As New Zealand climate reporting entities (CREs) embark on their first year of climate reporting, their focus has been on establishing a reporting baseline for compliance with regulatory requirements. Early feedback from CREs who have disclosed is that applying the standards is time-intensive and has not driven real change in the business, producing information not necessarily generating insights (KPMG, 2024).
The second year of reporting will require a significant step up with quantification of financial impacts and transition planning. Though even more challenging from a reporting perspective, this offers a real opportunity for New Zealand organisations to show strategic leadership in transitioning to a low-carbon economy and climate-resilient future, driving real business change.
In this article we discuss some of the key challenges and considerations that CREs are faced with as we move to the next phase of disclosure reporting.
Defining Transition Planning
A transition plan is defined in Climate-related Disclosures (NZ CS1) as “an aspect of an entity’s overall strategy that describes an entity’s targets, including any interim targets, and actions for its transition towards a low-emissions, climate-resilient future”. The XRB offers further guidance on this definition by stating that, “transition planning is about the repositioning and transformation of an entity’s business model and strategy in response to climate-related risks and opportunities…this means planning the actions the entity will need to take to maintain its ability to operate, generate sustainable revenue, protect its assets, and finance itself in a rapidly changing world.”
In their 2023 Transition Planning Guidance, the XRB highlight that transition planning is not just about achieving emissions reductions targets, but includes resilience and adaptation-related actions.
Climate Risk Analysis
Effective transition planning begins with a thorough climate risk analysis. This is referred to by the External Reporting Board as Scenario Analysis. This involves identifying, assessing, and prioritising climate-related risks and opportunities that are relevant to an organisation. These risks are broadly categorised into physical risks, such as extreme weather events and long-term climate shifts, and transition risks, including policy changes, market shifts, and technological advancements. Understanding these risks helps organisations to not only prepare for potential negative impacts but also to identify opportunities that a transition to a low-carbon economy might present.
Linking Climate Risks & Opportunities to Metrics and Targets
A significant challenge in climate-related disclosures is effectively linking the identified climate risks and opportunities to measurable metrics and targets. This connection is crucial for creating a transparent and meaningful disclosure. By translating risks into quantifiable metrics, organisations can set realistic and achievable targets to manage climate risks and opportunities.
Metrics should include not only operational emissions which are familiar to the organisation but also wider climate impacts identified during the risk assessment. These impacts may be upstream of the operation (e.g. suppliers), or downstream. Downstream emissions such as financial emissions for banks are orders of magnitude greater than emissions arising from daily operations so capturing these risks within the metrics and targets of any disclosure is vital.
Furthermore, targets should be aligned with recognised science-based industry targets to enable organisations to track progress, make informed decisions, and communicate their efforts to stakeholders effectively.
Finally, and as stated earlier, there should be consideration beyond emission reductions to include resilience and adaptation-related actions to ensure business continuity in the context of systemic change.
Transition Planning: Beyond Operational Emissions
As we progress with transition planning in the second year of reporting, it is important that CREs understand which risks and opportunities have a material impact on strategy and the organisation’s business model. While managing operational emissions is a critical component of climate strategy, effective transition planning requires a broader focus. For our CREs to generate sustainable revenue and protect their assets in a changing environment, it makes sense to shift allocation of capital towards activities that encourage a low or no carbon future, or at the very least, are mitigating the impacts.
Transition planning is unique to each sector, and timely high-quality data is critical for establishing a reporting baseline from which to develop transition plans. Conducting scenario analysis can help organisations understand potential future states and prepare for various climate-related scenarios. However, this is a complex task involving multiple variables, over various time periods, and stakeholders. Given the complexity of this task, organisations are increasingly calling on digital tools to support with transition planning and modelling.
As New Zealand's climate reporting entities move into the second year of climate-related disclosures, the emphasis shifts from establishing a baseline to driving tangible business transformation through strategic transition planning. The initial challenges of compliance have highlighted the need for a deeper integration of climate considerations into core business strategies. By effectively linking climate risks and opportunities to quantifiable metrics and targets, CREs can create more meaningful and actionable disclosures. This transition planning should not only focus on emissions reductions but also on resilience and adaptation to ensure business continuity in a rapidly changing climate landscape. Leveraging digital tools and conducting thorough scenario analyses will be crucial in navigating this complex process. Ultimately, this phase presents a pivotal opportunity for New Zealand organisations to demonstrate leadership in building a low-carbon, climate-resilient future, driving real and impactful change in their business models.
Generate Zero solution
Generate Zero’s decarbonisation platform supports organisations in their metrics and targets reporting by not only measuring their emissions but helping create emission reduction pathways within our Reduce module. This module allows organisations to set science-aligned targets and craft customised robust decarbonisation pathways. Organisations can track progress against targets, communicate internally, and report all in one unique platform. The ability to use this platform for internal brainstorming and engagement across teams and with the board can help form a clear strategic direction for meaningful change towards a more climate-resilient economy.
