21st May 2018
At today’s annual general meeting of shareholders, a representative of Sarasin & Partners LLP and ClientEarth asked BP to confirm how it has ensured that key accounting assumptions and estimates are prudent in light of how climate change and the energy transition could affect its business.
Commenting on the question, ClientEarth lawyer Daniel Wiseman said: “After many years of shareholder pressure, companies are finally talking about climate change in their annual reports and other disclosures. But boilerplate comments aren’t good enough if there’s no clear link to the financials.
“Company risk reporting must line up with the numbers that are actually being fed into the accounts. Auditors are also required to sign off on this and should be challenging management robustly on key assumptions. Any apparent inconsistencies should be a red flag for investors and regulators alike.”
A spokesperson for Sarasin & Partners added: “Shareholders rely implicitly on the audited accounts management present to be prudent and ensure capital is not overstated. Given the expected long-term structural decline in oil and then gas demand associated with global decarbonisation efforts, we are keen to see companies that are likely to be materially impacted to stress test their business models and accounts for any downside risks. There is no clear evidence that BP is doing this.”
In 2017, ClientEarth wrote to BP warning of the risk of investor lawsuits based on overoptimistic statements about future fossil fuel demand in its 2017 Energy Outlook.
BP’s 2018 Energy Outlook includes very different disclosures on future global energy demand – with significant upwards revisions for renewables, global coal demand peaking before 2030 and global oil demand peaking before 2040. However, as today’s question highlights, the company has still not the made clear how these transition risks might impact key economic assumptions relevant to its financial position.
The question asked at the AGM was:
'My question is for the Chair of the Audit Committee, Mr Brendan Nelson.
The annual report this year again identifies climate change and the impacts of the low carbon transition as significant risks which may impact demand and prices for oil and gas. Irrespective of the recent oil price spike, decreases in oil and gas demand and prices over an extended timeframe could depress cash flows and drive write-downs of some assets. Despite this being identified as a significant risk by the company, we note that this year the auditors have downgraded macroeconomic risks and do not identify them as a key audit risk. This is a different approach to that taken by the Audit Committee, as well as the auditors of some peers who identify long term oil demand and price assumptions as key risks to asset carrying values.
Given this apparent difference in approach, could you please confirm what procedures the audit committee has in place to ensure the accounting assumptions and estimates used are both prudent and consistent with material risks and macroeconomic trends, particularly in relation to the impact of climate change and the energy transition on future long-term oil prices and demand forecasts? And could you also please explain the apparent inconsistency in the approach taken by the Audit Committee and the auditors on this issue?’