Lawyers at ClientEarth have released analysis of the responsibilities of auditors and their duty to consider climate-related risks during UK company audits.

The report outlines the implications of climate-related risks for auditors’ legal and professional duties and warns of increasing risks of shareholder pressure, regulatory intervention and legal liability if auditors fail to take these duties seriously.

‘Many boards still see climate change as just another “environmental” issue to list in a sustainability report. Despite mounting evidence of immediate and escalating financial impacts, they continue to turn a blind eye,’ the ClientEarth report warned.

‘In doing so, they may be breaching their duties and facing increasing legal, reputational and commercial risks.’

Despite publication of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), the charity says the majority of climate risk disclosures in the UK are confined to the risk reporting section of the strategic report and are often provided at a high level of generality.

Very few companies provide granular detail about how they are managing climate risk and even fewer are reporting how they have quantified potential financial impacts.

The report states: ‘This potential mismatch between risk disclosures and their impact on the annual accounts is an issue that may require careful attention by companies, as well as by their auditors.’

The report singles out auditors for special attention due to their role in corporate governance and their clear professional duties. It says auditors must actively consider the implications of climate-related risks in their work, including for critical accounting assumptions and estimates.

Daniel Wiseman, ClientEarth lawyer and report author, said: ‘Increasing climate disruption and the low carbon transition are mega-trends that have clear financial implications for companies and their investors.

‘Company directors must be considering, managing and reporting these climate-related risks and company auditors must be making sure they do it properly. There are real and increasing legal risks if they don’t.

‘Robust reporting and auditing of the financial risks and impacts associated with climate change should now be of critical concern for investors. For shareholders worried about greenwashing by companies, an obvious next step for action is to engage with company auditors directly. Investors are already demanding “climate competent” boards. Demands for “climate competent” auditors could be next.’

The report also highlights the steps that companies are already taking to disclose climate-related risks and the growing investor pressure on them to do so, and provides suggestions for how auditors could move to best practice in this area.

In August 2016, ClientEarth submitted regulatory complaints to the Financial Reporting Council (FRC) alleging that two oil and gas companies listed on the main market of the London Stock Exchange, SOCO International plc (SOCO) and Cairn Energy plc (Cairn), had not complied with their legal duties under the Companies Act by failing to adequately report climate-related risks to their business.

While both companies complied with explicit requirements to disclose their greenhouse gas emissions, unlike many of their peers, neither of them identified climate change as creating a risk to their business.

SOCO made no mention of climate change whatsoever and while Cairn identified climate change as an issue in its corporate responsibility materiality matrix, it did not disclose any information about climate-related risk to its business model or strategy.

Following action by the FRC, both companies’ subsequent strategic reports included significantly more comprehensive information about climate-related risks to their business. The charity says this means that auditors are now required to review and provide an opinion on whether the information in the strategic report meets the relevant legal requirements, they will need to have a clear understanding of how the disclosure rules are being applied in practice in relation to climate risk.

Risky business: Climate change and professional liability risks for auditors

Report by Pat Sweet