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Exclusive: Investors call for governments to toughen climate accounting


© Reuters. FILE PHOTO – Clouds collect but don’t produce rain, as seen by cracks in the dry up municipal dam, drought-prone Graaff Reinet, South Africa. November 14, 2019. REUTERS/Mike Hutchings/File Photo

By Simon Jessop

LONDON (Reuters) – Investors managing more than $2.5 trillion have called on governments to compel companies and auditors to file financial accounts aligned with the world’s net zero emissions target, a letter seen by Reuters showed.

Alok Sharma was the UK’s climate czar. The group addressed this letter to him ahead of November’s next round of international climate talks. It stated that it was vital to make clear the economic impact of climate changes and provide an incentive for investors to take action.

The investor group urged governments to require that companies disclose all financial consequences of going net zero and allow auditors to point out areas where they have not done so.

The letter follows a study done by Carbon Tracker, the Climate Accounting Project and found that more than 70% of world’s most polluting businesses did not reveal the risks of their 2020 disclosures. Furthermore, 80% audits failed to show evidence that the risk was assessed.

According to the letter, “Most companies continue to make assumptions about decarbonisation. They report financial results based on government failures to meet their legal targets and stated commitments.”

Sharma’s office has not yet responded to our request for comment.

The upcoming climate conference, dubbed COP26, is seen as the most important since governments originally struck a deal to limit global warming in Paris in 2015, with all parties now being asked to accelerate their efforts

Britain’s watchdog on accounting has already advised companies and auditors that they need to do better, while international accounting and auditing experts have reaffirmed the necessity to evaluate material risks.

The investor group stated that despite investor groups representing over $100 trillion of assets calling for September to Paris-aligned accounts in September, there was no response from auditors or companies. This meant the government needed to take action.

The investors wrote that if we wait for the companies to react to the investor pressure it might take years to get the funds we need to invest in accordance with Paris goals.

Signatories to the letter include a body representing British local government pensions, Sweden’s AP2 pension scheme and investors including Sarasin & Partners, which coordinated the letter and an accompanying position paper, as well as Candriam and Federated Hermes (NYSE:).

The investor group stated that countries such as Britain have already made net-zero emission a legal requirement. Therefore, any changes in accounting or auditing laws would be consistent with all other government efforts.

It is a high-stakes situation. Companies like BP (NYSE -) deducted billions of dollars in the last year because they lowered their long-term assumptions about oil price. The money necessary to transition to a low carbon economy can end up going to the wrong spot if it isn’t properly accounted for.

The investor group stated that accounting which does not account for material climate impacts could misinform shareholders, creditors, and executives and lead to misdirected capital.