17 September 2018
ClientEarth has reported four major UK companies to the Financial Reporting Council (FRC) over failures to address climate change trends and risks in their reports to shareholders. For the first time, the companies’ auditors are also under scrutiny.
While the four companies – EasyJet, Balfour Beatty, EnQuest and Bodycote – do acknowledge their greenhouse gas emissions and indicate efforts to reduce them, none of the four clearly confront the risks or trends that climate change or the low carbon transition present to their business. This makes them outliers among their peers and in potential breach of UK reporting laws.
The companies’ auditors – PwC, KPMG, EY, and Deloitte respectively – all failed to signal any problems, stating that the reports complied with the law and that there were no material misstatements. ClientEarth has sent letters to the Big Four, asking them to explain their approach to these issues.
Under UK law, companies must disclose material trends and risks facing their business to investors in their annual report. Auditors in the UK must also give opinions about this information in their audit report to provide investors with greater confidence it can be trusted.
ClientEarth has asked the regulator to investigate the companies and to ensure any deficiencies in the reports are corrected. They 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.
ClientEarth lawyer Daniel Wiseman said: “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 said a robust response from the regulator was needed: “We want the FRC to clearly state that these companies have failed to report material climate-related risks, and must correct their reporting accordingly. 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.”
Wiseman added: “Company auditors have a critical role to play here too. What value are the auditors’ opinions if they are not applying the full extent of their expertise and knowledge to test management on this information?”
As recent reports published by each of the Big Four show, these firms have extensive awareness of climate-related risks and their implications for financial reporting. But they appear not to be carrying this over when performing audits themselves.
Wiseman said: “The ‘Big Four’ all talk a big game on climate risk reporting. We want to know how they’re putting it into practice in their core audit work. Investors should be asking the same question.”