Investors need to face facts on climate and audit at this year’s AGMs
So far this AGM season shareholders are failing to walk their talk on climate, or to recognise the true risk it poses to their investments.
The IPCC has just warned that emissions must peak within three years to keep 1.5 degrees in reach. The transition to net zero by 2050 means half the world’s fossil fuel assets could become worthless by 2036. Meanwhile the Ukraine crisis has further underlined the urgency of reducing our reliance on oil and gas for energy.
The world’s most polluting companies and their investors are acting as if none of this is happening. The Climate Action 100 investor coalition analysed reports from 166 high-emitting multinationals and found that none used financial assumptions that align with achieving net zero by 2050, such as diminishing oil prices.
These companies acknowledge they will have to transform their business models to meet the objectives of the Paris Agreement, reaffirmed in Glasgow at COP 26, yet ignore the most basic implications of such claims. Meanwhile the Big Four audit firms - KPMG, EY, Deloitte and PWC - routinely ignore this glaring inconsistency when they do their checks.
An auditor’s job is to vet that company accounts give a true and fair view of the company’s financial position and profitability, and are free of “material misstatement”. They are not delivering on climate, and the effect of this failing is twofold. As well as misleading investors and exposing them to the risk of stranded assets, it encourages further investment in heavily-polluting projects which is incompatible with avoiding catastrophic climate change.
Some audit professionals claim that the transition to net zero is too complex or it's not their job to speculate. Such helplessness is not a good look for some of the biggest financial firms in the world. Investors are entitled to expect they flag basic issues like accounts based on oil prices that are impossible unless we miss the Paris goals.
Indeed those same firms often sell consultancy services helping businesses develop Net Zero plans. Is it acceptable for audit divisions to tell investors they can’t be expected to determine whether financial statements reflect plans developed by their colleagues, and how they might change if they did?
To protect themselves, shareholders should call out failing auditors and the directors who appoint them. Yet Greenpeace has shown how some of the largest asset managers in the UK routinely waved through the reappointment of auditors at over 300 major listed companies, despite their failure to address climate risks.
So far, too few investors are facing facts on this front. At CRH’s AGM recently, Sarasin and Partners, which manages over $21bn in assets, made a point of voting against retaining Deloitte’s audit team, because of its failure to provide quantitative disclosure of climate risk. Despite being actively highlighted by Climate Action 100 , the auditor retained overwhelming investor support.
Attention now turns to Exxon, which faces an important shareholder resolution on this topic next month. A similar resolution received 49.4% support from ExxonMobil shareholders last year, so CBIS - the investor group and lead filer of the resolution - and its co-filers are hopeful of a result this year.
If that comes to pass, it will mark a watershed moment on an overlooked part of the climate puzzle. While assessing the impact for each company of getting to a 1.5 degree world might be complex, the incentives for investors to demand this are simple enough. Those companies that plan for a 1.5 degree future will thrive, while those that pay lip service to it will wither away, taking shareholder’s money with them. If auditors refuse to play their part in ensuring corporate action matches rhetoric, investors must vote against their appointment. We will be watching very closely at the Exxon AGM.
Originally posted in BusinessGreen: https://www.businessgreen.com/opinion/4049690/investors-climate-audit-agms