The latest audited accounts of the Rio Tinto, the mining giant, provide a lens into the ongoing disconnect between promised action to align with a 1.5°C temperature 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 or academic exercise.
Rio Tinto supplies critical minerals that support today’s current carbon-intensive economies. It also supplies minerals that support the transition towards carbon neutrality. It thus has the opportunity to support a more rapid economic transformation by pivoting its own business towards the cleaner end-users. Rio has stated that it is committed to driving this transition.
To support Rio’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. Rio’s recently published 2021 accounts and KPMG’s audit fail to meet these expectations.
We are seeking visibility of the critical accounting assumptions underpinning the accounts (for instance long-term commodity prices, carbon prices and asset lives), and where the company does not use a 1.5°C scenario as the basis for the core accounts (as is the case for Rio), then we expect to see quantitative disclosures in the Notes demonstrating how more rapid decarbonisation would be expected to impact the entity’s financial position.
While Rio has increased its discussion of climate risks and made clear that its accounts are not 1.5°C aligned, thereby providing welcome transparency, it does not provide disclosures on its quantitative assumptions, or visibility as to how it would be impacted if its own stated goal to be 1.5°C-aligned were achieved.
Rio does not change any critical accounting assumptions, suggesting they remain appropriate after having considered ongoing decarbonisation and its own strengthened climate targets. It furthermore states that it expects to prosper from more rapid decarbonisation in a well below 2°C scenario (its ‘society scenario’) based on sensitivity analysis it has undertaken on two key assets (Aluminium smelter at Kitimat and Copper mine at Oyu Tolgoi, representing roughly $15bn carrying value out of $65bn for Property, Plant and Equipment on the balance sheet).
These are reassuring statements. It does not, however, disclose the quantitative assumptions used in its accounts, or in its sensitivity analysis, or how other assets and liabilities have been tested. It is also not clear how the costs of achieving Rio’s more ambitious 2030 and 2050 carbon commitments have been incorporated.
The auditor, KPMG, sets out in general how it has considered climate risks as part of its audit process, but its disclosure under the Key Audit Matters are more limited.
Last year it stated that “It is therefore likely that the future carrying amounts of assets or liabilities will change for these other judgments and estimates as the Group responds to its climate change targets.” This statement has been removed without explanation, despite Rio publishing more ambitious (and thus likely costlier) targets.
KPMG has removed all reference to climate in its US Audit Report under its Critical Audit Matters, raising questions as to why the audit report should differ for different shareholders.
In summary, while we welcome the attention being given to climate risks in Rio’s accounts, we require visibility of how a 1.5°C scenario could impact its financial position. This would not only be consistent with its stated strategic goal to align with the Paris Agreement, it would provide vital impetus to the capital reallocation needed to achieve it, and Rio’s continued success in a net zero world.
Our votes at 2022 AGM
- Financial Statements: Against – lack of disclosure on 1.5°C resilience, or quantitative disclosures as to critical accounting assumptions and how the new medium-term targets have been integrated into the accounts.
- Audit Committee Chair: Abstain – welcome increased disclosures on how climate change and decarbonisation are considered but there remains a lack of quantitative information over critical assumptions and the implications of a 1.5°C pathway.
- Auditor: Against – KPMG provides commentary on climate considerations but provides no disclosure as to how it has tested consistency with a 1.5°C pathway, or the emission targets set by the firm. It has furthermore removed without explanation its statement from last year: “It is, however, likely that the future carrying amounts of assets or liabilities will change for these other judgments and estimates as the Group responds to its climate change targets” despite tougher targets. We are also concerned by the differential reporting for US investors under its Critical Audit Matters, which leaves out all mention of climate.
Note: For a full analysis of Rio Tinto’s 2021 Financial Statements, please see this report produced by the Climate Accounting & Audit Project.