GLASGOW / LONDON, Nov. 2 (Reuters) – Major investors have warned the world’s four largest audit firms that they will vote to prevent firms from working for companies they invest in at annual general meetings from next year if the audits do not include climate risk.

The challenge, featured in letters from a group of investors managing around $ 4.5 trillion that have been seen by Reuters, marks an escalation in the group’s efforts to ensure investors have solid information.

Investors have been pushing auditors to improve for several years, fearful of distorting the true health of companies by ignoring the potential impacts of climate change and associated policy changes.

Ahead of the COP26 climate talks in Scotland, the group called on governments to force companies and auditors to file accounts in line with the global goal of limiting global warming by mid-century. Read more

Letters dated November 1 and sent to Deloitte, EY, KPMG and PwC by the investor group highlighted recent research showing that more than 70% of audits assessed in 2020 had failed. Read more

The group includes asset managers Sarasin & Partners, Pictet and Aviva Investors (AV.L) and pension plans including RPMI Railpen. Investors said after three years of discussions with firms, they “can’t afford to wait another three years” for audits to improve.

In the next season of annual general meetings of companies, auditors could “increasingly expect” investors to vote against their renewal if they do not meet expectations, according to the letters.

In the letter to Deloitte, for example, the group said the auditor was responsible for 19 of the companies assessed in the research, including major oil company BP (BP.L), miner Glencore (GLEN.L) and the company of CRH building materials.

“Although we have identified welcome signs of leadership, especially at BP, based on our overall analysis, these audits have fallen short of our expectations,” the letter said.

“Outside of the UK the situation is worse. Of the 16 remaining audits undertaken by Deloitte, only three mention climate risk. None provide the visibility we seek into the potential financial implications of a 1.5C trajectory, which world leaders are committed to implementing. “

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

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

HARD

Cath Burnet, chief audit executive at KPMG UK, said the firm trained all of its auditors last year on the impact of climate change risk on businesses, in addition to the accounting and reporting implications.

“Our role as auditors includes challenging the recognition and measurement of climate in financial statements, as well as challenging storytelling when it is misleading or inconsistent,” she said. declared.

A spokesperson for PwC said that “to increase transparency in this area, our future audit opinions on large UK listed companies will further explain how significant climate-related risks have been addressed.

“We welcome investor engagement in this area, which will help promote corporate disclosure and the definition of clear climate-related goals. “

EY said in an emailed statement that the firm’s audit teams “continue to consider the risks that climate change poses to the companies we audit, when it comes to financial reporting.

“We are actively involved in the development of standards and support ongoing work to establish a framework to which companies and auditors can report and which would provide more consistent reporting to investors.”

World leaders are meeting in Glasgow this week to speed up climate action to limit global warming to no more than 1.5 degrees Celsius above pre-industrial standards by mid-century. Read more

After writing to the Big Four audit firms for the first time in 2019, investors said climate change-related structural changes and associated policy actions were accelerating, citing a recent United Nations report that released a ” red code for humanity “on climate change.

“This is leading to a more robust policy response globally,” the latest letters said.

“Auditors who fail to test accounting assumptions against these structural changes are, in our view, failing in their duty to shareholders.”

Reporting by Simon Jessop; edited by Philippa Fletcher

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