Holding audit committees and auditors to account for Paris-aligned Financial Statements – Sarasin & Partners to vote at forthcoming Royal Dutch Shell and BP AGMs
Reliable accounts underpin good governance and trust in companies. There are few places where this is more important than the oil and gas industry as it faces up to global decarbonisation. Shareholders and creditors (and indeed staff, suppliers, and the public) need to have visibility of the risks of asset write-downs and rising liabilities. In addition, prudent accounting is of utmost importance to prevent over-statement, the misallocation of capital, and the resulting harm to our planet.
Over the past three years, Sarasin & Partners has led an investor engagement effort calling for Paris-aligned accounts and audits. In November 2020, working with IIGCC, a clear set of Investor Expectations were published and sent to 36 companies detailing steps investors expect from Audit Committee directors and auditors to deliver Paris-aligned Accounts.
Investors are clear: they need to know whether and to what extent their capital is at risk.
Following engagements with Royal Dutch Shell’s and BP’s Boards seeking Paris-aligned accounts, we have reviewed their 2020 Financial Statements, and plan to vote as set out in detail below.
At Shell, we are planning to vote against the Audit Committee Chair and Financial Statements, while abstaining on the reappointment of their auditor EY. In the event that Shell makes a public commitment prior to the AGM that its 2021 financial statements will be aligned with its net-zero aligned strategy, we will support the Audit Committee Chair’s reappointment.
At BP, we are supporting the Financial Statements and Auditor Deloitte due to accounting adjustments that align with a net zero future, as well as market-leading disclosures on risks to capital from Paris-alignment. However, we plan to abstain on the appointment of the new Audit Committee Chair as we wait to see whether action is taken to ensure climate risks are made a priority by the Committee in coming months.
Royal Dutch Shell
Against Audit Committee Chair Ann Godbehere and Against the Financial Statements
- The Audit Committee report makes no mention of investor expectations for Paris-aligned accounts, despite repeated engagement by shareholders who have emphasized this to be material to their decision-making.
- Climate risks are not identified as a priority to their work for 2020 or 2021, however, the auditor EY identifies climate risks as a Key Audit Matter – in other words, this is an issue that presents an elevated risk of material misstatement.
- The accounts are out of line with Shell’s strategic commitment to net zero, as set out in Note 2 to the financial statements: “Meeting the goals of the Paris Agreement is a global and Shell target. Shell’s pathway to Paris alignment is reflected in the Group’s strategy and in 2020 we announced a long-term target to become a net-zero emissions energy business by 2050, in step with society.” … “However, our plan and pricing assumptions do not yet reflect Shell’s 2050 net-zero emissions target…”.
- There is no supplementary disclosure in the Notes on what Paris-alignment would mean for their financial position. Consequently, we cannot determine the capital at risk associated with a net zero pathway. No mention is made of dividend resilience in the face of decarbonisation.
- The Audit Committee discloses that the Financial Reporting Council undertook a ‘limited scope review’ of Shell’s climate disclosures in 2020. And while certain ‘improvements’ were made, there is no disclosure for what these were.
Abstain on Auditor EY
- EY should be commended for providing a full page response to the Investor Expectations document, including climate risks as a Key Audit Matter, and affirming that Shell’s accounts are not aligned with Paris.
- However, EY declined to provide a view requested by investors on how a 2050 net zero pathway might impact Shell’s financial position, and their ability to pay dividends.
We will also vote against Shell’s Energy Transition Plan due to concerns that until their financial statements properly reflect the implications of a net zero pathway, it is impossible to know whether the transition plan is credible or economically feasible. We will support the Follow This resolution as we have in previous years.
Abstain on Audit Committee Chair Tushar Morzaria
- Despite significant progress in bringing the accounts into line with a Paris-pathway (see below), the Audit Committee makes minimal reference to climate risks, and does not identify climate risks as a priority in their work programme. This runs contrary to the auditor Deloitte identifying climate risks as a Key Audit Matter, and thus results in a significant risk of material misstatement.
- There is no response to Investor Expectations despite long-standing engagement seeking Paris-alignment.
- However, the above report was led by the outgoing Audit Committee Chair, Brendan Nelson. We will abstain on the new Chair to permit him time to address the above shortcomings.
For Financial Statements
- Notwithstanding some outstanding areas for inquiry, e.g. broader asset exposure to decarbonisation risks and Deloitte’s comment that long-term commodity prices remain at the top end of the range consistent with Paris, steps taken by management to reduce commodity prices to a level they state is in line with Paris is welcome.
- This has resulted in a $23bn impairment and sensitivity analysis provided in the Notes provides visibility for further assets at risk.
For Auditor Deloitte
- Deloitte’s disclosure is market leading and includes climate risks as a Key Audit Matter & considered as part of other KAMs.
- They have set out in detail how they tested for Paris-alignment and affirmed that they believe the accounts to be Paris-aligned, although they alerted shareholders that BP’s commodity price assumptions are at the upper end of the range for Paris-aligned scenarios.
- Deloitte identified a further $48bn assets at risk from lower commodity prices. One area for improvement is to set out dividend resilience to a net zero transition.
You can find out how Shell responded here.