The latest audited accounts of CRH, the building materials company, provide another example of the ongoing disconnect between promised action to align with a net zero by 2050 pathway, considered vital to stabilise our planet, and the all-important accounting numbers driving real-world capital allocation at companies dependent on carbon-intensive activities.
Unless companies provide clarity as to how their assets and liabilities are likely to be impacted by global efforts to deliver a 1.5°C pathway, investors will be unable to allocate capital in a way that is consistent with this pathway. Moreover, management teams will continue to allocate capital as they always have. If we fail to shift capital away from carbon-intensive activities, and towards carbon neutral activities, we have little hope of containing devastating global warming.
Ensuring net-zero accounting disclosures is thus far from a technical academic exercise
Global regulators and standards setters have also made clear that, under existing rules, material climate risks must be incorporated into company accounts. The UK’s Financial Reporting Council and European Securities Market Authority have 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.
CRH is a leading building materials company globally. As a highly carbon-intensive business, largely due to its production of cement which accounts for almost 60% of its total emissions including scope 1 to 3, CRH has both a responsibility and opportunity to lead in driving emissions to net zero.
As countries transition to net zero and also adapt to climate change, the demand for carbon-neutral construction will only intensify. CRH has stated that it is committed to driving this transition and published a science-based target to reduce group-wide scope 1 and 2 emissions by an absolute 25% by 2030. It is aiming for 50% of its revenue to come from products with sustainability attributes by 2025.
To support CRH’s transformation, we and other investors have set out our expectation that its accounts provide visibility for the financial implications of a 1.5°C pathway, in line with the Investor Expectations for Paris-aligned Accounting paper released by IIGCC in November 2020. This sets out five expectations for disclosures in the Financial Statements, and four expectations for auditor disclosures in its report to shareholders. We were disappointed to find that CRH’s recently published 2021 accounts and Deloitte Ireland’s audit fail to meet these expectations.
CRH has both a responsibility and opportunity to lead in driving emissions to net zero
While CRH has increased its discussion of climate risks, and confirms that it is comfortable that all its assumptions and appropriate, its 2021 financial statements fail to provide quantitative disclosures relating to how material climate risks have been considered; or how CRH’s own climate targets have been incorporated into assessments of assets, liabilities and profitability. In addition, there is no disclosure for what a 1.5°C pathway might mean for CRH’s financial position.
The result is that investors are unable to ascertain whether CRH would be resilient to accelerating decarbonisation, despite its own ambition to be aligned with a 2050 net-zero pathway. Moreover, where the accounts fail to fully incorporate material climate risks, they will incentivise a misallocation of capital into excessively carbon-intensive activities. This would tend to harm long-term shareholder value, and would also be damaging for the planet.
The auditor, Deloitte Ireland, sets out in how it has considered climate risks as part of its audit process outside of its identified Key Audit Matters (KAMs). It states that CRH’s carbon emission reduction targets are consistent with the financial statements, but provide no quantitative disclosure as to the materiality of climate risks.
Whereas last year Deloitte included climate risks in their KAMs, it has removed all reference to climate change this year, without explanation. Furthermore, it has removed all reference to climate in its US audit report, raising questions as to why the audit report should differ in different jurisdictions.
In summary, while we welcome the attention being given to climate risks in CRH’s accounts, we require visibility of critical accounting assumptions, how these are consistent with the company’s climate targets, and how a 1.5°C scenario could impact its financial position. This would be not only be consistent with its stated strategic goal to align with a net zero by 2050 pathway, it would provide vital impetus to the capital reallocation needed to achieve it, and CRH’s continued success in a net-zero world.
Our votes at the 2022 AGM
- Audit Committee Chair (Shaun Kelly) - Against
Notwithstanding welcome references to climate change in the Audit Committee’s report to shareholders and 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, 2) how CRH’s own climate targets are integrated into its financial statements, and 3) the implications of a 1.5°C pathway for its financials.
- Auditor (Deloitte Ireland) - Against
While additional commentary in its UK report describes how climate risks have been considered, and specifically how CRH’s carbon emission reduction targets are consistent with the financial statements, Deloitte provides no quantitative disclosure as to the materiality of climate risks. It has taken climate out of its identified Key Audit Matters without explanation. Moreover, it is difficult to understand why it has removed all reference to climate change in its US audit report to shareholders despite global investors’ express desire to have visibility on this matter. No comment is provided on the sensitivity to a 1.5°C pathway, despite CRH’s net-zero ambition.
- Financial statements - Against
We cannot support approval of CRH’s financial statements where there remain questions as to how it has accounted for material climate risks, and where they fail to provide the requested visibility for a 1.5°C pathway.
Note: A full analysis of CRH’s 2021 Financial Statements undertaken by the Climate Accounting & Audit Project can be read here.