Simon Jessop & Carolyn Cohn

GLASGOW/LONDON (Reuters) – Major investors have warned the world’s top four audit firms they will vote to stop the firms working for the companies they invest in at AGMs from next year if audits do not integrate climate risk.

This challenge was laid out by letters sent to Reuters from an investor group that manages around $4.5 trillion. Reuters saw the letters and it shows an escalation of the group’s effort to make sure investors have reliable information.

Since the beginning, investors have been pushing for auditors’ improvement amid concerns that they misrepresent the health of companies and fail to factor in the potential damages from climate change.

The group demanded that governments force auditors and companies to open accounts, in accordance with the global goal of limiting global temperature rise by the mid-century. This was ahead of the COP26 climate negotiations in Scotland.

Letters dated Nov. 1, sent to Deloitte and EY by KPMG, Deloitte and PwC, pointed out recent research which showed that more than 70% failed to complete 2020 audits.

The group includes asset managers Sarasin & Partners, Pictet and Aviva (LON: ) Pension schemes, including RPMI Railpen. Investors stated that, after having had three years worth of talks with firms, they can’t afford to wait for the audits to improve by another three.

According to the letters, auditors may “increasingly” expect investors to vote against their reappointment at the next annual general meeting of corporate shareholders.

Deloitte received a letter stating that 19 of the firms included in the study were under the control of their auditor. This includes oil company BP (NYSE ), Glencore (OTC ) and CRH (NYSE ).

According to the letter, “While there have been some encouraging signs at BP of leadership,” it said.

“There are worse things outside of the UK. Three of 16 Deloitte’s remaining audits do not mention climate risks. We have not been able to get the information we need about the financial consequences of the 1.5C pathway. Global leaders are committed to providing this visibility.”

Paul Stephenson, managing partner audit & assurance at Deloitte, said the auditor agreed that “climate-related risks should be accounted for and disclosed appropriately in annual reports and financial statements.

“We are clear that along with investors, professional bodies, regulators, standard setters and audited entities we have an important role to play in enhancing confidence in the information provided to markets,” he said.

CHALLENGING

Cath Burnet, Head of Audit at KPMG UK, said the firm had trained all its auditors last year on the impact of climate change risk on companies, in addition to the accounting and reporting implications.

“Our auditors role includes challenging climate’s recognition and measurement on financial statements. We also challenge narrative where it is confusing or inconsistent,” she stated.

PwC spokeswoman stated that, in order to increase transparency and accountability in this field, future audit opinions of larger UK companies will explain how they have dealt with climate-related hazards. 

“We welcome investor engagement in this area which will help drive company disclosure and the setting of clear climate related goals.”

EY stated in an email statement that it continues to assess the risk that climate change poses to companies that audit them, particularly as they relate to financial reporting.

“We actively participate in the development standards. We support continuing work to establish an auditing framework against which companies can report. Investors would receive more consistent reporting.”

This week, the world’s top leaders gather in Glasgow to discuss climate change. They want to speed up action to limit global warming to 1.5 degrees Celsius below pre-industrial norms by midcentury.

The investors wrote the Big Four firms of audit in 2019 to first express concern about climate change.

The latest letters stated that “this is driving a stronger policy response globally.”

We believe auditors who fail to verify accounting assumptions that take these structural shifts into consideration are failing to fulfill their shareholders’ duty.