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Spotlight on auditors over climate risk reporting

Lawyers at ClientEarth have released new legal analysis on the responsibilities of auditors to consider climate-related risks during UK company audits.

The third report in ClientEarth’s ‘Risky Business’ series highlights the findings of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD). It outlines the implications of climate-related risks for auditors’ legal and professional duties and warns of increasing risks of shareholder pressure, regulatory intervention and legal liability if auditors fail to take these duties seriously.

The report singles out auditors for special attention due to their unique role in corporate governance and their clear professional duties. It says auditors must now actively consider the implications of climate-related risks in their work, including for critical accounting assumptions and estimates.

ClientEarth lawyer and report author Daniel Wiseman said: “Increasing climate disruption and the low carbon transition are mega-trends that have clear financial implications for companies and their investors. Company directors must be considering, managing and reporting these climate-related risks and company auditors must be making sure they do it properly. There are real and increasing legal risks if they don’t.

“Robust reporting and auditing of the financial risks and impacts associated with climate change should now be of critical concern for investors. For shareholders worried about greenwashing by companies, an obvious next step for action is to engage with company auditors directly. Investors are already demanding ‘climate competent’ boards. Demands for ‘climate competent’ auditors could be next.”

Investors turn their attention to auditors

The report also highlights many of the steps that companies are already taking to disclose climate-related risks and the growing investor pressure on them to do so.

Natasha Landell-Mills, Head of Stewardship at asset management firm Sarasin & Partners said: “It is hard to overstate the vital role played by auditors in reassuring shareholders and creditors that their capital is safe. The auditors kick the tyres to protect against misstatement and – above all – overstatement of profits and capital. Nowhere is the role of probing and challenge more important than in companies facing significant economic headwinds. ClientEarth’s report sets out how climate change and decarbonisation represent exactly this kind of headwind for many listed companies, and the need for auditors to be on their toes.

“Sarasin & Partners welcomes this report, and believes it should be essential reading for investors as they consider whether or not to reappoint auditors at this coming AGM season. Auditors have a duty to ensure companies are reporting a true and fair view of companies’ economic position to shareholders. If they fail in this duty, they should be held to account.”

Read the report – Risky Business: Climate change and professional liability risks for auditors

Daniel is an Australian-qualified lawyer.

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