The world’s four biggest auditing firms are taking fire for their failure to adequately assess the systemic risks posed by climate change, with 29 European investors managing more than £1 trillion (US$1.28 trillion) in assets warning the gap in their analysis could do more harm than the 2008 financial crash.
“In a letter sent in January to the so-called Big Four—EY, Deloitte, KPMG, and PwC—the investors said they were concerned that climate change was being ‘ignored’ in accounting and audits,” Reuters reports, in an exclusive published late last month. “Auditors are not giving enough weight to a potentially rapid transition towards a low-carbon future as governments implement the 2015 Paris Agreement to curb climate change, they said.”
“The overarching thing is that we don’t want another financial crisis, and this could be a lot worse,” said Natasha Landell-Mills, head of stewardship at asset manager Sarasin & Partners, which Reuters says is “spearheading” the campaign. “This time around, we need our auditors to be on the front foot and raise the alarm where executives fail to reflect foreseeable losses or liabilities.”
The investors decided to release their letter “as they prepared to broaden their campaign by writing directly to the audit committees of leading oil and gas companies to demand they also take a more robust approach to climate risk,” Reuters adds. “They want auditors to challenge assumptions about long-term prices for oil and gas, which underpin shareholder returns.”
The International Accounting Standards Board (IASB) told Reuters its standards do address climate risk, though not necessarily explicitly. “We would expect management to report on environmental and societal issues to the extent necessary for primary users of financial statements to form their own assessment of the company’s longer-term prospects and management’s stewardship of the business,” said IASB board member Nick Anderson.
EY said it was “committed to ensuring that the audit profession is able to continue to serve the evolving needs of investors, business, and the public interest”, while Deloitte said it acknowledged climate risk and had trained all its auditors on how to factor it into their work.
Reuters says the other two audit firms, KPMG and PwC, did not respond to email requests for comment.
UK shareholder engagement executive Lara Blecher of the Local Authority Pension Fund Forum, which signed the letter, said the audit firms still aren’t adequately accounting for climate risk. “It doesn’t bode well if we as investors don’t have accurate information on which to act,” she told Reuters. Ingrid Holmes, head of policy and advocacy at Hermes Investment Management, added that the Big Four must “play their role in helping us to shift the economy onto a more sustainable footing”.