Air Liquide, a world leading industrial gas and services company, has an opportunity to play a catalytic role in the global transition onto a 1.5°C temperature pathway.
Its own processes and those of many of its clients are carbon-intensive, giving it a place on the Climate Action 100+ initiatives’ priority list. In 2021 alone, its total emissions – including those associated with its clients’ products – came to 59.5Mt CO2 equivalent. This is roughly the same as Greece’s total carbon footprint in 20201.
Air Liquide recognises not just the opportunity to reduce its carbon footprint but also its responsibility to act to ensure it is playing its part in protecting our planet. In 2021 it set a goal to achieve net zero emissions by 2050, in line with the global effort to cap global warming at 1.5C. In early 2022 it published a new strategy, which identifies decarbonisation as a strategic priority. At its heart, Air Liquide’s plans is to build its business around providing low-carbon solutions to a range of hard to abate sectors. This determined action should be applauded.
Notwithstanding its ambitions, Air Liquide could go further in demonstrating its resilience and commitment to a net zero future by aligning its financial statements with this pathway. In the end, accounting numbers drive real-world capital allocation at companies, so it is vital that those numbers are aligned with a net zero trajectory.
Investors like Sarasin & Partners have set out explicit expectations for companies to publish precisely how reported capital and performance consider accelerating decarbonisation (see Investor Expectations for Paris-aligned Accounting paper, released by IIGCC in November 2020). For instance, have the costs of carbon capture and storage that will be needed to meet Air Liquide’s goals, or the rising carbon tax consistent with a 1.5°C pathway – expected by the IEA to rise to $250/tCO2 by 2050, been included in impairment testing for key carbon-intensive assets?
Air Liquide could go further in demonstrating its resilience and commitment to a net zero future
Following shareholder engagement on this topic initiated in 2020, Air Liquide does identify areas of financial risk associated with decarbonisation, for instance, changes to useful lives of key assets, asset impairments, provisions for contingencies/losses. It has also stated that the “…quantified impact [of these climate risks] on the Consolidated Financial Statements of the Group is not material”.
The problem is that shareholders have no clarity as to how precisely the management team adjusted key assumptions in its accounts. What carbon price did they use? What costs for CCS? What asset lives are assumed for the carbon-intensive assets? Critically, are these assumptions consistent with a 1.5°C pathway? Air Liquide does not make this clear.
These questions need answering. Global regulators and standards setters have also made clear that, under existing rules, material climate risks must be incorporated into company accounts. The European Securities Market Authority has identified the inclusion of material climate risks into financial statements as a supervisory priority for 2022. The accounting standard setter (IASB) and the audit standard setter (IAASB) have both published guidance underlining why material climate risks must be considered under existing standards.
Air Liquide has a system of joint audit undertaken by PWC and KPMG. Despite direct requests made to the lead audit partners in 2020 and again in 2021, the auditors’ report to shareholders makes no mention of how climate risks have been considered in their review of the financial statements.
The auditors, however, do note that the return on investments and recoverable amounts of the production units could be “adversely impacted” by various events, including the company’s “sustainable development objectives and commitments”. They then provide no comment on how they have assessed this risk, how material it could be, or whether it has been adequately considered in the accounts.
There remain clear outstanding questions for the auditors to answer as per our correspondence with them, and clearly set out in the paper “Investor expectations for Paris-aligned accounts”:
- Confirmation that critical accounting estimates or judgements reflect material climate risks, in line with accounting standards.
- Paris-alignment: Confirmation as to whether or not these critical assumptions and estimates can be considered aligned with a 2050 net-zero pathway. If not, the auditor should assess whether Paris-aligned assumptions have been adequately considered and disclosed in the Notes to the Financial Statements. Where Paris-aligned numbers are not provided, the auditor should indicate what reasonable Paris-aligned assumptions would be.
- Consistency: Confirmation that there is consistency between the narrative disclosures around climate risks and the financial statements.
- Dividend resilience: Confirmation that pertinent capital maintenance/solvency tests have considered climate risks, and dividends are appropriately funded and legal.
There remain clear outstanding questions for the auditors to answer
Our votes at the 2022 AGM
There is no vote on the Audit Committee Chair in 2022. Therefore, we have focused our climate accounting related votes on the financial statements’ approval and the incumbent auditor PWC (KPMG is being replaced in 2022, so is not up for reappointment).
- Financial statements - Abstain: Notwithstanding high-level commentary on how climate change and decarbonisation have been considered in the financial statements, there is little quantitative information. We continue to lack visibility for 1) how material climate risks are reflected in critical accounting assumptions and what these are, 2) precisely how Air Liquide’s own climate targets are integrated into its financial statements, and 3) the implications of a 1.5°C pathway for its financials, ideally presented in sensitivity analysis in the Notes. In light of ongoing constructive engagement with the company, we are abstaining on this resolution.
- Auditor reappointment (PWC) - Against: Despite specific shareholder requests to the lead audit partners in 2020 and 2021, the auditors remain silent on how they have considered climate risks in their audit process, or evaluated management’s assertion that there is no material impact for the financial statements. This is particularly concerning since they note that the return on investments and recoverable amounts of production units could be “adversely impacted” by various events, including the company’s “sustainable development objectives and commitments”. No mention is made of a 1.5°C pathway.
Note: A full analysis of Air Liquide’s 2021 Financial Statements undertaken by Carbon Tracker can be downloaded here.
3IFRS - Educational material: the effects of climate-related matters on financial statements prepared applying IFRS Standards, IAASB Issues Staff Audit Practice Alert on Climate-Related Risks | IFAC, Summary-FINAL.pdf (frc.org.uk)