Auditors fall down on climate risk as corporate polluters fail basic tests, study shows

Auditors were identified as falling down in the disclosure of climate-related risks in a sweeping analysis of companies responsible for 80 per cent of corporate industrial greenhouse gas emissions, as none of the 134 companies assessed passed basic tests.

The annual review by independent non-profit Carbon Tracker group found that carbon-intensive companies were not sufficiently disclosing the effects of climate-related risks and net zero emissions plans in their financial statements, an omission that deprived investors of key information.

Out of more than 130 industrial companies that account for the bulk of pollution, 98 per cent did not provide evidence that their 2021 financial statements had taken into account the effects of climate-related matters, according to the report in collaboration with the Climate Accounting and Audit Project, allied to a UN-supported investor body.

“Auditors do not appear to comprehensively consider the effects of material climate-related matters in their risk assessments and audit testing,” the Carbon Tracker Initiative said. “The stark differences between audit report information across the same global firm further suggests a lack of network policies to address climate matters.”

For example, French multinational Air Liquide and carmaker Mercedes-Benz indicated that climate change would not have a material impact on their financial statements, but did not explain that conclusion, the report said. The company declined to comment.

Air Liquide, responding after publication, said its in-depth studies of its climate change risks deemed them “not material” at a group level, and that it was developing decarbonisation solutions such as carbon capture. It added that it had complied with international accounting standards and laws.

Better practice was identified in oil major BP’s financial statements, which explained how it had assessed the effects of the global transition to net zero emissions on the value of its assets and liabilities, including property, plant and equipment. BP said that the expected long-term decline in fossil fuel prices was unlikely to affect the remaining useful lives of its oil and gas assets.

Very few companies disclosed how climate considerations would affect their assets, or detail underlying assumptions, such as an implied carbon price, the Carbon Tracker report said. Most audit reports, meanwhile, did not thoroughly assess material climate-related matters, nor indicate whether they had considered the effects of net zero emission targets.

“When companies don’t take climate-related matters into account, their financial statements may include overstated assets, understated liabilities and overstated profits,” said Barbara Davidson, Carbon Tracker’s head of accounting, audit and disclosure.

Not a single company met all of the seven tests the authors used in their assessment. Only eight companies met some of the tests, which included that financial statements disclose the quantitative climate-related assumptions and estimates used, and that the audit report explain how material climate-related impacts had been assessed.

The companies assessed were from the coal, oil, gas, mining, manufacturing, automotive and technology sectors, and are those being scrutinised by the influential investor group Climate Action 100+.

A sign that investors are increasingly concerned about the potential mismatch between discursive climate plans and financial statements became clear during this year’s annual general meeting season.

In May, shareholders of ExxonMobil backed a call for the oil major to publish an audited report explaining how the global transition to net zero would impact the “assumptions, costs, estimates, and valuations” underlying its financial statements.

All of the “Big Four” auditing firms joined the so-called Net Zero Financial Service Providers Alliance last year, committing them to “align all relevant services and products to achieve net zero greenhouse gas emissions by 2050.”

But there was “little evidence that auditors are addressing investor requests to assess companies’ alignment with this drive,” the Carbon Tracker initiative said.

PwC said accounting standards “can fall short of what some investors expect in relation to climate and so we support the work of the International Sustainability Standards Board, and others, that will better align standards with expectations.”

The International Accounting Standards Board is currently examining whether it should clarify its existing requirements, under which companies must “consider climate-related matters” when preparing their financial statements “when the effect of those matters is material.”