Companies publish annual financial accounts which are signed off by their auditor – in the vast majority of cases that’s one of the ‘Big 4’ accounting firms: PriceWaterhouseCoopers (PWC), EY, Deloitte, and KPMG. Those accounts set out the financial health of the company and the value of their assets and are used by investors to assess profitability and investment potential. Yet from Enron to Wirecard, Carillion to Patisserie Valerie, workers, suppliers, shareholders, and taxpayers bear the consequences of continuing failures by auditors to identify problems with company accounts. We believe there is another problem brewing in the form of a failure to properly account for climate risk.
If climate risk was properly integrated into companies’ financial statements and auditor’s reports, we believe many of the assumptions propping up the value of high-carbon companies (e.g. assumptions around future oil prices) would change, helping drive a reallocation of corporate and investor capital away from fossil fuels and other climate destroying activities. However, as analysis by Client Earth demonstrated, the overwhelming majority of UK companies and their auditors are failing to meaningfully disclose climate-related risks, impacts and financial implications.
In February we called out Shell’s grotesque ‘climate plan’ because it’s nothing more than a flimsy greenwash-laden cover for a business plan that will see Shell actually expand its fossil fuel activity in the next decade. So, we’re not at all surprised that their rhetoric has not translated into hard numbers in their financial accounts or operating plan. Shell claims that it does not need to include its net-zero targets in its operating plans and pricing assumptions because of uncertainty as to how society will reach net-zero. This should raise red flags about the credibility and feasibility of Shell’s plans, and it also leaves investors in the dark about the impact of such a transition on the value of the company and its assets. Yet, 88.7% of Shell shareholders voted to formally endorse its ‘net zero strategy’.
So far on a global basis, the Big 4 have not responded adequately or consistently to the call by the International Accounting Standards Board – effectively the global accounting standard setter – that they and directors must ensure material climate factors are properly reflected in financial statements.
Shell’s auditor EY seemed incredulous at the idea proposed by some investors that it should have to assess Shell’s accounts against the Paris goals stating: “it is neither possible nor appropriate for EY, as Shell’s auditor, to attempt to provide in our audit opinion Paris-aligned assumptions that are not in our remit to determine”. Deloitte, their competitor and auditor at BP did provide statements in their auditor’s report on the compatibility of key assumptions with Deloitte’s assessment of prices in a ‘2 degree goal scenario’.
Despite some notable exceptions and increasing interest in the issue, shareholders are far from taking the necessary action to tackle the issue of audit and climate change. As of now auditor appointments are waved through by shareholders with very few climate related objections. For example, EY was reappointed Shell’s auditor with 98.43% support and the Chair of the Audit Committee with 98.5%. More encouragingly non-binding shareholder resolutions at Exxon and Chevron calling for audited reports on how key financial assumptions might be impacted in a 1.5 degree world received almost 50% support.
Greenpeace recently joined with groups including Spotlight on Corruption, IPPR, Client Earth, and the Tax Justice Network in calling on the UK government to push ahead with fundamental reform of audit. Companies should be required to disclose how and to what extent their strategy and financial accounts are aligned with the 1.5° goal and, if not, what the implications of doing so would be for the company’s financial statements. Auditors should likewise be required to undertake audits that test accounts against assumptions aligned with the 1.5° goal and flag to shareholders any concerns about the assumptions and estimates used by the company.
Banks and investors now find themselves under a spotlight for their responsibility for climate change. The Big 4 accountancy firms would be naive to think their key role in propping up high-carbon industries will go unnoticed by activists, investors and regulators – or indeed by their pool of prospective employees.