The Big Picture: Climate Change – towards adaptation

THE BIG PICTURE: CLIMATE CHANGE Towards adaptation

CLIMATE CHANGE - TOWARDS ADAPTATION

Introduction

Extreme weather events have pushed climate adaptation and managed retreat to the forefront of the national conversation in New Zealand.

As New Zealanders grapple with how –and where – to rebuild, similar discussions are cropping up all around the world. Unusually damaging weather, soaring temperatures and toppling records have been drivers. So too has been widespread acknowledgement that the world’s chances of restraining global heating to 1.5 degrees Celsius are fast slipping away.

Last year, the UN’s environment agency said there is “no credible pathway to 1.5C in place” with the world still falling short on climate goals. The UN Environment Programme’s Emissions Gap Report said national climate pledges leave the world on track for a temperature rise of 2.4-2.6 degrees by the end of the century.1 More recently, the UN’s World Meteorological Organisation said in May that breach of the 1.5 degrees threshold is likely in the next five years.2

This is a world in which climate adaptation must go hand-in-hand with renewed efforts to rein in increasing temperature. The Climate Adaptation Act, the third part of the Government’s proposed reform

of resource management laws and centrepiece of New Zealand’s planned adaptation legislation, was expected to be unveiled before the election this year but has yet to emerge.

Law reform could help or hinder the process around adaptation, and there are still many details to be debated. New Zealand needs a well-thought out plan before the next state of emergency. The best chance for that will be if there is strong leadership on climate issues, cooperation and agreement – even as we go to the polling booths.

It’s not all bad news. Greenhouse gas emissions in New Zealand fell in the year to December 2022 even as the impact of COVID restrictions faded, according to the latest data from Statistics New Zealand,3 and two significant decarbonisation deals between the Government and heavy emitters offered a glimpse of what might be achieved to hasten New Zealand’s trajectory towards net zero carbon emissions by 2050.

For business, climate issues are increasing in significance, scope and reach. In The Big Picture Climate Change: towards adaptation, we take a closer look at the increasing range of factors businesses must now consider, from increased regulatory scrutiny of environmental claims, to the uncertainty around carbon pricing amid ongoing consultations on the New Zealand Emissions Trading Scheme (NZ ETS). We also look further ahead, to what’s coming next. Could ‘Blue Carbon’ support New Zealand’s transition to a low-emission economy? Will a framework to disclose nature-related risks come into view for some businesses?

To play its part, the business sector will need certainty that if decisions are made and investments follow, plans put in place won’t be up-ended. The stakes couldn’t be higher. Climate change will affect all of us and we will all need to work together.

Climate adaptation legislation - what we know

In the wake of significant floods and cyclones Gabrielle and Hale, what could have been pre-emptive adaptation planning, for many, is now post-disaster adaptation. The enormous impact severe weather events have had on New Zealand in 2023 exacerbates the need for climate change adaptation and expedites its importance.

What we know

While the Select Committee has strengthened the Natural and Built Environment Bill (NBA) to refer to the reduction in greenhouse gas emissions to assist New Zealand to meet the target set under the Climate Change Response Act 2002, the NBA and Spatial Planning Bill (SPA) are still relatively toothless instruments. With limited references to climate change in either, the bulk of any specific outcomes and climate protection mechanisms have been tied to subsidiary planning instruments and the Climate Change Adaptation Bill (CAA). Nevertheless, a few key takeaways may be drawn out of both bills to set the expectations for what is to come.

■ The NBA clearly identifies climate change as one of its primary objectives and shifts the resource management architecture from an effects-based approach to an outcomes-based approach. The eminence of climate change as an objective is promising, but without a clear view of the specific outcomes sought, it is difficult to make an accurate judgement on how well it may succeed.

■ Climate change issues aren’t specifically set out as a function and duty of territorial authorities, regional councils, and unitary authorities under the NBA. The Select Committee considers the reference to avoiding the risks arising from ‘natural hazards’ is deemed sufficient. A specific reference to climate change and adaptation would help clarify that the functions of local authorities include addressing climate change-related matters.

■ Existing land-use consents are no longer guaranteed protection. A consent can be reviewed or altered – including for the duration of the consent – if there are exceptional circumstances where it is necessary to adapt to the effects of climate change or to avoid, mitigate, or reduce risks from natural hazards. At this stage, it is unclear whether ‘exceptional circumstances’ will only arise from immediate harm, or if the term could be applied to future harm anticipated over a longer timeframe. We anticipate it will apply to harm over a longer period, to provide flexibility in responding to emerging threats.

■ The Select Committee has recommended adding references to the emissions reduction plan (ERP) and national adaptation plan (NAP) within the provisions relating to Natural and Built Environment Plans. This aligns with the position under the RMA and is particularly important given the ERP and NAP both refer to key actions relating to the RMA system.

■ The interaction between the NBA and the CAA remains unclear both on land acquisition under the Public Works Act 1981 to enable managed retreat (or for other climate-related reasons) and on compensation.

■ The main climate-change function provided by the SPA will be in the strategic directions contained in the Regional Spatial Strategies (RSS). An RSS must provide for strategic direction both on major infrastructure to address the effects of climate change and on areas appropriate for climate adaptation.

■ The relationship between RSS and CAA remains to be seen. But we anticipate spatial planning will involve consideration of two things: future development and pre-emptive areas that will be subject to relocation from high-risk natural hazard areas to low-risk areas – managed retreat.

Climate adaptation legislation - what's to come

What we expect

Last year’s bills laid the foundations of the new system but lacked specifics for confronting climate change. While promise is shown, success or otherwise will depend on the details. Hope lies in the National Planning Framework (NPF) to contain specific target outcomes, and in the CAA to illustrate how New Zealand will effectively address the consequences of climate change.

■ The NPF should provide significant insight as to whether the new regime will provide adequate direction to address the challenges of climate change.

■ The second iteration of the NPF may provide greater national direction on assessing climate change at the time of considering consents. This means climate change outcomes are likely to be more relevant in a consenting context than was the case under the RMA.

■ The CAA intends to broach managed retreat and adaptation financing issues.

■ We expect the CAA will confirm the powers to acquire land, clarify how compensation will be determined and specify how the costs of any scheme will be funded.

■ The RM Review Panel stated the legislation should address the impacts on insurance arrangements for landowners and local authorities, and liability issues for local authorities.

■ One potential bone of contention will be who bears responsibility for managed retreat between central government, local government, and the private sector.

The CAA needs to clearly articulate the role of both central and local governments in implementing adaptation financing and planning measures, and an overall long-term outlook on managed retreat and adaptation. It will be critical to have effective engagement with the public so there is broad support for the approach to compensation, and communities can move forward with certainty.

NPF National Planning Framework

CAA Climate Change Adaptation Bill

CLIMATE CHANGE - TOWARDS ADAPTATION

Timeline

Key developments in 2023 reflect the roll-out of the framework around climate-related risk reporting, consultation around the NZ ETS across a range of areas and the move toward adaptation.

2023

MAR

He Pou a Rangi, Climate Change Commission (the Commission) supplied advice to Minister on NZ ETS unit limits and price control settings

JAN

Mandatory reporting regime for climate risks took effect from

1 January onwards

JUN

Environment select committee reports on Natural and Built Environment and Spatial Planning Bills

2023 - still to come

Cabinet decision expected on pricing agricultural emissions (was expected early 2023)

Decision on Smith v Fonterra Cooperative Group Ltd & Ors expected

Climate Adaptation Act (was expected before end of parliamentary term)

APR

NZX ESG Guidance

Note, revised Corporate Governance Code released

Permanent forest category and new average accounting took effect

31 JUL

Commission’s call for evidence on emissions reduction targets and emissions budgets closes, contributing to advice on emissions budgets, the treatment of aviation and shipping emissions, and the inaugural review of the 2050 target

11 AUG

14 OCT New Zealand general election

DEC

2024

Commission to provide final advice on second emissions reduction plan

30 NOV - 12 DEC

COP 28 in Dubai

DEC

Ministry for the Environment (MfE) consultation on a review of NZ ETS (considering whether it should be used to reduce gross emissions reductions) closes

MfE consultation on the redesign of the permanent forestry category closes

Commission to provide advice on treatment of aviation and shipping emissions and split-gas emissions approach

Commission to deliver review of the 2050 emissions reduction target

Change ahead for the Emissions Trading Scheme

One of the big New Zealand climate change stories of 2023 has been the uncertainty triggered by the release of two Government consultations on the NZ ETS. Two significant discussion documents were released by the Ministry for the Environment with consultation opening on 19 June.

redesigned NZ ETS permanent Forest Category.

The first of these, the discussion document Te Arotake Mahere Hokohoko Tukunga – Review of the NZ ETS identifies a number of possible material amendments to the NZ ETS. Underpinning the consultation is a view from the New Zealand Government that the current emissions trading scheme settings, in particular those for carbon forestry, are placing too much incentive on net (as opposed to gross) emissions reductions, and unduly incentivise carbon forestry (dominated by exotic forests), which can have an adverse impact on New Zealand’s biodiversity.

Amending the NZ ETS

The discussion document identifies a series of options to reform the NZ ETS, to incentivise gross emissions reductions, and reduce its reliance on pine forestry offsets:

Use existing NZ ETS levers to strengthen incentives for net emissions reductions.

Create increased demand for removal activities to increase net emissions reductions.

Strengthen incentives for gross emissions reductions by changing the incentives for removals.

Create separate incentives for gross emissions reductions and emissions removals.

In June 2023, the Government opened public consultation on four options for changing the design of the NZ ETS, which closes in August 2023.

The discussion document appears to favour Option 4, at least in terms of ranking it highest according to the policy criteria. This is the option that would result in the most change to the NZ ETS. If this option were adopted, it could result in the formation of two separate emissions trading scheme markets; one for gross emissions reductions and another for emissions removals. Under this option, emitters would be faced with material implications as forestry New Zealand Units (NZUs) could no longer be used to meet surrender obligations for their emissions. Emitters would be required to purchase these from the Government. All substantive decisions following this consultation will be a matter for the next government.

Te Arotake Mahere Hokohoko Tukunga – Review of the New Zealand Emissions Trading Scheme

A

Change ahead for the Emissions Trading Scheme

The uncertainty created by the consultations has had a material impact on the price of New Zealand Units (NZUs). At one point not long before the time of writing, the price was below NZ$40 per unit, though it has since bounced upwards following a Court decision detailed below. In addition, certain participants in the market have been seeking to sell forestry generated NZUs and shift into purchasing NZUs issued at auctions. To this point, NZUs generated from different sources had been ‘fungible’ but the latest consultation could see a wedge develop in the price and demand for different categories of NZUs.

It has also created much angst in the market, with forestry entities voicing their concern around the resulting loss of confidence among investors who had been looking to make long-term carbon forestry investment decisions.

As at the time of writing, the uncertainty continues. A judicial review brought by Lawyers for Climate Action NZ Incorporated against the Minister of Climate Change was successful, with the High Court determining that Cabinet had failed to adequately address whether the NZ ETS unit limit and price control settings announced last year were consistent with the emissions budgets and the Government’s nationally determined contribution under the Paris Agreement.

Uncertainty around the NZ ETS aside, a fund paid for through the scheme has been used to drive two major emissions reduction deals in recent months. The first, announced in May, will see the Government partner with New Zealand Steel for it to build and operate an electric arc furnace at Glenbrook Mill. The second is a partnership between the Government and Fonterra forecast to halve the dairy cooperative’s manufacturing emissions by 2030, which will see Fonterra commit to undertaking a complex range of projects to cut primarily coal use across six manufacturing sites.

The conditional funding agreement with NZ Steel is for up to NZ$140 million co-funding from the NZ$650 million Government Investment in Decarbonising Industry (GIDI) Fund, while the Fonterra deal will see the Government co-fund up to NZ$90 million through GIDI with Fonterra planning to invest approximately NZ$790 million to meet the revised decarbonisation target. GIDI is paid for through the Emissions Trading Scheme and administered by the Energy Efficiency and Conservation Authority (EECA). Bell Gully supported EECA on both projects.

Following this decision, the NZU price had shifted closer to NZ$50.

Most recently, the Government has made further decisions regarding unit limits and price control settings for the NZ ETS auctions for 2024-2028, and has signalled

changes to be made to December 2023 auction settings, following a reconsideration of decisions made in 2022 after settlement of the judicial review. These changes may support upward movements in the NZU price.

Regardless, with an election looming, it is unlikely that there will be a swift resolution to the current uncertainty surrounding the market for NZUs.

NZ STEEL DEAL

Aligning the markets

Overview

Since the introduction of the NZ ETS, the regulation of the market for the trading of NZUs has generally been light touch. In July 2021, the MfE initiated a consultation process in relation to proposed reforms to implement further regulation of the market for trading NZUs. At the end of 2022, MfE released a discussion document on the “Market governance of the New Zealand Emissions Trading Scheme”. The consultation period closed on 27 February 2023 and a policy decision is expected later this year. Notably, the discussion document proposes to bring NZUs within the ambit of the existing financial markets regulatory framework that applies to the trading of shares and other more traditional financial products (with suitable modifications). This is MfE’s preferred option for regulating market conduct for the trading of NZUs.

In addition to proposing the extension of the financial markets regulatory framework to the NZU market, MfE considered options to reduce information asymmetry and the application of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/ CFT Act) regime to the NZU market.

FMCA applies

The Financial Markets Conduct Act 2013 (the FMCA) will apply to the trading of NZUs, prohibiting insider trading and market manipulation of NZUs. NZU market operators will be required to hold a licence and comply with the onerous obligations that apply to operators of financial product markets under the FMCA. However, certain rules under the FMCA, such as information disclosure requirements (for example, the provision of a product disclosure statement), will not apply to the NZU market.

Reporting requirements

In order to reduce information asymmetry in the NZU market, MfE proposed to require parties to NZU trades to report on the following information for all NZU trades:

(a) the price of NZUs or total value of the transaction;

(b) whether the trade is with someone else or between the transactor’s own accounts; and

(c) the transactor’s primary reason for holding an account.

This proposal does not require parties to report on additional information in respect of NZU derivative transactions at this stage.

Rules for advisers

NZU financial advisers, brokers and custodians will be subject to the same regulatory regime (including the FMCA) that currently applies to financial advice providers, brokers and custodians who provide such services in respect of existing “financial products”. Implications include:

(a) licensing requirements may apply (for instance if providing an NZU financial advice service);

(b) oversight by the Financial Markets Authority (FMA) as to compliance with fair dealing rules and other statutory duties; and

(c) increased compliance costs, including fees and levies payable to the FMA.

AML regime already applies

MfE emphasised in the discussion document that the AML/CFT Act already applies to activities related to the NZU market – in particular, where persons handle or invest money on behalf of others or carry out other types of financial activities. The MfE noted that it does not consider it necessary at this time to extend the scope of the AML/CFT Act framework beyond the way it already applies to the NZU market.

Aligning the markets

Impact on market participants

MfE’s proposals will constitute a significant change for the NZU market in New Zealand. It will align the regulation of the NZU market with New Zealand’s financial markets and many international emissions trading schemes. In many jurisdictions emission allowances are already treated as financial instruments or products under the definitions set out in their financial markets laws, and financial markets authorities are tasked with overseeing the emissions trading sector.

The impact of the proposed changes will be varied across NZU market participants. For participants that provide services relating to the NZU market – in particular, advisers,

brokers, custodians and market operators – the proposed changes would result in a material increase in the level of regulation. For participants that already provide similar services for traditional financial products (and are licensed under those regimes) the new regime may look familiar, but it could be a leap for entities not familiar with the existing regulatory regime. The changes are likely to be less significant for parties that trade NZUs on their own account.

Either way, NZU market participants should assess the impact of the proposed changes, including whether they would be regulated under MfE’s proposal and the effect of any such regulation on their operations.

Mandatory reporting

In 2021, New Zealand became the first country in the world to introduce legislation requiring mandatory climate-risk reporting. The legislation is intended to:

• promote a more efficient allocation of capital in light of the potential impacts of climate change;

• help with the transition to a sustainable and low-emissions economy; and

• ensure that companies consider and understand the financial impacts of climate-related risks and opportunities.

WHO IS REQUIRED TO REPORT?

The mandatory reporting regime applies to “climate reporting entities”. Although the regime is targeted at the financial sector, a relatively broad range of entities fall within the scope of the regime. The regime applies to:

NZX listed issuers of:

- quoted equity securities, where the issuer has equity securities (quoted or unquoted) with a total value exceeding NZ$60 million

- quoted debt securities with a total face value of exceeding NZ$60 million

All registered banks, credit unions, and building societies with total assets of more than NZ$1 billion

All managers of registered investment schemes (other than restricted schemes) with greater than NZ$1 billion in total assets under management

All licensed insurers with greater than NZ$1 billion in total assets or annual premium revenue greater than NZ$250 million

The regime is expected to apply to approximately 200 entities and capture 90% of assets under management in New Zealand.

Crown financial institutions with greater than NZ$1 billion in total assets under management are also expected to produce climate-related disclosures (because of a letter of expectation from their relevant minister).

ADAPTATION

Mandatory reporting

What will reporting look like?

Reporting is required against climate standards issued by the External Reporting Board (XRB). These climate standards are based on the recommendations of the Task Force on Climate-related Financial Disclosures after a public consultation process.

The climate-related disclosure framework is structured around four thematic areas. These are outlined in the table to the right.

Climate reporting entities will be required to prepare an annual climate change statement. This can either be included in its annual report or on its website. It is not a comply or explain regime – disclosure is required.

Greenhouse gas (GHG) emission disclosure included in climate statements needs to be subject to external assurance. However, there is no external assurance requirement for the first climate statements. Climate reporting entities will be required to have the greenhouse gas disclosure in climate statements be the subject of external assurance from the second climate statement (i.e., for the accounting period starting in 2024).

Climate change statements must be supported by appropriate records.

TOPIC OVERVIEW

GOVERNANCE STRATEGY

Enable readers to understand both the role an entity’s governance body (e.g., a board or an investment committee) plays in overseeing climate-related risks and climate-related opportunities, and the role management plays in assessing and managing those climate-related risks and opportunities

KEY FOCUS

The directors’ role in providing oversight of climate-related risks and opportunities

RISK MANAGEMENT

Enable readers to understand how climate change is currently impacting an entity and how it may do so in the future

Identifying climate-related risks and opportunities (both transition risks like policy, reputational and market shifts, and physical risks like extreme weather events)

Enable readers to understand how an entity’s climate-related risks are identified, assessed and managed, and how those processes are integrated in existing risk management processes

How identified risks (transition and physical) will impact the entity’s business model, strategy and financial planning

METRICS AND TARGETS

Enable readers to understand transition and physical risks

Entities are required to disclose scope 1, 2 and 3 greenhouse gas emissions.

Legislation requires these to be assured

CLIMATE CHANGE

TOWARDS ADAPTATION

Mandatory reporting

What is the implementation timetable?

The mandatory disclosure reporting regime will apply for financial years ending on or after 31 December 2023. This means that the first statements complying with the new regime will be issued in 2024.

The requirement for greenhouse gas emissions to be subject to independent assurance will only apply to financial years ending on or after 27 October 2024.

There is also transitional relief for certain other of the more onerous requirements under the regime, recognising that it may take time to develop the capability

to produce high-quality climate-related disclosures.

Who regulates compliance?

The Financial Markets Authority (FMA) is responsible for enforcing compliance, under its existing statutory powers, including monitoring the disclosures.

CLIMATE DISCLOSURE REGIME SUMMARY TIMELINE

The FMA has indicated that it will take a broadly educative and constructive approach at first, moving to a proactive regulatory role as the regime becomes more established. The FMA has said that its enforcement approach during the early years of the regime will focus on serious misconduct as the sector learns and builds capability.

DECEMBER 2022

XRB issues climate standards

First reporting year begins

AUGUST 2023

FMA expected to publish guidance on record keeping

Second reporting year begins

First climate statement published <4 months of balance date (or 3 months for NZX listed issuers)

Content based on NZCS 1, 2 and 3, including:

• Governance

• Strategy

• Risk management

• Metrics and target (including scope 1 and 2 GHG emissions)

Some transitional relief for first climate statements

Third reporting year begins

Second climate statement published <4 months of balance date (or 3 months for NZX listed issuers)

For second and subsequent climate statements:

• Transitional relief no longer applies

• Disclosure of scope 3 GHG emissions required

• Assurance required for GHG emissions disclosures

Take care when talking about emissions targets

New Zealand has committed to the Paris Agreement and made its ’Nationally Determined Contribution’ to reduce our greenhouse gas emissions by 50% below 2005 levels by 2030. These sorts of big and ambitious goals are what the Paris Agreement was all about – countries coming together and setting challenging targets that will cumulatively result in a significant reduction in global emissions.

It follows that New Zealand businesses are feeling that they should follow suit and set their own ambitious targets for reducing emissions. After all, New Zealand will only achieve its Nationally Determined Contribution if emissions are reduced by the various players within the New Zealand economy.

However, boards are generally cautious about publicly articulating targets. Setting emissions targets involves projecting a long time into the future – to 2030 or 2050, for example – and making some relatively large assumptions about things like developments in technology. In contrast, financial forecasts are generally discussed in the short term, like the next financial

year, and the underlying assumptions are heavily vetted and disclosed.

It is no surprise then that some directors are finding the process of setting emissions reduction goals difficult. Stakeholders like customers, investors and employees are saying that they want to hear about the business’ emissions targets, so how can targets be articulated in a responsible way?

Largely the same rules apply to statements about emissions reductions targets as other types of statements. The Financial Markets Conduct Act and Fair Trading Act both prohibit misleading and deceptive statements and unsubstantiated representations. This means that statements about climate targets must be accurate and able to be substantiated.

Various regulators in New Zealand and overseas have commented on the need to take care when making claims about carbon neutrality targets, or when describing activities as ‘net zero’ (particularly where emissions claims are based on carbon-offsetting instead of the business taking positive steps to reduce its own emissions).

Take care when talking about emissions targets

There are a number of things that should be considered when making statements about emissions targets.

What is the baseline?

Do you describe what the starting point is?

Gross vs net.

Are there separate targets for emission reductions and removals? How much of the plan relies on carbon removal solutions (i.e., off-sets)? Given there is growing recognition that not all off-sets are created equal, do you understand what off-setting is proposed and whether that aligns with international best practice?

What is the plan?

How does the business expect to move from the baseline to the target over the period? What assumptions underpin the plan? Is the plan based on an achievable and verifiable strategy?

What are the risks?

Are you transparent about the risks associated with the plan? If you are relying on things outside your control like the development of new technology, what are the risks associated with those factors?

What are the targets?

Clearly described targets are ones that can be measured against. Is there a target year?

Progress review?

When will progress be reviewed and reported?

Provide information about any measurement scheme (which should be based on recognised standards and measurements, and should be capable of objective verification).

Is the statement balanced?

Taking everything into account, is the statement balanced? Is there a risk that the statement overstates the certainty that the target will be achieved and understates the risks associated with the plan?

‘Carbon neutral’

Claims should take into account the whole lifecycle of the good or service (e.g. both carbon produced during a good’s production process, and also its delivery and use).

We would expect New Zealand regulators to be supportive of businesses wanting to talk about their ambitious emission reduction targets with stakeholders. However, as discussed elsewhere in this publication, we expect them to be focused on claims that don’t stand up to close scrutiny. Any positive reactions from statements about climate targets would be quickly undone by regulatory criticism.

Greenwashing: golden rules for green claims

As consumers and investors continue to prioritise environmental sustainability in their purchasing and investment decisions, businesses increasingly strive to present their products and services as ethical and environmentally conscious. That requires a delicate balance to ensure that promotional activities remain authentic and do not trip into exaggeration – or ‘greenwashing’ – a practice which has increasingly drawn the attention of climate advocacy groups and regulators. As the risks of greenwashing increase, and enforcement action becomes more prevalent, there are various strategies and recommendations which businesses should keep in mind when seeking to legitimately promote their ESG credentials:

AVOID VAGUE STATEMENTS

As the Commerce Commission warns in its guidance on Environmental Claims, vague claims can be difficult for consumers to understand, which increases the risk of litigation or regulatory scrutiny. In July 2022 various environmental groups issued proceedings against Dutch airline KLM, alleging that adverts promoting its broad “Fly Responsibly” campaign was misleading as it was not suitably clear. Similarly, an advertisement which stated that Persil detergent was "kinder to our planet" was found by the UK's Advertising Standards Authority (UK ASA) to be vague and unclear, where the headline messaging accompanied a range of imagery covering various environmental issues.

RELY CAUTIOUSLY ON THIRD PARTY CLAIMS

When relying on external tests or surveys to back up ESG claims, businesses should make sure that they understand the test results and interpret them correctly. Claims based on test results must not embellish the environmental performance of the relevant products, which is important both to ensure that claims are substantiated (as the Fair Trading Act and Financial Markets Conduct Act require) but also so that businesses have a better prospect of relying on various defences under those Acts (which permit reasonable reliance on third party materials). If businesses fail to take reasonable precautions and exercise due diligence when relying on inaccurate third party materials, they are more likely to be held liable for those inaccuracies. For example, in 2019 Kiwipure was found guilty of making unsubstantiated claims about what it described as “scientifically proven” benefits of its magnetic water filtration system, in circumstances where it had relied on speculative observations in a Japanese University report from 2005.

UNDERSTAND YOUR PORTFOLIO (ESG FUNDS)

For ESG funds and similar products, it is important to ensure that disclosures and marketing materials accurately describe the specific categories of investments targeted by the fund, as well as any screening filters to exclude certain investments based on ethical criteria (such as weapons manufacturers or gambling).

In February 2023, ASIC issued proceedings against Mercer for alleged greenwashing in relation to its superannuation investment options, claiming that investors who took up Mercer’s “Sustainable Plus” options had investments in companies involved in industries which Mercer’s online statements had said were excluded.

TAKE CARE WITH CARBON PLEDGES

As discussed on page 14, statistics about carbon emission reduction can be very influential for consumers, and are frequently promoted by businesses – despite the absence of any agreed yardstick for such claims. This can attract regulatory enforcement action and resulting reputational harm. In January 2023, Black Mountain Energy was fined by the ASIC for making unsubstantiated statements about a new gas project with “net zero carbon emissions” (even though it had allocated no funding to the work required to support its net zero claims, and had not carried out any modelling of the project’s likely emissions). Similarly, in 2021, New Zealand's Advertising Standards Authority (ASA) ordered a gas company to remove an advertisement which stated that its natural gas was “going zero carbon”, when such developments were found by the ASA to be “years and perhaps decades away” (and where the company’s internal plans were more modest, proposing a 1% hydrogen blend by 2030).

Greenwashing: golden rules for green claims

MARKETING 'OWN GOALS'

In some instances, businesses have suffered unnecessary reputational damage because of inaccurate execution of marketing campaigns. For example, last year Kathmandu settled an ASA claim relating to its biodegradable puffer jacket, which it had promoted in advertisements with the words “Made for out there. Biodegrades in here” – with an image of the jacket lying in an open landfill. In contrast to that image, the small print clarified that the jacket only broke down in specialised anaerobic landfills (rather than conventional landfill, which represent the majority of New Zealand landfills). Following the complaint, which was widely publicised, Kathmandu removed the advertisement – a lost opportunity for positive publicity after devoting extensive resources in developing the product.

JUNE 2023

New Zealand businesses wishing to promote their environmental initiatives should implement these recommendations as part of their ESG strategy, and take care to learn from the increasing flow of enforcement examples and regulatory recommendations emerging here and overseas.

Greenwashing

RECENT ENFORCEMENT EXAMPLES

The UK ASA ruled that advertisements by Shell were misleading as to the overall climate and environmental benefits of their products and services. The UK ASA found that Shell had “omitted material information” by promoting sustainable plans such as renewable energy and net zero goals, without mentioning the pollutant impact of their wider operations.

OCTOBER 2022

NOVEMBER 2022

Goldman Sachs agreed to pay US$4 million to settle a claim by the US SEC alleging that certain funds and accounts were misleadingly marketed as ESG investments.

The UK ASA ruled that HSBC advertisements which promoted various environmental initiatives (e.g. that HSBC had planted 2 million trees) were misleading because, despite their technical accuracy, they misled customers as to HSBC’s overall climate impact (when it still financed fossil fuel companies).

OCTOBER 2022

Tlou Energy paid A$53,280 in infringement notices issued by ASIC (its first greenwashing enforcement action) relating to misleading sustainabilityrelated statements made to the ASX in October 2021.

MAY 2022

Police raided the Frankfurt offices of a bank's asset management arm, following allegedly misleading statements about ESG weightings in its portfolio.

ADAPTATION

Climate litigation - challenging the boundaries

Climate change lawyers continue to challenge the boundaries of existing legal standards as they seek to accelerate emissions reductions. The number and scope of climate change-related claims continues to expand.

Despite failure to achieve a decisive victory in the Australian and New Zealand courts to date, international cases hint at future direction while a growing body of regulation requiring reporting against climate standards may provide a new platform for future legal action.

COMMON LAW COURTS - NO DECISIVE VICTORY YET

New Zealand has so far followed a similar path.

In March 2020, the High Court refused to strike out a new tortious duty which makes corporates responsible to the public for their emissions in Smith v Fonterra Co-operative Group Ltd & Ors. 4 The Court of Appeal overturned the decision on appeal.5 It concluded that “the magnitude of the crisis which is climate change simply cannot be appropriately or adequately addressed by common law tort claims pursued through the courts”. A further appeal was argued before the Supreme Court in August 2022 and judgment is pending.

In May 2021, the Federal Court of Australia found in Sharma v Minister for the Environment6 that the Minister for the Environment owed Australian children a duty to take reasonable care to protect them from the harms of climate change when deciding whether to approve projects under environmental legislation. The decision was reversed on appeal by the Full Federal Court.7 The appeal court observed that the duty was inconsistent with statute, involved core policy questions unsuitable for judicial determination and had features that were incompatible with tort law.

Public law challenges remain a feature

Judicial review continues to be a forum for complaints that public power has not properly prioritised climate change concerns. While climate change-related matters are frequently identified as

relevant considerations in the exercise of public power, they are not the only consideration. Courts have been reluctant to prioritise climate change over other relevant considerations or interfere with the judgement of a public decision maker that has sought to balance all relevant matters.

Lawyers for Climate Action v Climate Change

Commission & Anor saw the High Court reject challenges to the Commission’s advice to the Government about how to meet New Zealand’s emissions targets and international obligations. The High Court found that the legislative purpose of contributing to the global effort to limit the average temperature increase to 1.5 degrees, was not an independently enforceable obligation.

Movement v Waka Kotahi saw the High Court reject a claim that approval by Waka Kotahi of the national land transport programme for 2021-2024 was unlawful because it had not implemented the Government’s policy statement on land transport (which includes reducing greenhouse gas emissions as a strategic priority). In March 2023, the High Court found that climate change was just one of the four strategic priorities (along with safety, better travel options and improving freight connections for economic development). Waka Kotahi was required to balance those strategic priorities and no one priority took primacy over the others.

Climate litigation - what lies ahead?

Directors duties - a new area of private law action?

In England, ClientEarth (as a nominal shareholder) filed a derivative action on behalf of Shell against all 11 directors on the board. The claim alleged that Shell’s 11 directors breached their UK Companies Act duties to promote the success of the company and exercise reasonable care, skill and diligence by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. The claim was supported by institutional shareholders which collectively hold more than 12 million shares in Shell.

In May 2023, the High Court ruled that it would not give permission to ClientEarth to bring the claim on behalf of Shell. In July, ClientEarth confirmed it would pursue its right to appeal that decision. New Zealand’s Companies Act has very similar directors’ duties to those which are alleged to have been breached in the ClientEarth case, so the progress of this case may be relevant to the prospects of similar claims being considered here.

Regulation and litigation

In October 2021, the Financial Sector (Climate-related Disclosure and Other Matters) Amendment Act 2021 was passed. For financial years beginning

on or after 1 January 2023, affected institutions will be required to publicly report against climate-related standards that cover governance, strategy, risk management, and climate metrics and targets.

Increased publication of climate changerelated risks, objectives and achievements may prove an additional source of scrutiny and legal challenge. Critics may allege that the objectives are inadequate, the risks are not being properly managed or achievements are misleading or unsubstantiated.

In Australia, ASIC has commenced civil penalty proceedings against a superannuation provider for making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options. In New Zealand, the group Lawyers for Climate Action has complained to the Commerce Commission about allegedly misleading statements made by a petrol retailer about its achievement of carbon reduction targets, including a statement that it is “getting out of the petrol business”. The Commerce Commission did not find evidence of misleading or deceptive conduct.

Cost protection for public interest litigants

The usual rule is that the party who fails should pay costs to the party who succeeds. However, courts have been willing to depart from this rule when the proceeding involves a matter of public interest and the unsuccessful party has behaved reasonably.

In Lawyers for Climate Action v Climate Commission & Anor, the High Court refused an application by the Commission for the costs of successfully defending a judicial review application against it. The court relied on the not-for-profit nature of the unsuccessful litigant, the fact it was not seeking a pecuniary benefit, and the general (and high-level) nature of the issues that were raised and resolved by the unsuccessful application. Although the decision does not provide a general exemption from a costs order, it is likely to be relied on by climate change litigants in cases to come.

Global Stocktake ahead at COP 28

Tthe 2023 United Nations Climate Change Conference, 30 November – 12 December , comes at an inopportune moment in the history of the temperature of the world. The 28th meeting of the conference of the parties, or ‘COP 28’, marks the conclusion of the first ‘Global Stocktake’ of how well the Paris Agreement on climate change is being implemented8 – at a time when the Paris Agreement’s key 1.5 degrees threshold looks significantly challenged.

In May, the World Meteorological Organization warned of a 98% likelihood the next five years will be the warmest on record, and a strong chance the world’s annual average near-surface temperature will spend a year above the key level of more than 1.5 degrees above preindustrial levels.9 While that won’t mean permanently breaching the 1.5 degrees level specified in the Paris Agreement, which refers to long-term warning over many years, it would mean breaching that level on a temporary basis with increasing frequency, the WMO said.

The Intergovernmental Panel on Climate Change (IPCC) warned in 2022 that the Nationally Determined Contributions (NDCs) declared under the Paris Agreement – each participating nation’s plan to cut emissions to limit global heating – would not limit warming to 1.5 degrees even though many countries had

strengthened their NDCs in 2020/2021.10 There was also a gap in the outcome suggested by NDCs and those suggested by the actual policies implemented.11 Without immediate and deep emissions reductions across all sectors, limiting global warming to 1.5 degrees was “beyond reach”, it said.12

New Zealand’s own NDC was last updated in October 2021 to set a target of 50 per cent reduction of net emissions below its gross 2005 level by 2030.13 However, the Climate Action Tracker (an independent scientific project that tracks government action against the Paris Agreement) rated New Zealand’s climate policies and action as “highly insufficient”14 indicating they were “not at all consistent with limiting warming to 1.5° by 2030.”

Parties must report transparently on their actions on climate change under the enhanced transparency framework established through the Paris Agreement,15 however, there are no hard enforcement mechanisms under the agreement. That means that parties who fail to achieve their NDC commitments will not have any direct consequences. That said, the impact of not meeting the NDCs will be borne by all. There is the likelihood of more extreme weather events, occurring more frequently, which will have its impact in more tangible ways such as impacts on agricultural

productivity and damage to infrastructure. If New Zealand isn’t able to meet its NDC, this will also likely cause reputational damage which will affect New Zealand’s credibility in future negotiations.

COP 28 has its own challenges as a forum for critical assessment, attracting criticism from the outset for the decision to hold the conference in the major oil producing country of Abu Dhabi and to appoint oil company CEO Sultan Ahmed Al Jaber to lead it. Looking past the controversy of the conference’s location and leadership, climate financing, loss and damage funding and food systems are among other key issues to watch for at the conference.16

Investment in climate efforts generally will be a particularly important focus considering the need for adaptation funding for high income countries, investment in the transition from nonrenewable to green energy for low-

income countries and the reformation of international financial institutions to understand the value of investing in climate efforts generally. Advancing the loss and damage agreement for low-income countries is another focus, given the agreement to set up a transitional committee at COP 27, with an eye on how the fund will evolve from being transitional to operational. Additionally, COP 28 will provide an opportunity to see the UN Food and Agriculture Organization’s first plan to reduce emissions from food and agriculture systems in an attempt to keep temperatures from increasing above 1.5 degrees.

Overall, there will be a lot to watch for as the international developments on climate action move into an operational rather than transitional stage of achieving the commitments countries have made.

Forestry's temporary adverse event exemption

From rising sea levels to more frequent (and extreme) weather events, erosion and drought, the adverse effects from climate change on forests are many and varied. But recent NZ ETS rule changes around temporary adverse events came just in time to avoid exacerbating the impact of 2023’s extreme weather for some foresters whose trees were lost. Amendments which took effect on 1 January 2023 through the Climate Change (Forestry) Regulations 2022, mean they have avoided potentially significant emissions liabilities they could otherwise have faced under the old rules, allowing a chance to replant and recover.

With the prospect of climate change driving the increasing severity and frequency of such events, however, the question remains – will more changes be needed?

Post-1989 forest land and adverse events

Under the Climate Change Response Act 2002 (CCRA), a distinction is drawn between “pre-1990 forest land” and “post1989 forest land”, with each category of forest land treated differently under the NZ ETS. The recent changes only affect post-1989 forest land.

Post-1989 forest land identified in mapped “carbon accounting areas” (being designated areas of post-1989 forest land, greater than a hectare, of which the participant determines the size and boundaries) is subject to the NZ ETS. Registration of post-1989 forest land under the NZ ETS gives rise to the right to be awarded NZUs by the Crown associated with the carbon sequestration of the forest. Conversely, it also imposes an obligation to surrender NZUs to the Crown for any reduction in the carbon stock of a forest.

A new exemption

Since 1 January, if all or part of a registered post-1989 forest is cleared or lost as a result of a “temporary adverse event” such as windthrow, flood, naturally-caused fire, slips, or drought, the landowner may now apply for an exemption from emissions liabilities.

Under this exemption, the affected part of the forest will not earn any more NZUs until it reaches the carbon stock it was at before the adverse event. Similarly, there is no obligation to surrender NZUs during the suspension period. The landowner must replant the forest within four years. Once it has reached carbon sequestration equivalence with the affected part of the forest on the day before the adverse event occurred, the suspension will cease.

Forestry's temporary adverse event exemption

New ability to offset deforestation liabilities

If the post-1989 forest land has been registered under the NZ ETS as an “averaging accounting” forest, the landowner may choose to establish a forest elsewhere rather than replant the affected forest. The new forest must be equivalent in carbon stock as the original forest, and must be actively established rather than left to regenerate naturally. This new offsetting regime is not available for post-1989 forest land which has been registered under the NZ ETS as a “carbon stock accounting” forest.

No change for pre-1990 forest land

These changes do not affect owners of pre-1990 forests. In general terms, under the CCRA an owner of pre-1990 forest land:

• was awarded a free allocation of NZUs for their pre-1990 forest land; and

• is only liable to surrender NZUs to the Crown if the owner “deforests” the pre1990 forest land.

The loss of trees on pre-1990 forest land caused by temporary adverse events is not in itself “deforestation”, provided that the land is replanted or allowed to regenerate to specified levels within certain required timeframes.

More changes ahead?

The amendments to the NZ ETS introduced by these regulations will likely soften the effects on participants in the NZ ETS who lose trees as a result of climate change – whether due to rising sea levels, erosion, or storms – by giving those participants the ability to re-establish their forests without facing potentially significant liabilities to return NZUs under the NZ ETS and allow for more flexible land use.

If New Zealand continues to suffer more severe and/or regular adverse events, there also remains a risk of significant impact on foresters despite these changes. Affected carbon foresters will have to either:

• pause their accounting and NZU issuance until their forests have recovered – which may take longer with the adverse events being more severe and/or regular. If that occurs, there may still be a need for authorities to consider extending the prescribed timeframe and period of suspension under the new exemption / offsetting regime; or

• develop new forests elsewhere within New Zealand. If there are fewer suitable alternative areas, greater competition for those areas, and therefore higher prices to acquire those areas, will inevitably result. This may incentivise yet more farm to forestry conversions - which itself may require further adjustments to policy settings in order to ensure the right level of afforestation for New Zealand.

ADAPTATION

Reining in emissions from industrial process heat

Regional councils will for the first time be expressly required to take the cumulative effects of discharges from greenhouse gases into account when considering applications for resource consents, as a result of new regulations taking aim at greenhouse gas emissions caused by industrial process heat.

Hard on the heels of the Government’s decision in May to remove all remaining coal boilers from hospitals and tertiary institutions by the end of 2025,17 Mfe issued the National Policy Statement for Greenhouse Gases from Industrial Process Heat (NPS-GGIPH) and National Environmental Standards for Greenhouse Gases from Industrial Process Heat (NESGGIPH) in July, which both entered into force on 27 July 2023.

Part of New Zealand’s transition to a low emission economy, the instruments apply to emissions of greenhouse gases from fossil fuel-fired heat devices. Together, they will operate on a number of levels, from greater guidance and new responsibilities for regional councils, to restrictions or prohibitions on certain activities, notably around the use of coal boilers.

The statement

The key objective of the NPS-GGIPH is to reduce emissions of greenhouse gases by regulating the discharges to air of greenhouse gases from the production of industrial process heat in order to mitigate the adverse effects of climate change

With industrial process heat contributing to approximately 8% of New Zealand’s total greenhouse gas emissions, this will provide an opportunity to reduce New Zealand’s domestic greenhouse gases output and limit the future effects of process heat on the environment.

Policies

1. Discharges to air of greenhouse gases from heat devices are reduced or eliminated by avoiding discharges from certain new heat devices and restricting discharges from certain types of existing heat devices.

2. Regional councils must consider the cumulative effects of discharges of greenhouse gases when considering resource consent applications for discharges from heat devices.

3. Holders of resource consents for discharge to air of greenhouse gases from heat devices must update relevant emissions plans to reflect technological developments and best practice.

New responsibilities for regional councils

Every regional plan must include a policy (or something of similar wording) that, before granting resource consent for the discharge of greenhouse gases to air from heat devices, requires a regional council to:

(a) Consider the total discharges of greenhouse gases from all heat devices on the site that the application relates to; and

(b) Recognise the cumulative effect of greenhouse gas emissions contributing to climate change, and that any reduction in greenhouse gas emissions will contribute to mitigating climate change.

Regional councils will now have clearer guidelines when making resource consent decisions for process heat and the Minister for the Environment can request a report from any council outlining the number of resources consents granted for process heat, the volume and extent of discharges of greenhouse gases from the production of process heat and other consenting conditions.

This policy ensures that councils will factor in climate change impacts and regulate fossil-fuel burning devices in a nationally consistent way.

The standards

The NES-GGIPH contains activity standards for the discharge of greenhouse

gases from new and existing heat devices that burn coal and other fossil fuels. Depending on the age of the heat burning device, the temperature of the heat emitted, and the type of fuel burnt, the activity will be classified as either a restricted discretionary activity or a prohibited activity.

Notably, the standards prohibit discharges of greenhouse gas emissions from new low to medium temperature (less than 300 degrees Celsius) coal boilers immediately and from existing coal boilers after 2037. The standards also require resource consent to be held for new and existing fossil fuel boilers that emit 500 tonnes and above of CO2-e per year, per site, and requires resource consent applicants to prepare and implement greenhouse gas emission plans (which must be reviewed by a suitably qualified person) and set out actions to reduce emissions.18

Resource consent durations are limited to 20 years or less for activities relating to a new heat device, and 10 years or less for an existing heat device (if the existing heat device burns coal and delivers heat below 300 degrees, it must end before 1 January 2037).

If a discharge is an existing permitted activity under a regional rule that has legal effect, it remains a permitted activity under that rule for 18 months after 27 July 2023.

Blue carbon ― a new frontier

Recent research has identified ‘blue carbon’ as a possible tool for supporting New Zealand’s transition to a low-emission economy. Blue carbon, the term for carbon captured and stored by coastal ecosystems such as mangroves, salt marshes and sea meadows, is an emerging area of focus around the world. International project initiators are eyeing the role that these systems can play in climate mitigation, driven by data suggesting sequestration activity in this sphere could be disproportionately effective – and seeing the threat posed by failure to protect coastal ecosystems.

New Zealand projects

In New Zealand, a number of research projects are being undertaken to investigate the potential to use blue carbon to combat climate change. One project, being led by Blue Carbon Services and NIWA (with funding from the Ministry of Business Innovation and Employment and The Nature Conservancy), is investigating the relationship between coastal kelpbiomass and carbon sequestration in offshore marine sediments. Commercial development of open-ocean ‘kelp-farms’ could be used as an effective carbon sequestration tool, and possibly be

Like terrestrial vegetation, marine vegetation (kelp, mangroves, marshes etc.) absorbs carbon from the atmosphere through photosynthesis. This carbon is stored in the vegetation’s living biomass and in marine sediments. A proportion of the carbon captured during this process also ends up in deep ocean waters, where it can be locked away for hundreds or possibly thousands of years.19 Although blue ecosystems cover a very small proportion of the globe, studies suggest they can sequester carbon at rates between three and ten times greater than terrestrial forests, depending on the type of plant life involved.20

included in the New Zealand Emissions Trading Scheme (NZ ETS). The kelp-farms could be integrated with existing mussel aquaculture infrastructure, providing an important source of nutrition for the shellfish resulting in increased growth rates and larger, tastier mussels.21

Research is also being undertaken by the Tasman Environmental Trust into the carbon storing capacity of salt marshes and seagrasses in the Tasman region. The project is supported by Tasman District Council, local iwi and local businesses as well as Live Ocean, The Nature Conservancy and the University of Canterbury, and will provide the information that will help prioritise areas for restoration.22 The Nature Conservancy (an American-based NGO) is assessing these coastal ecosystems for their potential to help set up a market for blue carbon credits.23 The basic idea is that if it is demonstrated that these areas hold sufficient carbon, investors could pay for restoration at scale, which would generate carbon credits which have a tradeable value in the New Zealand carbon market (not to mention the potential to generate carbon credits in voluntary carbon markets, outside of the NZ ETS). Restoration of these sites would also contribute to increased flood protection, enhanced biodiversity, cleaner water, and eco-tourism opportunities.24

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Blue carbon ― a new frontier

At COP27, in November 2022, Conservation International Aotearoa (New Zealand) launched the Hinemoana Halo Ocean Initiative, described by Te Rūnanga o Ngāi Tahu chair Lisa Tumahai as “an opportunity for Iwi to create one of the first indigenous-led voluntary blue carbon regimes in history.”25 One of the areas being explored is the part whales may play in capturing carbon from the atmosphere. A 2019 article in International Monetary Fund publication Finance & Development identifies that whales are worth “thousands of trees”, sequestering 33 tonnes of CO2 in their bodies on average, and carrying that carbon to the bottom of the ocean – and out of the atmosphere for centuries – when they die.26

The Ministry for the Environment’s Emissions Reduction Plan states that while blue carbon projects may possibly be included in the NZ ETS, such projects will need to be included in Aotearoa

New Zealand’s Greenhouse Gas Inventory, and be supported by a comprehensive evidence base.27 There is work to do –but with the potential for a blue carbon industry in New Zealand to bring together environmental protection and economic production, there are those prepared to do the mahi.

Looking further afield, there is already interest in blue carbon projects in the Pacific and South-East Asia, with project sponsors and international investors seeing the opportunity to create carbon credits for businesses around the globe looking to off-set their emissions through projects that have much wider environmental and social benefits than conventional carbon forestry. Watch this space!

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What's next?

Science-based targets

It is becoming increasingly important for New Zealand businesses to set credible climate change targets.

Targets without a clear and consistent methodology are increasingly at risk of challenge from customers, competitors, regulators or discerning stakeholders. Various regulators have recommended that where ‘net zero’ or ‘carbon neutral’ targets are based on carbon offsetting, that should be transparent and clear. Pledges based on offsetting, in the absence of direct emissions reductions in the business’s own operations, have in some cases been criticised as greenwashing.

So as the market matures and regulators grow increasingly focused on greenwashing, varied approaches can give rise to concern.

The climate-related disclosure standards published by the External Reporting Board (XRB) in December 202228 include a requirement for climate-reporting entities to disclose certain information when describing targets used to manage climate-related risks and opportunities, and their performance against those targets. The required information includes the entity’s view as to how each GHG emissions target contributes to limiting global warming to 1.5 degrees celsius, the basis for that view (including reliance on opinion or methods provided by third

parties). It also requires information on the extent to which the target relies on offsets, whether the offsets are verified or certified, and if so, under which schemes.

In such an environment, the rigorous methodology set by the Science Based Targets initiative (SBTi) is likely to hold growing appeal. The SBTi’s target dashboard shows 3166 companies had adopted validated science-based targets internationally as at late July. That includes 21 New Zealand companies that have set targets around emissions reduction consistent with restricting global warming to specific levels – 1.5 degrees by 2030 for example – and had those independently validated by the SBTi. A further 10 have committed to setting a science-based target consistent with the SBTi’s criteria within a two-year period.29

With the first year of mandatory climate risk reporting underway, those figures may soon increase.

Nature-related risks

As climate change begins to bite in the human sphere, it is also casting a long shadow over the world around us.

Looking to the success of the framework developed by the Task Force on Climaterelated Financial Disclosures (TCFD), a new framework is emerging, focused on the natural world.

The Taskforce for Nature-related Financial Disclosures (TNFD) plans to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks and opportunities.

It points out that more than half of the world’s economic output – US$44 trillion of economic value generation –is moderately or highly dependent on nature.

Drawing heavily on the same playbook as the TCFD, the TNFD is developing a market-led, science-based framework to enable companies and financial institutions to integrate nature into decision making. Like its climate counterpart, the TNFD seeks to provide recommendations and guidance of relevance to investors, banks, insurance companies, corporates and regulators, among others.30 Its ultimate aim is to support a shift in global financial flows away from “nature-negative outcomes” and towards “nature-positive outcomes”.

CLIMATE CHANGE - TOWARDS ADAPTATION

What's next?

To support that, the TNFD will recommend new nature-related disclosures for financial services firms and corporates. In the financial sector, it has proposed banks, insurance companies, asset managers, asset owners and development finance institutions as priority financial industries for the development of specific guidance.

Food & beverage

Meat, poultry, dairy and agricultural products, alcoholic and non-alcoholic beverages, and processed foods.

Transportation

Cruise lines, marine transportation.

Consumer goods

Apparel, accessories and footwear.

PROPOSED NON-FINANCIAL PRIORITY SECTORS

It has also developed a list of proposed non-financial priority sectors – sectors more likely to be financially impacted than others due to their exposure to dependencies and impacts on nature – for the development of sector-specific guidance.32

Resource transformation

Chemicals.

Health care

Biotechnology and pharmaceuticals.

Renewable resources & alternative energy

Forestry management, pulp and paper and biofuels.

Infrastructure

Engineering and construction services.

Utilities

Water utilities and distributors, electric utilities and power generators

Extractives & mineral processing

Construction materials, metal and mining, oil and gas exploration and production.

It is yet to be seen whether the TNFD will have the broad impact of the TCFD, but it will be significant for some companies.

Could the TNFD follow the TCFD and become the basis for mandated disclosure requirements? That will be determined by regulators in each jurisdiction, the TNFD says – but adds that it is “receiving strong interest from policy makers and regulators in a number of jurisdictions”.33

After four beta versions of the framework, the TNFD plans to release the first version of its full framework for market adoption in September 2023.34

CLIMATE CHANGE - TOWARDS ADAPTATION

Endnotes

United Nations Environment Programme “Emissions Gap Report 2022” (27 October 2022) Emissions Gap Report 2022 (unep.org)

2 World Meteorological Organization “Global temperatures set to reach new records in the next five years” Press Release (17 May 2023) Global temperatures set to reach new records in next five years | World Meteorological Organization (wmo.int)

3 Statistics New Zealand “Greenhouse gas emissions (industry and household): December 2022 quarter” (20 July 2023) Greenhouse gas emissions (industry and household): December 2022 quarter | Stats NZ This work is licensed under a Creative Commons Attribution 4.0 International License (Creative Commons — Attribution 4.0 International — CC BY 4.0)

4 Smith v Fonterra Co-operative Group Ltd & Ors [2020] NZHC 419

5 Smith v Fonterra Co-operative Group Ltd & Ors [2021] NZCA 552

6 Sharma v Minister for the Environment [2021] FCA 560

7 Minister for the Environment v Sharma [2022] FCAFC 35

8 International Institute for sustainable development “2023 UN Climate change conference (UNFCCC COP 28)” Event: 2023 UN Climate Change Conference (UNFCCC COP 28) | SDG Knowledge Hub | IISD

9 World Meteorological Organisation “Global temperatures set to reach new records in next five years” (May 17, 2023) Global temperatures set to reach new records in next five years | World Meteorological Organization (wmo. int)

10 Intergovernmental Panel on Climate Change (IPCC) “Climate change 2022 – Mitigation of climate change” (2022) Working Group III Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC, 2022) at 165.

11 Intergovernmental Panel on Climate Change (IPCC) “Climate change 2022 – Mitigation of climate change” (2022) Working Group III Contribution to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC, 2022) at 14.

12 Intergovernmental Panel on Climate Change (IPCC) “IPCC Press Release” (April 4, 2022) IPCC Sixth Assessment Report – Working Group |||: Mitigation of Climate Press release (ipcc.ch)

13 Ministry for the Environment “National Determined Contribution” (17 June 2022) <https://environment.govt.nz>

14 Climate Action Tracker “New Zealand” (7 March 2023) <www.climateactiontracker.org>.

15 United Nations Framework Convention on Climate Change (UNFCC) “Moving Towards the enhanced transparency framework” (June 6, 2022) Transparency Framework Moving Towards the Enhanced Transparency Framework | UNFCCC

16 UN Foundation Climate and Environment Experts “Climate issues to watch in 2023: toward COP 28 and faster, more urgent climate action” (12 December 2022) United Nations Foundation <https://unfoundation.org>.

17 Hon James Shaw “All coal boilers to be removed from New Zealand public hospitals” (3 May 2023) All coal boilers to be removed from New Zealand public hospitals | Beehive.govt.nz The official website of the New Zealand Government

18 Ministry for the Environment “National Policy Statement for Greenhouse Gases from Industrial Process Heat 2023” Last updated (11 July 2023) <https://environment.govt.nz>

19 Robert Hickson “Integrated Multi-Trophic Aquaculture for Carbon Sequestration and Shellfish Production” (October, 2018) Blue Carbon Services New Zealand https://bluecarbon.co.nz/wp-content/uploads/2020/05/ Seaweed-Carbon-Sequestration-off-the-Continental-Shelf-of-NZ.pdf

20 National Oceanic and Atmospheric Administration “Coastal Blue Carbon” National Ocean Service https:// oceanservice.noaa.gov/ecosystems/coastal-blue-carbon/

21 Blue Carbon “Blue Carbon Sequestration Technology” Blue Carbon https://bluecarbon.co.nz/

22 Tasman Environmental Trust “Blue Carbon Core and Restore” https://www.tet.org.nz/projects/blue-carbon-coreand-restore/

23 Sean Weaver, Ekos. Anna Berthelsen, Cawthron Institute, Jessica Schattschneider, Cawthron Institute, Tom Bennion, Bennion Law “Feasibility Assessment: Aotearoa New Zealand Blue Carbon Resilience Credits” (9 April 2022) Environmental Finance Consulting Services https://www.nature.org/content/dam/tnc/nature/en/ documents/FeasibilityAssessmentofBlueCarbonOpportunitiesinNewZealand_reduced.pdf

24 The Nature Conservancy “Advancing Blue Carbon in New Zealand’s Coastal Wetlands” https://www.nature.org/ en-us/about-us/where-we-work/asia-pacific/new-zealand/stories-in-new-zealand/blue-carbon/

25 Conservation International “Hinemoana halo ocean initiative to deliver blue carbon economy in Aotearoa, NZ” (November 15, 2022) Conservation International https://www.conservation.org/press-releases/2022/11/15/ hinemoana-halo-ocean-initiative-to-deliver-a-blue-carbon-economy-in-aotearoa-nz

26 Ralph Chami, Thomas Cosimano, Connel Fullenkamp, Sena Oztosun “Nature’s solution to climate change” (December 2019) Finance & Development Nature’s Solution to Climate Change

27 Ministry for the Environment Manatū Mō Te Taiao, ME 1639 “Aotearoa New Zealand’s First Emissions Reduction Plan” (May 2022) at 103.

28 Te Kāwai Ārahi Pūrongo Mōwaho – external reporting board “Aotearoa New Zealand Climate Standard 1 Climaterelated Disclosures (NZ CS 1)” https://www.xrb.govt.nz/dmsdocument/4770 at page 10

29 Science Based Targets “Target Dashboard” https://sciencebasedtargets.org/companies-taking-action#dashboard

30 Taskforce on Nature-related Financial Disclosures “The TNFD Nature-related Risk and Opportunity Management and Disclosure Framework Final Draft – Beta v0.4” (March 2023) https://framework.tnfd.global/introducing-thetnfd-framework/ - ‘who the TNFD framework is designed for’.

31 Taskforce on Nature-related Financial Disclosures “The TNFD Nature-related Risk and Opportunity Management and Disclosure Framework Beta v0.3” (November 2023) https://framework.tnfd.global/wp-content/ uploads/2022/11/TNFD_Management_and_Disclosure_Framework_v0-3_B.pdf at page 31. This is an amended version of Figure 7: The TNFD’s proposed drivers of nature change. This work is licensed under a Creative Commons Attribution 4.0 International License (Creative Commons — Attribution 4.0 International — CC BY 4.0)

32 Taskforce on Nature-related Financial Disclosures “The TNFD Nature-related Risk and Opportunity Management and Disclosure Framework Final Draft – Beta v0.4” (March 2023) https://framework.tnfd.global/introductionto-the-framework/tnfd-methodologies/approach-to-additional-sector-and-biome-guidance/ - ‘Towards sector guidance: TNFD sector classification & sector prioritisation’.

33 Taskforce on Nature-related Financial Disclosures “Are the TNFD’s recommendations voluntary or mandatory?” https://tnfd.global/faq/ This work is licensed under a Creative Commons Attribution 4.0 International License (Creative Commons — Attribution 4.0 International — CC BY 4.0)

34 Taskforce on Nature-related Financial Disclosures “Who we are” https://tnfd.global/about/#who ‘our work’. This work is licensed under a Creative Commons Attribution 4.0 International License (Creative Commons — Attribution 4.0 International — CC BY 4.0)

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Bell Gully’s climate change practice

Our firm has been at the forefront of climate change action in New Zealand for more than 20 years. We helped to develop core climate change legislation in New Zealand and have had long-standing involvement with New Zealand’s emissions trading initiatives, including advising the New Zealand Government on the design of the New Zealand Emissions Trading Scheme. Internationally, we worked on the world’s first carbon trade for avoided deforestation and on pioneering emissions trading activity.

We act for an array of individuals and organisations, ranging from leaders in the emissions trading market and global investment banks to regional governments or government groups in New Zealand and overseas. This has included some of the nations that will be among those most affected by climate change.

That consistency in providing marketleading climate change advice is recognised by international legal directories. Bell Gully’s climate change practice is the only New Zealand team ranked among Asia Pacific regional market leaders by leading directory Chambers Asia Pacific 2023, while consultant Simon Watt has also featured in the world-wide climate change rankings of Chambers Global since 2008 – and has been the only New Zealand lawyer to be ranked over the last nine years.

Bell Gully’s team was last year ranked in the inaugural Asia Pacific regional edition of the Legal 500 Green Guide Asia Pacific, and is ranked in the top tier for environmental law in New Zealand by the Legal 500 Asia Pacific 2023. Individually, it ranked Simon Watt in its Hall of Fame and also names practice leader Natasha Garvan, who heads Bell Gully’s environment practice and is convenor of the New Zealand Law Society’s Climate Change Law Sub-Committee.

We can provide you with advice on:

• Specialist advice on all areas of law involving the regulation and reduction of greenhouse gas emissions.

• Advice on the regulatory and commercial opportunities and barriers in all sectors (including energy, transport, forestry, agriculture, manufacturing, and mining) transitioning to meet New Zealand’s net zero carbon target.

• Advice on the implications of climate change adaptation for your business or community.

• Identifying carbon risks, as well as advice on carbon pass-through and trading.

• Robust due diligence around the sale or acquisition of emissionsexposed businesses or assets.

• Advice on activities and the financing of activities to implement carbon reductions and addressing regulatory barriers to a lower-carbon operation.

• High-level interpretation of New Zealand’s climate change legislation and the implications of international agreements including the Paris Agreement.

• Advice on governance, risk and reporting associated with climate change.

• Advice on potential climate change litigation, and acting on climate change litigation matters.

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Bell Gully’s team

If you have any questions about this report, please contact one of the team listed below or your usual Bell Gully adviser:

CLIMATE

Blair

Keown

CLIMATE CHANGE - TOWARDS ADAPTATION

Bell Gully’s team

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Acknowledgements

Our thanks to Bell Gully lawyers Wei Jie Chong, Rebekah Te Rito, Maringi Kete, Harini Meiyappan, Molly Anning, Will Hulme-Moir and Andrew Franklet for their assistance in preparing this report.

CLIMATE CHANGE - TOWARDS ADAPTATION

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