According to a well-known environmental law charity, senior management at the six biggest accounting firms in the world are failing to make sure that financial reports and audits effectively address climate change.
Client Earth’s Concerns Addressed to Global Public Policy Committee (GPPC)
In a letter to the Global Public Policy Committee, Client Earth stated that it was “very concerned” that auditors were not fully taking climate-related issues into account when evaluating corporate accounts. The Global Public Policy Committee is made up of senior leaders from the Big Four firms PwC, Deloitte, KPMG, and EY, as well as BDO and Grant Thornton. The committee also expressed worry over noncompliance with audit criteria.
GPPC’s Response to Client Earth’s Claims
The nonprofit organization claimed that after sending the letter—which was viewed by the Financial Times—in May, it never heard back. Following an 18-month engagement, Client Earth said it was referred to the GPPC after voicing its concerns to the Big Four firms in 2021.
Impact on Financial Risks and Accountability
According to Client Earth attorney Robert Clarke, it is impossible to perceive any substantial leadership from the GPPC when it comes to climate change. “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,” Clarke explained.
The letter addressed “the elephant in the climate reporting room,” according to David Pitt-Watson, a visiting fellow at Cambridge University’s Judge Business School and a former executive at investment firm Hermes.
He predicted that firms would fail to cover clean-up expenses and inflated fossil assets would lead to the kind of financial dangers that accounting and auditing are designed to fend off.
Growing Pressure from Investors and Regulators
Investors and regulators are putting more and more pressure on businesses to report the opportunities and risks associated with the climate. Additionally, they are governed by a patchwork of reporting guidelines established by international accounting bodies and standard-setters.
Climate Action 100+ Audit-related Findings
Investor group Climate Action 100+ discovered last year that 94% of 152 large corporations it has evaluated on a variety of climate-related measures had not passed any of its audit-related requirements. The organization manages a combined $68 trillion in assets.
These included whether and how a company’s financial statements took climate-related issues into account as well as whether or not auditors had evaluated the implications of significant climate-related issues.
Calls for Considering Climate-related Issues in Financial Reporting Standards
In a report released in October, CA100+ stated that “most companies do not fully consider material climate matters when preparing their financial statements” (and their auditors, in their audits thereof).
The International Accounting Standards Board and the body that sets auditing standards have both stated that significant climate-related issues need to be taken into account when developing financial reporting standards.
In 2020, the GPPC declared that it will “play its part” in assisting with the application of the recommendations.
The GPPC’s Stance and Client Earth’s Critique
Client Earth wrote in response that “the evidence suggests that only modest changes have been made in the financial disclosure practices of companies and their auditors, and the GPPC has not made any further public statements as to why this is considered acceptable.”
The letter stated that it was “essential” for the group to release a “clear public statement” about its stance. We don’t believe the GPPC is providing enough leadership on these issues based on its position (or rather, lack thereof) in the public.
Disagreement with Carbon Tracker’s Conclusions
According to Client Earth’s letter, it was understood from a January meeting with the GPPC that the group’s view was that its members’ audits conformed with the necessary recommendations.
According to the organization, the GPPC also disagreed with conclusions by the nonprofit Carbon Tracker about corporate accounting and audit failings related to climate concerns, though it had not publicly explained why.
GPPC’s Commitment to Reporting and Information Gap
The GPPC stated that it is “committed to reporting consistent, high-quality information to support stakeholders’ decision-making,” but acknowledged that “some stakeholders 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,” it said.