Shareholders ignoring auditor approaches to climate risk, report warns

A new report from Greenpeace found that between January and August this year, shareholders voted by 90% or more to reappoint the auditors at all but 3 of 349 large listed companies. Greenpeace notes that these firms were either listed on the UK FTSE100 or FTSE250, or were one of 78 of major global emitters whose audit reports were identified by Carbon Tracker and the Carbon Accounting Project as failing to meet ‘good practice’.

Indeed, ClientEarth found that only 4% of the audit reports of the 250 largest listed UK companies included clear explanations of whether auditors were considering climate change in their decision-making factors.

Greenpeace UK’s senior programme adviser Charlie Kronick said: “Polluting companies and their auditors are failing to integrate climate change and the 1.5C  target of the Paris Agreement into their business plans and financial statements – for example over-valuing fossil fuels, rather than recognising they need to be phased out.

“This leads to bad investment decisions that not only harm company profits, but also wreck the climate. Our findings show that investors aren’t going to force auditors to improve any time soon. We’re calling for the government to step in by creating a duty for companies and auditors to ensure climate risk is reflected in financial statements.”

Greenpeace is calling for the UK Government to introduce “specific duties” for companies and auditors to ensure that “climate risk is reflected in financial statements”.

Indeed, the Government is introducing a mandate on corporate non-financial disclosure, in alignment with the Task Force on Climate-related Financial Disclosures (TCFD). However, it seems that policy is relying on investors to hold these companies to account.

The Greenpeace report notes that shareholders in the UK have the power to vote against auditors, but that they tend not to.

The findings come as investors increasingly call on the government to introduce a mandate for companies and auditors to align accounts with the pathways of the Paris Agreement.

Insufficient audits

Earlier this year, a survey of more than 700 chief audit executives found that just over one in ten (12%) believe their organisation is making sufficient efforts to measure, reduce and adapt to climate risks.

The survey was conducted by the Chartered Institute of Internal Auditors (Chartered IIA). Climate change and other environment-related risks have been steadily climbing the list of risk priorities in recent years, the report revealed. It was ranked in the top five risks by just 14% of professionals in the 2020 edition of the report, published in 2019. That proportion rose to 22% last year and 31% this year. No other risk area saw year-on-year increases in prioritisation this steep.

Nonetheless, that leaves 69% of audit chiefs not viewing climate risk as a top-five risk. The Chartered IIA’s definition covers physical risk, such as flooding; transition risk, such as stranded assets or increased costs from altered legislation, and potential reputational risk.

Moreover, just 12% of the survey respondents agreed that they, their teams and their organisations are prioritising spending significant time and effort preparing for the climate crisis. As well as professionals working in the private sector, those working in NGOs and the public sector were also polled.

Matt Mace