also been getting in on the act, with the Institute of Directors publishing guidance on transition planning for New Zealand directors just last month.
Key areas for companies to consider as they build a transition plan in this “new net zero” landscape include:
● How to manage potential liability risk relating to targets and transition planning, while also recognising the legal and reputational risk of inaction.
● Reconciling the various transition planning requirements and expectations, from the New Zealand Climate Standards through to international frameworks that are informing investor and lender requirements.
● Understanding and managing evolving legal risks relating to the use of voluntary offsetting and impacts on the ability to use claims such as “net zero” and “carbon neutral”.
Above all, careful communication of targets and robust transition planning will be increasingly essential to navigate the “new net zero”.
Air NZ engine problems mean just over half of flights are departing on time.