Spotlight on net zero pledges: greenwashing advice released

A UN expert group has released a cautionary report in relation to net zero commitments by non-state actors such as businesses, cities and regions in response to growing concerns internationally about greenwashing. The report puts forward a "universal definition of net zero", which is based on five principles and ten recommendations.

In this update, we comment on the relevance of the report to businesses operating in Aotearoa New Zealand (NZ) that have or are looking to set net zero commitments, before going on to summarise the report's key recommendations.

Should you wish to discuss the report, or matters relating to your net zero targets more generally, Russell McVeagh and Te Whakahaere are available to assist. Please contact your regular Russell McVeagh contact or one of the Russell McVeagh or Te Whakahaere contributors mentioned at the end of this update.

Relevance of the report to New Zealand organisations

While the guidance in the report is not binding on NZ, it signals emerging "good practice" and we expect it may influence future policy development and regulatory expectations around net zero commitments. It may also be called into evidence in litigation to support allegations that organisations have contravened NZ's consumer protection laws, such as the prohibition against misleading or deceptive conduct under the Fair Trading Act 1986.

Organisations who are considering making, or have made, net zero or "net zero aligned" claims may wish to assess those claims against the recommendations set out in the report and consider aligning their plans with emerging international good practice.

When setting a net zero target, we suggest that an organisation undertake a full assessment of its ability to develop pathways that will achieve the target before committing publicly (ie, that the target is realistic, although the organisation may still wish to set a more aspirational net zero target for internal purposes). While such an approach may constrain an organisation's ability to market its support for climate action while detailed plans are being developed, that must be balanced against the growing market and legal risk of making a net zero commitment without credible proposed pathways in place. In relation to legal risk, claims in relation to greenwashing in the climate change space are increasing globally: for example, in Australia, gas company Santos has been sued in relation to the credibility of its net zero plans,^[1] while in NZ, a complaint was recently lodged with the Commerce Commission against Z Energy in relation to alleged misleading advertising in relation to its decarbonisation plans.^[2]

Organisations looking to set net zero targets may be grappling with potential tensions between reducing emissions and the economic impact of those reductions on their organisations. Many businesses will be looking to reduce emissions, take advantage of new opportunities brought about by the transition, and at the same time ensure continued financial stability. In light of these tensions, organisations setting targets should consider the consequences of any proposed targets and how the business will realistically meet them. This requires selecting appropriate and adaptive decarbonisation pathways and careful consideration of how to align the business with those pathways (for example, by considering impacts on asset value, revenue and expenditure, and the allocation of capital over appropriate time periods).

While the recommendations in the report target organisations, cities and regions, rather than central government, it is not clear at this stage how the guidance around net zero in the report intersects with the concept of net zero at the national level under the Climate Change Response Act 2002. To the extent that future regulatory reform occurs in response to the report, this interaction would need to be considered to ensure alignment with NZ's overarching emissions reduction goals.

Background to the report and key recommendations

In the past few years, there has been significant growth in voluntary net zero pledges by organisations. There is now widespread recognition that central governments cannot combat climate change without accompanying action by organisations, cities and regions (in NZ, this multi-party responsibility is reflected in the Government's approach to emissions reduction, outlined in the first emissions reduction plan). There has, however, also been a corresponding rise in concerns about whether voluntary climate pledges are credible and backed up by action. These concerns have been exacerbated by recent press reports that some large organisations were preparing to back away from net zero commitments (specifically, US banks with continuing involvement in oil and gas).^[3]

The UN's High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities (HLEG) was accordingly established earlier this year to develop stronger and clearer standards for net zero pledges and to speed up their implementation. Dr Rod Carr, the Chair of NZ's Climate Change Commission, is a member of the HLEG and contributed to the advice - this suggests that the report could inform the Commission's future work programme (for example, future advice on NZ's 2050 target).

Five principles for net zero pledges

The report's five high-level "key principles" for net zero pledges (which are informed by the more detailed recommendations) are:

1. Ambition which delivers significant near and medium-term emissions reductions on a path to global net zero by 2050.

2. Demonstrated integrity by aligning commitments with actions and investments.

3. Radical transparency in sharing relevant, non-competitive, comparable data on plans and progress.

4. Established credibility through plans based in science and third-party accountability.

5. Demonstrable commitment to both equity and justice in all actions.

Ten recommendations for net zero pledges

At a high level, the report's ten key recommendations include:

1. Announcing a net zero pledge: Where an organisation announces a net zero pledge, this must be a public commitment by the entire entity, and reflective of the organisation's fair share of global climate action. Related to this recommendation:

   • An organisation should only be considered "net zero aligned" where it has set its pathway to net zero using a robust methodology, its pledge and progress includes the full value chain and all scope emissions (including financed emissions), and it is demonstrating progress by achieving or exceeding interim targets (see recommendations 2 and 8 below).

   • An organisation should only be considered net zero or to have "achieved its net zero pledge" when it has done the above and it has achieved its long-term net zero target with any residual emissions neutralised by high-quality, verified offsets (see recommendation 3 below).

2. Setting net zero targets: A net zero pledge must include five-year "stepping stone" targets and set out concrete ways to reach net zero in line with the science around limiting warming to 1.5°C, including reducing emissions by at least 50% below 2020 levels by 2030, and reaching net zero by 2050 or sooner. The plan must cover the entire value chain, including end-use emissions. In relation to the last point, the report recognises that there needs to be a concerted effort to speed up the creation of datasets needed for organisations to produce plans to measure and reduce scope 3 emissions. This has already been a particular point of concern for NZ businesses in working towards compliance with the NZ climate-related disclosures regime, which require "climate reporting entities" (generally, listed issuers, large financial institutions and managers of registered schemes) to make disclosures in line with climate standards issued by the External Reporting Board for reporting periods commencing 1 January 2013. It is helpful to see the UN recognising the need for high quality data to enable measurement and management of scope 3 emissions.

3. Using voluntary credits: The priority should be "urgent and deep" emissions reductions across the value chain, rather than reliance on voluntary offsets. While formal voluntary carbon markets are being developed, high integrity carbon credits should be used for mitigation beyond an organisation's value chain, but cannot be counted toward an organisation's interim reductions in accordance with its net zero pathway. While "high integrity" is not defined in the report, organisations looking to use voluntary credits in the NZ market should do so in line with published guidance from the Ministry for the Environment.

4. Creating a transition plan: Organisations must report publicly on their net zero transition plans. This disclosure should detail what the organisation will do to meet targets, as well as align governance and incentive structures, capital expenditures, research and development, skills and human resource development, public advocacy, and support a just transition. The report includes specific and detailed requirements for transition plans by companies, financial institutions and cities/regions respectively. This sort of exercise will soon be required of many NZ organisations under the mandatory climate-related disclosures regime discussed above under recommendation

5. Phasing out of fossil fuels and scaling up renewable energy: Organisations cannot claim to be net zero while continuing to build or invest in new fossil fuels supply. NZ has previously broadly banned new exploration, although not all political parties agree with this ban, and therefore there is scope for reform should there be change of government at the next election.

6. Aligning lobbying and advocacy: Organisations making net zero claims must lobby for positive climate action and not against it. Organisations should work with governments to create an "ambition loop" to ensure a level playing field for ambitious pledges and de-risk the transition.

7. People and nature in the just transition: By 2025, organisations with significant land-use emissions must ensure their operations don't contribute to deforestation or other environmental destruction. Financial institutions should have a policy of not investing or financing businesses linked to deforestation and should eliminate agricultural commodity-driven deforestation from their portfolios by 2025. While some NZ organisations have already taken steps to reduce support for deforestation, organisations may wish to consider whether those commitments go far enough in light of this recommendation.

8. Increasing transparency and accountability: Organisations must produce annual public reports on their progress, including greenhouse gas data, and these should be independently verified. Again, NZ's mandatory climate-related disclosures regime will require disclosure of some information relevant to this recommendation for organisations covered by that scheme.

9. Investing in just transitions: Financial institutions and multinational corporations should work with governments, Multilateral Development Banks, and Development Finance Institutions, to agree a new deal for developing countries to resource a just transition and which involves those organisations consistently taking on more risk and setting more ambitious targets that help to maximise investments in clean energy.

10. Accelerating the road to regulation: While voluntary efforts by organisations and standardisation bodies are fostering best practices, this can only take things so far and regulators should develop regulation and standards starting with corporate emitters and financial institutions. The report recommends that countries launch a new international task force on net zero regulation to convene regulators across borders. If a specific regime for net zero claims emerges in NZ, we think it will be important to ensure close alignment with the existing mandatory climate-related disclosures regime and other climate-related regulation to avoid unduly adding to the compliance burden for organisations.