Assurance over GHG Emissions Disclosures

The climate reporting standards we issued in December 2022 are yet to be applied and international assurance requirements for sustainability assurance engagements (including climate reporting) are still in development. It is also possible that the scope of mandatory assurance in New Zealand may extend beyond the GHG disclosures to the full climate statement. In addition, an assurance licensing and oversight regime is currently being developed.

We are acutely aware of the rapidly changing environment and are closely monitoring developments – In particular, we are keeping a watching brief on the anticipated change in the scope of assurance, and the yet-to-be-confirmed oversight and licensing regime.

Our solution to this ‘environment of unknowns’ is to create a temporary standard that is narrow in scope and applies only to the current mandatory assurance engagement requirements of the Act. The proposed standard is intended to fill a gap until we know more about the scope of assurance, the oversight regime, and whether the developing international standards will be locally relevant.

Application material is placed directly after the requirements section in the standard. Application material provides context, explanations, suggestions for actions or matters to consider, illustrations, and other guidance to assist assurance practitioners.

While the application material does not impose a requirement, consideration of the material is necessary for the proper application of the requirements of the standard.

The lists of examples in the application material are not intended to be exhaustive.

The Financial Markets Conduct Act (the Act), as amended by the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021 (the Amendment Act) does not outline who can undertake a GHG assurance engagement. However, section 461ZH (2) of the Amendment Act outlines who cannot undertake such an engagement.

Currently, MBIE and MfE are jointly consulting on:

• Whether occupational licensing for assurance practitioners should be introduced and, if so, what form that licensing should take; and
• Whether the assurance requirement should be expanded to cover the whole climate statement.

You can view the document here.

Under the Act, a climate reporting entity’s GHG disclosures, prepared in accordance with Aotearoa New Zealand Climate Standards (‘NZ CS’), are required to be subject to an assurance engagement.

While the Act establishes a narrow scope for the mandatory assurance engagement, we understand that some entities may voluntarily seek assurance over other parts of the climate statement.

Section 461ZH C of the Act requires that the assurance report separately identifies the information that has been required under the Act to be assured. It states:

If an assurance engagement does cover the whole, or other parts, of the statements, –

(a) the assurance practitioner’s report must separately identify the matters that are required to be the subject of the assurance engagement under section 461ZH; and

(b) this subpart applies, with any necessary modifications, in relation to the whole of the assurance engagement.

The XRB has existing assurance standards that apply to such engagements, such as ISAE (NZ) 3000 (Revised). In 2021, we published the IAASB’s comprehensive guidance to support application of ISAE 3000 (Revised) to Sustainability and Other Extended External Reporting (EER) Assurance Engagements along with a tool to help users navigate the relevant chapters and illustrative examples.

Under the Act, an assurance engagement is required to be undertaken in relation to the parts of a Climate Reporting Entity’s climate statements that relate to GHG emissions. GHG emissions disclosures form part of the climate statements. Climate statements might, in turn, be included within other documents, for example an annual report.

Assurance practitioners are required by paragraph 26 of the proposed standard to read other information in documents containing the GHG emissions to identify if there are any material inconsistencies that might undermine the credibility of the assurance report or undermine the credibility of the information. Inconsistencies might also indicate that there is a material misstatement in the GHG emissions disclosures.

Inconsistencies identified in the other information need to be discussed with management. Depending on the result of the discussion, assurance practitioners should consider what actions are necessary in the circumstances.

Paragraphs 64 and A124-A126 of ISAE (NZ) 3410 and ISA (NZ) 720 deal with other information and might be useful for assurance practitioners when considering what further actions to take if inconsistencies are identified in the other information.

Yes.

The Act requires assurance practitioners to comply with applicable assurance standards issued by the XRB. While the XRB has several/many standards that might apply, we have also explored what other international standards could usefully inform our approach for this regime.

The exposure draft proposes to deactivate Professional and Ethical Standard (PES) 1 International Code of Ethics for Assurance Practitioners (including International Independence Standards (New Zealand), PES 3 Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements and PES 4 Engagement Quality Reviews. These standards need to be deactivated so that practitioners are not all required, under the Act, to comply with them. It is important to note that relevant ethical and quality management requirements have been included in NZ SAE 1.

However, we recognise that assurance practitioners may be required to comply with their own professional or accreditation bodies’ requirements and therefore propose that the assurance practitioner identify which standards they have applied in the assurance report. For example:

• CA ANZ requires its members to comply with the NZICA Code of Ethics and PS-1 Quality Control
• JAS-ANZ accreditation might require compliance with additional ISO standards such as:
  • ISO 14065:2020 General principles and requirements for bodies validating and verifying environmental information
  • ISO 14066:2011 Greenhouse gases – Competence requirements for greenhouse gas validation teams and verification teams
  • ISO/IEC 17029:2019 Conformity assessment – General principles and requirements for validation and verification bodies.

Paragraphs 18 and 19 of proposed NZ SAE 1 require the engagement leader to have sufficient competence in both assurance skills and techniques and in the measurement and reporting of GHG emissions.

Further guidance on competency requirements that practitioners may find helpful can be found in paragraphs A18 and A19 of ISAE (NZ) 3410 and ISO 14066 Competence requirements for GHG validation teams and verification teams.

Assurance practitioners may also be required to follow competency requirements set by their professional or accreditation bodies.

Paragraph 11 of proposed NZ SAE 1 requires assurance practitioners and assurance organisations to remain free from conditions and relationships that a reasonable and informed third party would conclude compromised their independence.

Conditions and relationships might impair the independence of an assurance practitioner or an assurance organisation, especially in the relatively small New Zealand market.

Such conditions or relationships might include:

• Personal relationships, such as a close family member holding a senior role within the climate reporting entity.
• Professional relationships, such as prior employment with the climate reporting entity
• Financial relationships, such as direct investment in a climate reporting entity.
• Business relationships, such as distribution or marketing arrangements with a climate reporting entity.
• Temporary personnel assignments, such as the loan of assurance organisation personnel to a climate reporting entity.

Sections 400- 800 of PES 1 describe circumstances and conditions that might create threats to independence in the context of audits of financial statements and provide examples of safeguards that might be applied to reduce these threats. Assurance practitioners may find these examples helpful to identify, evaluate, and address threats to independence in the context of the GHG assurance engagement.

ISO standards (17029:2019 and 14065:2020) include considerations regarding providing consultancy services and specify when assurance services cannot be provided if the assurance practitioner has delivered consulting services.

The assurance organisation, the engagement leader, the independent reviewer, and senior personnel on the assurance team are required to address familiarity threats that arise due to an individual’s long association with an assurance client. The assurance organisation might develop its own policies to address familiarity threats. Such policies might address the period of service before rotation is required (i.e., ‘time-on’) as well as how the length of any stand-down period (i.e., ‘cooling off’ period).

PES 1, Section 540 includes requirements for rotation periods that may be useful to consider for the engagement leader and for an independent reviewer. Additionally, PES 1, Section 325 addresses the objectivity of an independent reviewer.

Some organisations may have their own rotation policies based on these or other requirements which they also apply to GHG assurance engagements.

The phrase “might possibly create a self-review threat” sets a very high bar. It means that an assurance practitioner needs to consider whether there is any possibility that a self-review threat may be created. If there is even a slight chance (i.e. 1%), that the service might create a self-review threat, the service should not be provided.

Self-review threats to independence may arise in either fact or appearance. Assurance practitioners should maintain a state of mind that is free from bias and they should also be seen to be independent by an impartial observer. Before providing a service to a climate reporting entity, an assurance practitioner needs to consider whether a reasonable and informed third party (I.e., someone who has appropriate knowledge and experience to understand the relevant facts) would conclude that the service might possibly create a self-review threat to independence.

Paragraph A10 in the Application Material of proposed NZ SAE 1 includes two considerations that need to be assessed in relation to any services before they are provided to CRE. These are:

(a) The assurance practitioner needs to use professional judgement to assess if there is any risk that the service will impact or make a difference to the GHG records, the internal controls over GHG emissions, or GHG disclosures. If the risk exists, then the service is prohibited under proposed NZ SAE 1; and

(b) The assurance practitioner needs to assess if there is any risk that the service will result in any judgements or activities that will be evaluated later in the GHG assurance engagement. The judgements and activities might arise, for example, from use of tools or IT solutions designed by the assurance organisation. If the risk exists, the service is prohibited under NZ SAE 1.

Assurance organisations might wish to put in place policies and procedures to support consistent application of the self-review threat prohibition.

Climate reporting entities will prepare their first climate statements in accordance with New Zealand Climate Standards for accounting periods that start on or after 1 January 2023.

Assurance over GHG emissions disclosures is required for financial years ending 27 October 2024 onwards (i.e., three years after the Act received Royal Assent).

Unless a climate reporting entity has voluntarily obtained assurance over its GHG emission disclosures, the comparative information included in the first climate statements over which GHG emissions assurance is provided is unlikely to have been assured.

In this instance, we would expect that the climate statements state that the comparative GHG emissions disclosures are ‘not assured’ by including a heading over the comparative information column.

The assurance practitioner, as required in para 25 of proposed NZ SAE 1, would include an “Other Matter” paragraph in the assurance report advising users that the comparative information has not been assured.

It should look similar. Proposed NZ SAE 1 requires compliance with one of two international assurance standards:

• International Standard on Assurance Engagements (ISAE 3410) Assurance Engagements on Greenhouse Gas Statements; or
• International Organization for Standardisation (ISO) Greenhouse gases —Part 3: Specification with guidance for the verification and validation of greenhouse gas statements (issued 2019) 14064-3.

Although assurance engagements undertaken in accordance with these standards include the same, or substantively similar, procedures, there will be some differences in the way the assurance opinion or conclusions is expressed in the assurance report. This is due to the different reporting requirements of these standards, in particular the use of the terms “validation” and “verification” in ISO 14064-3. It is worth noting that these differences already exist with respect to GHG assurance engagements currently being undertaken in New Zealand.

All assurance reports will state whether reasonable or limited assurance was obtained. However, assurance engagements undertaken in accordance with ISO 14064-3 may also state whether a validation or verification engagement was undertaken. Verification provides either limited or reasonable assurance based on historical information. Validation provides only limited assurance over the key assumptions, methods, and limitations used to prepare projected or forecast information.

In cases when the assurance practitioner obtains limited assurance over GHG disclosures and reasonable assurance over the remaining GHG disclosures, the assurance report should separately identify each part so that readers can clearly determine which level of assurance relates to which disclosure.

Assurance reports issued under ISO 14064-3 may include separately identified limited or reasonable assurance over historical information (referred to as “verification”) and limited assurance over future-oriented information (referred to as “validation”).

A Key Matter is a matter which, in the assurance practitioner’s professional judgement, was of most significance in the assurance engagement in the current period and is relevant to users’ understanding of the assurance engagement. A Key Matter enhances the communicative value of the assurance report.

An Emphasis of Matter paragraph refers to a matter appropriately disclosed in the climate statements that, in the assurance practitioner’s judgement, is of such importance that it is fundamental to users’ understanding of the GHG emissions disclosures.

An Other Matter paragraph refers to a matter other than those disclosed in the climate statements that, in the assurance practitioner’s judgement, is relevant to users’ understanding of the assurance engagement, the assurance practitioner’s responsibilities, or the assurance practitioner’s report.

If a matter meets the definition of Key Matter and the definition of Emphasis of Matter or Other Matter, it should be communicated in the assurance report as a Key Matter only.

There are many different considerations that should be factored in when determining materiality for GHG disclosures. Aotearoa New Zealand Climate Standard 3 includes guidance on what some of these considerations may be.

PES 4 Engagement Quality Reviews and section 8 of ISO 14064-3 provide further guidance on expectations related to independent review requirements (i.e., a second partner review of the key matters and judgements made in the assurance engagement).

In some circumstances, for example in the case of a smaller assurance organisation or a sole practitioner, there may not be an individual in the assurance organisation who is eligible to perform the independent review or with whom the assurance practitioner can consult. In these circumstances, the assurance organisation may need to obtain the services of individuals external to the assurance organisation to perform an independent review or to provide the necessary consultation. The assurance organisation needs to establish relevant policies and procedures for these services. An assurance organisation may take advantage of advisory services provided by other assurance organisations, professional or regulatory bodies; or commercial organisations that provide relevant quality control services. Before contracting such services, it is important to consider the competence and capabilities of the external provider to determine whether they are suitably qualified to provide the service.