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Keeping you in-the-know on environmental, social and governance developments

Earlier this week, Liz blogged about two items that caught my attention over on

First, she wrote that Audit Committees, who are being increasingly tasked with playing substantive roles in their companies’ climate risk assessment, management and disclosures:

… may not feel prepared to oversee the data collection and other changes that enhanced climate change disclosures and strategies may require. The [Deloitte] survey also shows that at this point, there’s quite a bit of variation in the climate change responsibilities that audit committees are taking on.

This isn’t surprising. Climate matters involve expertise Board members have not historically needed. They have now been thrust into the spotlight to aggressively and actively be involved in their companies’ processes for risk assessment, identification/implementation of internal controls, monitoring, materiality determinations and investor/regulatory responses. Acting Comptroller of Currency Michael Hsu’s “Five Climate Questions Every Bank Board Should Ask” is a glimpse into the depth and complexity of what Board members should be prepared for. It’s a lot to take in.

Second, Liz blogged about an interesting development in the UK:

A coalition of UK-based investors representing $4.5 trillion recently announced – just ahead of the COP26 summit – that it had sent letters to PwCDeloitteKPMG and EY that escalate a years-long engagement about reflecting climate change risks in financial statements. Each letter starts off like this:

Many of us wrote in January 2019 seeking assurance that [audit firm] was integrating material climate risks into its audits wherever relevant. Specifically, we asked that [you] alert shareholders where company accounts were not considering the financial implications of either the current decarbonisation pathway, or the global transition onto a 1.5C pathway. We are writing again now as an even larger group of investors following analysis of carbon-intensive companies’ financial statements published by Carbon Tracker, which details the broad failure of both directors and auditors to act on our expectations. We would like to understand what you plan to do to address these weaknesses in [audit firm’s] audit process. 

The body of the letter contains details about the particular firm’s audits, and then it goes on to threaten action at upcoming annual meetings:

We began our engagement with you almost three years ago. We cannot afford to wait another three years for [audit firm] to act. From next voting season, you should increasingly expect to see investors vote against [audit firm’s] reappointment as auditor where you fail to meet the expectations we have clearly set out in our previous correspondence, the November 2020 IIGCC paper and underlined again here.

I see some competing dynamics at play here.

  1. Boards that don’t know what to do with climate risk information are demanding that very information from their external auditors or be voted out as the company’s auditor.
  2. Audit firms who are being ask to increase the scope of their audits to include climate matters are – as Liz pointed out – also expanding their climate advisory services.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile