INSIGHT by ClientEarth
Senior leadership from the world’s six largest accounting firms – BDO, Deloitte, EY, Grant Thornton, KPMG and PwC – are failing on their commitments to improve how climate change is addressed in financial reporting and audit, ClientEarth lawyers say.
While the first new international standards for corporate reporting on sustainability and climate were announced recently, ClientEarth lawyers have written to the firms to question their position on the current lack of transparency on climate risk in financial reporting and audit – transparency which existing standards already require and investors say must urgently improve.
ClientEarth’s letter is addressed to the Global Public Policy Committee (GPPC) – a group comprised of senior leaders from the Big Six, which is focused on policy issues of global importance but is little known outside of the profession.
In December 2020, the GPPC wrote to the International Accounting Standards Board (IASB) of the IFRS Foundation, the independent body which develops and approves International Financial Reporting Standards. The IASB had written important new guidance on climate reporting, and the GPPC promised to play its part in supporting greater transparency on climate matters in company financial statements in line with that guidance.
Accounting and audit are crucial for managing climate-risk in the financial world. In 2021 ClientEarth lawyers warned the world’s four largest audit firms – Deloitte, EY, KPMG and PWC – that they risk failing to fulfill audit standards and their core legal duties by not adequately considering climate risk, threatening the integrity of the market and leaving them open to legal challenge.
ClientEarth received no written responses to its 2021 letters from the individual firms, but was instead invited to discuss its concerns with the Big Six via the GPPC. Since then, ClientEarth lawyers have sought, via the GPPC, to engage with the audit firms to understand how they are implementing their 2020 commitment to drive improved disclosure of climate matters in corporate reporting and audit under existing rules, standards and guidance.
However, ClientEarth lawyers say the auditors’ responses are unsatisfactory, given evidence of continuing deficiencies in accounting and audit practices, and in the face of escalating climate risk. Lawyers say that despite engaging privately, it is surprising that the GPPC has failed to issue a clear public statement on the audit firms’ position on this topic, making it hard to understand how the auditors are applying existing rules and guidance.
“Despite promising to drive improvements to how climate risk is reported in financial statements and audit reports, the auditors’ position on this crucial issue remains worryingly unclear.
“The largest audit and accounting firms have a huge sphere of influence over the crucial issue of how climate risk is reflected in financial reporting and audit, yet it is hard to discern any meaningful leadership from the GPPC when it comes to climate change. We urgently need to see the auditors’ thinking on how financial reporting must be improved and ClientEarth is urging the GPPC to publish and develop its position as financially material climate risk continues to escalate.
“Investors are repeatedly demanding better reporting. Standard setters have already said this is required under existing rules. It’s time the auditors step up and drive the necessary change.”
-Robert Clarke, ClientEarth lawyer
Recent company assessments published by investor climate coalition, Climate Action 100+, show that the largest corporate emitters and their auditors are still largely failing to fully consider climate-related matters when preparing and auditing the financial statements, or if such matters are considered, they do not explain how this was done, depriving investors of much-needed transparency. This is despite guidance from accounting standard setter, the IFRS Foundation, and audit standard setter, the International Auditing and Assurance Standards Board, stating that more transparency is already required under their standards.
ClientEarth lawyers have now written to the GPPC, setting out their understanding of the Big Six’s stance on climate issues for accounting and audit, and urging the GPPC to use its influence to drive improvements. ClientEarth lawyers say that establishing a public record of the GPPC’s position is a key first step to understanding whether audit firms are in step with regulator and standard setter expectations, and ensuring that climate risk is appropriately presented in financial statements and audit reports.
The GPPC was given opportunity to provide a statement in response to ClientEarth’s letter but has not done so.
Accounting and audit experts have expressed concern over the positions attributed to the GPPC in the letter, and the implications not only for investors but for a sustainable climate.
Climate Accounting and Auditing Project member and visiting Cambridge University fellow David Pitt-Watson said: “This is the elephant in the climate reporting room. Standard setters have issued clear guidance on the need for transparent disclosure of material climate risk in accounting and audit, but this appears to not be implemented in practice.
“So, for example, we will have fossil assets which are overvalued, and companies not providing for clean-up costs, creating the sort of financial risks which accounting and audit aim to protect against. The challenge in this letter from ClientEarth, is that it appears auditors’ interpretations in effect will turn a blind eye to existing standard setter guidance. They may seem nerdy, but if we don’t follow existing rules, we are in trouble. That is especially true when we are writing new ones.”
Climate Accounting and Auditing Project member and former director of the Financial Reporting Council’s Reporting Lab Sue Harding said: “It’s essential to ascertain what the auditors seem to be saying, and it’s difficult to understand how some of the GPPC’s interpretations, as articulated in the ClientEarth letter, may tally with the standards themselves and standard setter and regulatory expectations.
“Some could serve to limit transparency, and others might even go to the core of how principle-based standards, a foundational element of financial statement reporting and audit, function to ensure appropriate information is presented to investors.”
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ClientEarth is a non-profit organisation that uses the law to create systemic change that protects the Earth for – and with – its inhabitants. We are tackling climate change, protecting nature and stopping pollution, with partners and citizens around the globe. We hold industry and governments to account, and defend everyone’s right to a healthy world. From our offices in Europe, Asia and the USA we shape, implement and enforce the law, to build a future for our planet in which people and nature can thrive together.
| All opinions expressed are those of the author and/or quoted sources. investESG.eu is an independent and neutral platform dedicated to generating debate around ESG investing topics.
