Lawyers cross-examine Big Four for climate reporting of audit clients

02 October 2018 5 min. read
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The Big Four have been called upon by a group of activist lawyers to explain alleged failures to signal problems of climate change reporting at some of the UK’s biggest companies. While ClientEarth noted that PwC, KPMG, EY and Deloitte had all complied with the law, the organisation has written to the quartet challenging them to do more to push clients on the reporting of carbon emission reduction strategies.

Governmental and business collaborations to combat climate change have been hailed as approaching a turning point in recent years. While for a long time it proved impossible to align global interests with a meaningful deal on the matter, the Paris Agreement was hailed as a landmark climate treaty, having set clear global targets for the prevention of climate change. The accord set targets for planetary warming of no more than 2°C by 2100, with a strong preference for 1.5°C.

In line with this, the economy is said to be advancing toward an all-electric future where clean energy can maintain the needs of society, without having to take legislative or regulatory action against the interests of business. In spite of the hype, however, energy consumption is continuing to rise, having more than tripled in the last five decades thanks to the needs growth-based economics, while oil production, for the first time in history, is about to hit 100m barrels a day, and the oil industry expects demand to climb well into the 2030s.

Lawyers cross-examine Big Four for climate reporting of audit clients

Increasingly, a large part of the continued problem regarding global climate action is being its voluntary aspect. Without a concerted response to climate change determined by scientific research, and planned, coordinated and led by government, companies are often seen as offering up little more than encouraging rhetoric on the subject of their environmental impact, while backsliding on their commitments in private. To that end, a group of UK companies and auditors have been told by a group of legal activists that relegating climate considerations to the corporate social responsibility (CSR) section of annual reports no longer cuts the mustard.

Environmental legal group ClientEarth has reported EasyJet, Balfour Beatty, EnQuest and Bodycote to the Financial Reporting Council (FRC) over failures to address climate change trends and risks in their reports to shareholders. ClientEarth now hopes the FRC will investigate the companies and ensure any deficiencies in the reports are corrected. ClientEarth warned that after the widespread endorsement of recommendations by the industry-led Taskforce on Climate-related Financial Disclosures, relegating climate considerations to the Corporate Social Responsibility section of a report is no longer good enough.

The four companies acknowledge their greenhouse gas emissions while indicating efforts to reduce them, however the group of lawyers alleges that none of the four clearly confront the risks or trends that climate change or the low carbon transition present to their business. To this end, they are ‘outliers’ among their peers and in potential breach of UK reporting laws, according to the lawyers.

Climate auditing

Interestingly, in launching this assault on the environmental record of the four UK companies, ClientEarth has also subjected their auditors to scrutiny for the first time. These happen to be the so-called Big Four – the four firms with the largest revenues in the auditing and advisory sector – and in letters to PwC, KPMG, EY, and Deloitte, ClientEarth accused the quartet of failing to signal any problems in their clients climate reporting. While the letters acknowledge that the reports relating to the Big Four complied with the law, containing no material misstatements, ClientEarth is pressing the foursome to explain their approach to these issues.

Among the questions levelled at the Big Four, the letters aim to find out what processes and procedures they have in place to ensure that their extensive institutional knowledge about climate change-related trends and risks and their financial  implications are made available to audit teams for inclusion in standard audit programmes. They also ask what processes and procedures the auditors perform to identify whether information about trends and principal risks included in the strategic report and directors’ report is materially misstated, among a number of other matters.

Commenting to the press, ClientEarth lawyer Daniel Wiseman, stated, “It’s 2018 and the dial has shifted. Governments, regulators and investors have been saying for years that climate change and the energy transition are some of the biggest challenges facing business. For companies in exposed sectors to claim these risks are not material to their shareholders is unacceptable. Manufacturers, builders, airlines, oil and gas producers, all are at risk in some way. Investors expect these issues to be dealt with just like any other risk to their capital.”

Wiseman added that a robust response from the regulator was needed, as “the law here is clear – companies must report material trends and risks likely to affect them to shareholders and in our view, these companies have manifestly failed to do so.”