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

02 October 2018

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.”


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Private equity firms ramp up sustainability focus

19 April 2019

In line with business leaders across the industrial gamut, private equity firms are increasingly on board with sustainability projects. According to a new study, the investment arms for major funds are implementing a number of strategies aimed at supporting sustainable economic development in line with global goals.

While the business world has finally begun to acknowledge the danger of climate change, effective action plans remain difficult to achieve. The Paris Agreement has stipulated a clear target for the decades leading up to 2100, although massively reducing emissions while not crashing the economy could be a tall order.

Businesses that are able to acquire capital can use it to boost productivity and output, thereby creating a virtuous cycle of development. However, some businesses are better able to utilise resources than others, both in terms of their relative productivity, as well as the value of the respective outcomes relative to costs (including environmental harms). Financing can therefore provide an avenue to select businesses that are aligned with various global sustainability goals, while shunning those that drive little or unsustainable social value creation.

Top moves made by investment arms towards responsible investment

Profit has for the longest time been the central criterion for investment decisions. Yet profit at any cost is increasingly seen as creating considerable social harms, while often delivering only marginal value. As a result, the private equity sector, which was initially sluggish to change its ways with regards to sustainability, has started to see the topic as an opportunity as much as a challenge.

A new study from PwC has explored how far sustainability goals have become part of the wider investment strategy for private equity (PE) firms. The report is based on analysis of a survey of 162 firms and includes responses from 145 general partners and 38 limited partners.

Maturing sustainability

Top-line results show that responsible investment has become an issue for 91% of respondents. For 81% of respondents, ESG (environmental, social, and corporate governance) was a board matter at least once a year, while 60% said that they already have implemented measures to address human rights issues. Two-thirds have identified and prioritised Sustainable Development goals that are relevant to their investment segments.

Change in concern and action on climate-related topics over time

While there is increasing concern around key issues, from human rights protections to environmental and biodiversity protection, the study finds there are mismatches between concern and action. For instance, concern among investment vehicles around climate change has increased since 2016.

In terms of risks to the PE firm itself, concern has increased from 46% of respondents in 2016 to 58% in the latest survey. However, the number who have taken action remains far below those concerned, at 9% in 2016 and 20% in 2019. Given the relatively broader scope of investment opportunities, portfolio companies face higher risks – and more concern – from PE professionals, at 83% in the latest survey. However, action is less than half of those concerned, at 31%.

Changing climate

In terms of the climate footprint of the portfolio companies, 77% of respondents state concern in the latest survey. 28% of respondents are taking action through the implementation of measures to mitigate their concerns.

Concern and action taken on ESG issues

In terms of the more pressing issues for emerging responsible investment or ESG issues, governance concern of portfolio companies comes in at number one (92% of respondents), while 60% have taken action on it. Firms have focused on improving awareness – setting up policies and a range of training modules for their professionals around responsible investment decision making. Cybersecurity takes the number two spot, with 89% concerned and 41% implementing strategies to mitigate risks.

Climate risks take the number three spot in terms of concern for portfolio companies (83%), but falls behind in terms of action (31%). Health and safety track records are a key concern at 80% of businesses, with 49% implementing action. Gender imbalance within PE firms themselves ranks at 78%, which is being dealt with by 31%. A recent survey from Oliver Wyman showed that there is gender balance at 13% of GP teams in developed countries.

Biodiversity is also an increasingly pertinent topic, with risks from pollution and chemical use increasingly driving wider systematic risks around environmental outcomes. It featured at number eight on the ranking of most likely global risks for the coming decade, with its impact at number six. As it stands, biodiversity is noted as an issue at 57% of firms, with 15% implementing action.