The relevance of climate change to world leaders, Royals, activists, Leonardo DiCaprio, chief execs and both former, and current central bank heads, is largely understood, by their presence at Cop26, to be of paramount importance.
But what on earth auditors have to do with climate change, is rather more perplexing.
One explanation is that audit committees around the world are wholly “unprepared” for climate change, according to a new report by Deloitte published last week. But how exactly should auditors, of all people, prepare for the planet to warm up?
What do audits have to do with the climate change?
Climate change, and adapting to its impacts, could render a company’s inventories obsolete, change the value of assets and commodities, result in new green regulations imposed upon businesses, as well as levies by governments.
A report by the Financial Reporting Council gave the example of a manufacturing business with facilities in places at higher risk of flooding due to climate change, which could affect its impairment expenses.
One way or another, every business will be affected – whether through their supply chain, their customers’ changing demands and needs, financing, insurance or regulatory environments, or all of these. For an investor, climate change is a minefield of risks.
Enter the auditor.
Paid to make sure business financial statements are not misstated, and are prepared correctly, auditors are being called upon by investors to make them aware of the material impact of climate-related risks on a company’s financial statements.
What’s happened so far?
In 2017 the Task Force on Climate-related Financial DIsclosures (TFCD), formed by the Financial Stability Board (FSB), published recommendations on how the financial sector could take account of climate-related issues.
“Climate change has become a material risk that isn’t properly disclosed,” wrote the chair of the task force, and billionaire, Michael Bloomberg in a letter to Mark Carney, then governor of the Bank of England. Financial disclosures therefore, the task force concluded, were essential.
Although over 2,500 global organisations support the recommendations, the framework is still only voluntary and just over half of the companies reviewed actually disclosed their climate-related risks and opportunities, according to the latest FSB report.
In November last year the Financial Reporting Council (FRC) published its own review of climate-related considerations, including those by companies, auditors and investors. Its report found that while investors supported the TFCD, there was growing demand to also see disclosures regarding the financial implications of climate change, as investors became wary of changing regulatory environments.
What’s happening now?
An investor group managing around $4.5tn worth of assets last week sent the Big Four auditing giants a warning to start including climate risk in their audits, or risk rebellions at AGMs next year where they would vote to stop them from working for companies they invest in.
While the auditing behemoths were quiet, the UK chancellor unveiled a grand plan to make Britain the world’s first “net-zero financial centre”, starting by forcing the UK’s financial institutions and listed firms to publish their strategies on how they will transition to net-zero by 2050, dubbed ‘net-zero transition plans’.
The director of policy at the Institute of Chartered Accountants in England and Wales (ICAEW) John Boulton noted there was no mention of assurance in Rishi Sunak’s announcement: “This very ambitious and extensive programme of corporate reporting is, as far as I can see, outside of the audited financial statements so wouldn’t be covered by the audit and there is a very real question about whether there would be assurance over all of these announcements.”
The UK government also welcomed the announcement of a new set of “baseline” standards for companies to keep investors informed about the impact of climate change to their business, by global accounting body IFRS last week. Adoption of the new disclosure standards will be by jurisdictions on a voluntary basis.
These are voluntary, but will they soon be made a legal requirement?
It’s unclear, but unlikely to happen soon. However the government have consulted on legislating for an audit assurance policy that would force all companies to think about whether there are other things, outside of the financial statements, that should have assurance, said Boulton.
Shareholders would then get to vote on them, and this could then act as a mechanism for a debate about whether assurance is needed in the context of a company, he explained.
The ICAEW have advised the government to amend the stewardship code – a code of conduct asset managers are expected to sign up to – to specifically make them consider whether there should be assurance over sustainability measures.
“At the moment, that’s entirely missing and we think it’s an omission. There’s been a lot of talk about disclosures but nothing about assurance, and that needs to be addressed,” said Boulton.
“The onus will swiftly fall on auditors to provide assurance around published information so that it can be trusted and legitimate concerns around greenwashing can be dealt with,” agreed Mike Suffield, director of professional insights at ACCA, the global body for professional accountants.
“This will require both commitment both from standard-setters to build a stronger assurance framework, and audit firms to invest in capability and to deliver truly independent assurance,” he added.
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