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More on New Zealand’s Super Fund Carbon Footprint 2023 report which explicitly excludes bond-financed emissions. You might be asking how that could pass muster in the assurance engagement that was undertaken. Here is KPMG’s conclusion:

“Based on our limited assurance engagement, which is not a reasonable assurance engagement or an audit, nothing has come to our attention that would lead us to believe that the 2023 Carbon Footprint (Emissions Intensity and Fossil Fuel Reserves) presented in Table 1 and Carbon Intensity and Fossil Fuel Reserves Reductions relative to 2019 presented in Table 2 of the Carbon Footprint Report 2023 for the period from 1 July 2022 to 30 June 2023 (the ‘Subject Matter’) has not, in all material respects, been prepared in accordance with the requirements of Guardians of New Zealand Superannuation (‘GNZS’) management criteria (the ‘Criteria’).”

KPMG clarified:

“The criteria used as the basis of reporting include the Criteria specified in ‘Box 2: The Fund’s Approach to Carbon Footprinting’ contained within the Carbon Footprint Report 2023 (‘Box 2’). As a result, this report may not be suitable for another purpose.”

Audits/assurance engagements are performed against identified criteria, which don’t have to be legal compliance requirements or accounting standards. In this case, KPMG compared data in Tables 1 and 2 against the Fund’s own internal management strategy – specifically Box 2 of the report. The text in Box 2 is limited to equities, therefore the assurance criteria were also limited to equities. Because of this specificity, KPMG was not tasked with evaluating or opining on the validity of the fund’s view (presented outside of Box 2) that

“… bond investments are considered to have no carbon footprint (and no revenue) assigned. This is based on the Market Capitalisation approach as set out in TCFD guidance, where emissions are allocated based on equity ownership. In this approach, bonds are not allocated fossil fuel reserves, emissions and revenue as there is no equity ownership.”

Had that statement been in scope of the assurance engagement, we might have seen a different report from the Super Fund (I doubt we would have seen a report with an adverse assurance conclusion – it is far more likely that the report language itself would have been changed in such a way to obtain a positive assurance outcome).

This isn’t the only time assurance/audit criteria resulted in a conclusion that isn’t what it may seem. Auditors (including me) and companies alike struggled with awkward but legally-mandated audit criteria for certain conflict minerals reports filed with the SEC. Especially as assurance becomes more common in climate and ESG reporting, it is critical to understand what audits and assurance engagements do/don’t do.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile