As part of a campaign led by Sarasin & Partners, a group of investors representing over $4.5 trillion have written to the UK Big Four Audit firms (PWC, Deloitte, KPMG and EY) calling on them to sound the alarm when company financial statements ignore the global transition to a 1.5°C temperature pathway.
Where auditors stay silent, the investors believe there are clear risks of accounting misrepresentation putting shareholder capital at risk, and driving damaging investment into carbon-intensive activities.
We, and the group of investors state that auditors that fail to respond to our call for net zero aligned audits should expect increasing votes against their reappointment.
The letters are the latest instalment in an engagement initiated by Sarasin & Partners in January 2019, and follow the recent Carbon Tracker report that provides overwhelming evidence of auditors failing to check whether and how global decarbonisation is being reflected in company accounts, even where the move away from fossil fuels poses an existential threat to the business.
Since 2019, we argue the investors argue that the situation has become more pressing. Structural changes linked to both climate change itself and associated policy action are accelerating, making accounts (and their audits) based on ‘business as usual’ ever more questionable.
Also, audit standard setters and regulators have now underlined auditors’ responsibility to take material climate risks into account under existing standards and regulations.
Finally, investors are expressly asking for accounting disclosures that align with a 1.5°C pathway. This makes these considerations material and, thus, under the existing rules, a matter for directors to disclose, and auditors to audit. As helpfully reiterated in the latest IASB guidance, materiality is a function of what investors view as important to their decision-making, not what management perceives to be most important.
Investors are expressly asking for accounting disclosures that align with a 1.5°C pathway
In the run-up to COP26, there has been much focus on narrative reporting of climate risks and impacts (for example TCFD), but this misses the vital importance of climate-aware financial statements. In the end, if we want to see an immediate and system-wide shift in capital towards climate solutions, company accounts need to be aligned with that goal.
In our letter to auditors, we make clear that weare not prepared to wait longer for action:
“We began our engagement with you almost three years ago. We cannot afford to wait another three years for you to act. From next voting season, you should expect to see investors increasingly vote against your reappointment as auditor where you fail to meet the expectations we have clearly set out in our previous correspondence, the November 2020 IIGCC paper and underlined again here.”
Read the letters below: