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Greenpeace welcomes the opportunity to comment on the consultation document: “Restoring trust in audit and corporate governance: proposals on reforms”. For too long, audits have been plagued by conflicts of interest and poor standards, which lead to lost jobs, wasted taxpayer money, and companies failing to tackle the climate crisis. We welcome Business Secretary Kwasi Kwarteng’s decision to prioritise audit reform, and urge him to deliver bold and radical change.
Greenpeace is a movement of people working towards a vision of a greener, healthier and a more peaceful planet, which can sustain life for generations to come. Working across Europe, the Americas, Africa, Asia and the Pacific, we investigate, document and expose the causes of environmental destruction, and we promote solutions, informed by science and research, for a green and peaceful future.
The UK has now set a commitment to achieve net-zero greenhouse gas emissions by 2050 with interim targets that mean businesses must now change their behaviour. Many other countries are following suit. If companies do not change their business models in line with these trends, they will misallocate shareholder capital, make the climate situation worse and/or will not be profitable. As noted by Sarasin & Partners, “Shareholders and creditors (and indeed staff, suppliers, and the public) need to have visibility of the risks of asset write-downs and rising liabilities”. As a consequence, we believe climate change is a key factor to be considered in financial statements. However, the overwhelming majority of companies are failing to meaningfully disclose climate-related risks, impacts and financial implications.
A Client Earth analysis of companies on the FTSE 250, studied each company’s most recent annual report, and developed a quantitative assessment of how company disclosures match up against existing disclosure requirements. It found that more than 90% of financial accounts and associated audit reports make no reference to climate change-related risks and impacts. This is despite the fact that the International Accounting Standards Board – effectively the global accounting standard setter and regulators such as the UK’s Financial Reporting Council (FRC) – are reminding directors and auditors that they must ensure material climate factors are properly reflected in financial statements. Accordingly, there is a need to ensure that mandatory disclosure of this information is now made in audited financial statements.
As a specific example, Royal Dutch Shell has committed to achieving net-zero carbon emissions by 2050 but the company 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 raises questions over the credibility and feasibility of Shell’s net-zero ambitions, and also leaves investors in the dark about the impact of such a transition on the value of the company and its assets.
The Government should create specific duties for companies, and their directors and auditors, to ensure climate risk is reflected in financial statements. This should include a duty on company directors to:
- State in the notes to the financial statements whether and how they have adopted assumptions/estimates in their accounts which are compatible with a corporate strategy aligned with the goal of limiting global temperature increases to 1.5 degrees above pre-industrial levels as set out in the Paris Agreement on Climate Change (the “1.5° Goal”).
- If they have not, provide supplementary disclosures in the notes to the financial statements about how the accounts would be impacted if they had used such assumptions/estimates.
Auditors should likewise be required to undertake audits that test accounts against assumptions/estimates aligned with 1.5° Goal and flag to shareholders any concerns about the assumptions and estimates used by the company.