Investors warn 'Big Four' to integrate climate risk into audits

November 5, 2021

Investors are to begin voting against the reappointment of auditors that do not challenge companies on the impact of decarbonisation on their accounts.

A group of 24 institutional investors wrote letters to accountancy and audit giants Deloitte, EY, KPMG and PwC, advising them that they will take the action from next year.

The investors said in their correspondence - reported by several news sources, including Reuters - that recent research showed more than 70% of assessed 2020 audits had fallen short on decarbonisation plans.

Asset managers including Sarasin & Partners, Aviva Investors, and EOS, part of Federated Hermes, argued that “companies that base their accounting assumptions on ‘business as usual’ risk misrepresenting their economic position”.

After three years of discussions with auditors, the investor group said it “cannot afford to wait another three years” for audits to improve.

At the COP26 conference in Glasgow this week, the investor group also urged governments to force companies and auditors to file accounts in line with net-zero targets by 2050.

At the next season for corporate annual general meetings, auditors should expect investors to vote against their reappointment if they failed to meet expectations, the letter said.

Deloitte, EY, KPMG and PwC each told Reuters that all material climate-related risks are considered in their audits of companies’ financial statements, and that each firm had taken steps to improve their understanding and incorporation of climate risks.

Deloitte was flagged by the investor group as responsible for 19 of the companies assessed in its research, including oil giant BP, miner Glencore, and building materials company CRH.

"While we have identified some welcome signs of leadership, notably at BP, based on our analysis overall these audits have not met our expectations," the letter said.

"Outside the UK, the picture is worse. Of the remaining 16 audits undertaken by Deloitte, only three mention climate risk. None provides the visibility we seek on the potential financial implications of a 1.5C pathway, which global leaders have committed to delivering."

Paul Stephenson, managing partner for audit and assurance at Deloitte, told Reuters that the auditor agreed that “climate-related risks should be accounted for and disclosed appropriately in annual reports and financial reports”.

Investors have been increasing the pressure on auditors over the past several years amid concern that they were misrepresenting companies' true positions by not factoring in the impact of climate change and associated policy changes.

The letters follow a September report by think-tank Carbon Tracker, which found that in 80% of cases auditors did not assess the effects of climate risks when assessing carbon-intensive companies.