ClientEarth has accused senior leadership at the world’s six largest accounting firms – BDO, Deloitte, EY, Grant Thornton, KPMG and PwC – of failing on commitments to improve how climate change is addressed in financial reporting and audits.
Lawyers for the climate action group have written to the accountancy firms to question their position on the lack of transparency on climate risk in financial reporting and audit.
This is transparency that existing standards already require and investors say must urgently improve, according to ClientEarth.
ClientEarth’s letter is addressed to the Global Public Policy Committee (GPPC), a group of senior leaders from the Big Six focused on globally important policy issues.
ESG Clarity contacted the accountancy firms named by ClientEarth for their response.
PwC replied with a ‘no comment’. BDO and Grant Thornton did not reply. EY, KPMG and Deloitte sent a statement from the GPCC.
The statement said: “GPPC networks are committed to reporting consistent, high-quality information to support stakeholders’ decision making. We perform our work in full compliance with existing standards.
“However, we recognise some want broader information than current standards require. We strongly support standard setters’ efforts to address the current information gap, for example, greater connectivity between sustainability-related corporate disclosures and financial statements.
“We urge stakeholders to work together to bring about the change required to address the needs of global capital markets, stakeholders and society.”
Importance of audits
Recent company assessments published by investor climate coalition, Climate Action 100+, show the largest corporate emitters and their auditors are still largely failing to fully consider climate-related matters when preparing and auditing the financial statements.
When they have taken these into consideration, they do not explain how this was done, depriving investors of much-needed transparency, ClientEarth said.
Similarly, a 2021 Carbon Tracker report found audit opinions published alongside 2020 accounts for listed fossil-fuel-related companies in Europe and the US hardly mentioned climate change. Where they did, it was cursory and most claimed there was no risk of material mis-statement.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, said at the time: “These ‘clean’ audit opinions are being issued while accountants proclaim leadership on climate change. Alongside grand pledges to achieve net-zero carbon emissions before 2050, the audit firms are expanding lucrative businesses that advise companies how to report climate risks and develop carbon-neutral strategies. The hypocrisy is breath-taking.”
This is despite guidance from accounting standard setter, the IFRS Foundation, and audit standard setter, the International Auditing and Assurance Standards Board, stating that more transparency is already required under their standards.
Accounting and audit are crucial for managing climate-risk in the financial world. In 2021 ClientEarth lawyers warned the world’s four largest audit firms – Deloitte, EY, KPMG and PWC – that they risk failing to fulfil audit standards and their core legal duties by not adequately considering climate risk, threatening the integrity of the market and leaving them open to legal challenge.
ClientEarth received no written responses to its 2021 letters from the individual firms, but was instead invited to discuss its concerns with the Big Six via the GPPC.
Since then, ClientEarth lawyers have sought, via the GPPC, to engage with the audit firms to understand how they are implementing their 2020 commitment to drive improved disclosure of climate matters in corporate reporting and audit under existing rules, standards and guidance.
However, ClientEarth lawyers say the auditors’ responses are unsatisfactory, given evidence of continuing deficiencies in accounting and audit practices, and in the face of escalating climate risk.
The GPPC has not issued a clear public statement on the audit firms’ position on this topic, which ClientEarth’s lawyers say is making it hard to understand how the auditors are applying existing rules and guidance.
ClientEarth lawyer Robert Clarke said: “Despite promising to drive improvements to how climate risk is reported in financial statements and audit reports, the auditors’ position on this crucial issue remains worryingly unclear.
“The largest audit and accounting firms have a huge sphere of influence over the crucial issue of how climate risk is reflected in financial reporting and audit, yet it is hard to discern any meaningful leadership from the GPPC when it comes to climate change.
“We urgently need to see the auditors’ thinking on how financial reporting must be improved and ClientEarth is urging the GPPC to publish and develop its position as financially material climate risk continues to escalate.
“Investors are repeatedly demanding better reporting. Standard setters have already said this is required under existing rules. It’s time the auditors step up and drive the necessary change.”