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Green credentials - ensuring your best intentions can be validated

September 30, 2019

Contacts

Partners Josh Cairns, Matt Conway, Gerald Lanning
Special Counsel Mark Baker-Jones
Senior Associates Joanna Lim, Victoria Anderson, Mace Gorringe

Climate change (inc Zero Carbon Act and Emissions Trading Scheme) Financial services regulation

To limit global warming to 1.5°C, global carbon emissions need to fall by a staggering 45% by 2030 from 2010 levels.
- United Nations [1]

This message, if it isn’t already, should be being raised at board room tables and considered throughout the corporate community. It serves to remind us of the deadline we face, and should encourage governments and private organisations to carefully consider their own carbon footprint.

We discuss two types of green credentials below - carbon neutrality and responsible investment products.

Summary - what you need to know

  • The Ministry for the Environment released guidance on the key elements of a valid carbon neutrality claim - clarifying that compliance with the Emissions Trading Scheme doesn’t, of itself, make an organisation’s activities “carbon neutral”

  • The Financial Markets Authority has also released a consultation paper on proposed guidance for green bonds and other responsible investment products - with a focus on ensuring clarity so that investors can make informed choices

  • These developments arrive on the back of predictions of increased attention from consumers and regulators on how organisations monitor, report and reduce their emissions and carbon footprint, including in their supply and value chains.

Achieving carbon neutrality - new guidance released

Making voluntarily offsets is often seen as an embodiment of good corporate citizenship. It indicates that a business has a comprehensive carbon management strategy in place and typically enables the business to engage customers and employees with sustainable behavioural change.

To achieve this, businesses, which should all be taking responsibility for their carbon emissions, need to know what steps they can take to offset those emissions on the pathway to carbon neutrality for the organisation. But, what are these steps, and how can businesses make a real difference and avoid “greenwashing” pitfalls?

The Ministry for the Environment Manatū Mō Te Taiao (MfE) has recently released guidance for organisations that intend to voluntarily offset their emissions.[2]

The guidance explains the six key elements of a valid carbon neutrality claim in New Zealand; they are:

  • Transparency: clearly describing the process you have gone through to verify your claims

  • Real: ensuring that mitigations and reductions in GHGs are real, measurable, and verified

  • Additional: ensuring that reductions in GHGs through emission reduction projects are only counted where the reduction is additional to business as usual, and would not have happened anyway

  • Not double counted: ensuring that only one entity (country, company or person) can claim the reduction or removal

  • No leakage: ensuring that the reduction does not just result in the activity moving elsewhere

  • Permanence: ensuring that offsets are permanent and have occurred.

There are a few matters that require navigation in order to correctly measure and report on emissions. For example, the guidance makes it clear that compliance with the New Zealand Emissions Trading Scheme (ETS) does not, of itself, make an organisation’s activities “carbon neutral”. The surrender, cancellation, or retirement of a New Zealand Unit (NZU) or other units in the ETS does not guarantee that there has in fact been a tangible reduction in greenhouse gas (GHG) emissions. It also does not guarantee against a double-counting where someone else may have already accounted for the reduction.

For example, the Crown might account for a reduction, so a business cannot also claim it, or the NZU might be one that has been created as a free allocation to industry and therefore has not come from any actual removal of carbon through forestry. Even where NZUs are created from forestry sequestration the carbon that has been sequestered in those trees may be re-released into the atmosphere when the forests are harvested.

Carbon accounting - increasing public and regulator pressure

With consumers becoming increasingly focussed on the need to account for the carbon footprint of the organisation that produced the good or service they purchase, it is inevitable that they will begin to assert pressure on organisations and business to consider and reduce their carbon footprint. The Climate Leaders Coalition (whose members make up 60% of New Zealand's gross emissions) already requires its members to measure and report on their greenhouse gas emissions.

Regulators are likely also to begin focussing their attention on how organisations monitor and report on emissions, both their own and in their supply and value chains. This is being largely driven in response to increasing legal action being taken globally against organisations that fail to disclose or downplay their climate change risks, but we also see powers to require reporting being drafted into legislation. Adhering to the principles in the guidance will assist organisations that want to begin the process of monitoring and reporting on their emissions.

Responsible investment products - “green bonds”

Another way of combining a strategy to reduce an organisation’s carbon footprint while also harnessing market support is to launch a responsible investment product, for example “green bonds”.

A green bond offering is where an organisation raises money to finance projects with clear environmental benefits. According to NZX, the cumulative global issuance of green bonds since 2007 is USD521bn with USD167.6bn issued during 2018.[3]

The Financial Markets Authority has just released a consultation paper on proposed guidance on green bonds and other responsible investment products.[4] Similar to the MfE guidance on carbon neutrality claims, the focus is on ensuring clarity so that investors can make informed choices, given that there are no agreed standards for what makes something green, ethical or responsible.

As a minimum, we would suggest that anyone promoting responsible investment products should consider obtaining external assurance and proof of ongoing compliance for their product.

For those interested in this market development, FMA’s consultation offers an opportunity to inform and assist in shaping the ground rules. Consultation closes on Friday 18 October 2019.

Please get in touch with our contacts for advice on plans to become carbon neutral or offer a responsible investment product, and to discuss your organisation’s climate legal risk.