"At CRH, our vision is to develop sustainable solutions that build, connect and improve our world."
CRH Strategy & Business model, 2023
CRH’s vision is to pivot away from merely supplying construction materials to providing sustainable construction solutions that enable customers to meet tightening environmental regulations. This is potentially transformative.
A key pillar of this strategy is CRH’s ambition to get to net zero carbon emissions by 2050. It has promised to cut all its emissions (covering scope 1-3 emissions) by 30% by 2030. In essence, by aligning the business with global efforts to tackle climate change, CRH is positioning itself to take market share and grow margins. We are fully behind this plan.
Disconnect between vision and accounting assumptions
The problem is: when we examine CRH’s financial statements in greater detail, there seems to be a disconnect between their bold vision and critical accounting assumptions. Crucially, these do not appear to acknowledge tightening carbon emission regulations.
As investors, we need CRH’s financial statements to give us clarity on its capital strength given its planned transformation, including any anticipated investments to deliver falling carbon emissions. We also need to know that they reflect the expected tightening of climate-related policies, in particular the higher cost of carbon, when they test their asset values for impairment. If they don’t, they risk understating the risks to the capital linked to ongoing investments into carbon-intensive assets. The further out management expects climate rules to bite, the slower they will be to pivot the business.
A lack of disclosures in CRH’s accounts and audit last year led us to vote against several resolutions.
Investors need more visibility
This year, while we note some improved disclosures in the financial statements, we continue to lack visibility, or have questions, on:
- Consistency with CRH’s decarbonisation roadmap: CRH has said that $150 million per annum will be required to deliver the 2025 carbon-intensity target, and this is integrated into the financial statements. However, there is no detail on how this was calculated or what it covers. Moreover, this is only part of their decarbonisation plan. Any other investments beyond 2025, notably to deliver on carbon capture use and storage requirements, appear to be left out.
- Low carbon price assumptions support goodwill valuations ($9.2 billion on balance sheet): While there is no disclosure of the numbers used, they state in Note 14 on Intangible Assets that they have used the existing carbon prices they pay under the European Emission Trading System, and make no allowance for expected tightening of allowances until 2030. Here they helpfully indicate how they stress tested for prices rising after 2030 in line with the International Energy Association’s (IEA’s) Net Zero Emissions by 2050 scenario (a 1.5˚C-scenario). However, they concluded that “there was no material impact on any of the CGUs [Cash Generating Units] primarily due to the levels of headroom in these CGUs and an assumption of cost recovery through pricing”. In other words, this impairment test ignores potential rising prices before 2030, and after 2030 they assume that they will increase prices to cover rising costs, so there would be no problem.
- Inconsistency with Task Force on Climate-Related Financial Disclosures (TCFD) scenario analysis for a 1.5˚C-scenario: with regards to the narrow 1.5˚C stress test for intangible assets above, we note the conclusion that there is no risk seems at odds with their conclusion in the climate risk assessment undertaken in the front half of the annual report. According to the latter, higher carbon prices associated with a 1.5˚C-scenario would be a ‘high impact’ and ‘high probability’ risk.
- Plants, property & equipment (PPE) ($18.9 billion): they concluded that the planned decarbonisation targets and associated capital expenditure would not reduce asset value or asset lives, but provide no detail on how this was established. Presumably, they use similar carbon pricing assumptions as detailed for intangibles above.
- Discount rates unadjusted: according to the financial statements, discount rate assumptions are a “major source of estimation uncertainty”. These are critical to impairment testing, amongst other things. There is no sign that they considered how tightening carbon emission regulations might push up the risks associated with CRH’s key carbon-intensive assets and thus the discount rate they use. A higher discount rate for carbon-intensive business lines could increase the risk of write-downs.
- Environmental and remediation provisions ($0.6 billion): CRH states that it has considered climate risks, and “Changes to legislation, including those relating to climate change, are factored into the assessment of provisions when the legislation is virtually certain to be enacted.” There does not appear to have been a stress test for the 1.5˚C-pathway that they are committed to.
Turning to the auditor, Deloitte, who claims to have reviewed all the assumptions considering climate-related risks and managements’ decarbonisation targets. This year, they indicate they paid particular attention to the potential for climate-related factors resulting in impairments to goodwill. However, no comment is made on the partial 1.5˚C stress test performed on goodwill, or the carbon price assumptions used. Deloitte also makes no mention of how they considered CRH’s longer-term capital expenditure requirements to deliver decarbonisation.
In summary: while we welcome the improved disclosures relating to climate risks in CRH’s accounts, we have questions over 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. Given the above, we will vote as follows:
Our accounting & audit related votes at the 2023 AGM
- Audit Committee Chair (Shaun Kelly) – Abstain: Despite ongoing concern with the actual financial statement disclosures, we will abstain on Kelly’s reappointment in recognition of our engagement and the efforts made, as detailed in the Audit Committee report to shareholders. However, we continue to lack visibility for 1) how material climate risks are reflected in critical accounting assumptions, notably the carbon price and discount rates used in impairment testing; 2) how precisely CRH’s medium to longer-term decarbonisation targets are integrated into its financial statements; and 3) the implications of a 1.5°C-pathway for its financials, given the results of the 1.5˚C-scenario in CRH’s TCFD disclosure suggests this is a high probability which may have a high impact.
- Auditor (Deloitte Ireland) – Against: While Deloitte provides additional commentary in its UK report on how climate risks have been considered, as well as on the consistency between the financial statements and climate targets, they offer no disclosure on how the medium to longer-term decarbonisation targets are accounted for, or views on the carbon price assumptions used. No comment is provided on the sensitivity to a 1.5°C-pathway, despite CRH’s net-zero ambition.
- Financial statements - Against: Despite some improvements, we cannot approve CRH’s financial statements where there remain questions over critical accounting assumptions such as the carbon price and discount rates used, and where they fail to provide the requested visibility for a 1.5°C-pathway.
CRH’s efforts to decarbonise matter. Buildings – their construction and use – contribute between 30-40% of global carbon emissions. Global efforts to contain climate change depend on getting these emissions down. We are thus strongly supportive of CRH’s vision – we just need to see bolder action to deliver it. This will start by getting the numbers right.
 Investors have set out Investor Expectations for Paris-aligned Accounting in November 2020.
 Note that we may also vote against other resolutions on climate grounds, but the focus here is on accounting and audit-related voting. Please see our published votes and rationale on our website in the quarter following the AGM.