The coming role of CAMs in ESG?
– CAMs could be a tool that independent auditors use to assess how clients are managing their climate risks.
– However, so far, CAMs haven’t been used that much in this area.
Shell becomes the first company who has an auditor – EY – to insert a CAM into the company’s audit report regarding ESG. EY qualifies climate risk and energy transition to be a “key audit matter” for the oil company. And it finds the plans lacking: “it is “neither possible nor appropriate” for EY to be able to declare that the Shell financials are ‘ Paris-aligned.'”
In this Forbes article, Bob Eccles notes that – in theory – “critical audit matters” could be a powerful tool to assess how climate changes are impacting the clients of auditors. Here is an excerpt:
Wow, I said to myself, if I’ve got this right, auditors already have a simple and powerful tool to convey to investors what they did to assess how climate change affects a company’s accounts and to describe the work they did to test the appropriateness of the assumptions made.
I am hard pressed to think of a topic that would more closely fit this bill than the impact of climate change, which invokes not just physical risks but also a host of governmental, political, competitive and consumer actions to limit global warming. There is a massive energy transition underway. It is highly disruptive, as with everything else about climate change, and has a range of financial consequences for companies. Consider the fact that more and more companies are making commitments to how they are going to achieve net-zero status by 2050 in accord with the Paris Agreement. How is that being reflected in their financial statements?
I asked Ross if the CAM is as important as it seems to be for putting the spotlight on the financial impacts of climate change. Her reply was: “Critical audit matters are a valuable communication tool, especially in times of disruption and uncertainty.
A good audit report should be the starting point for investors looking to understand the areas of the audit that required the most judgment and what the auditor did to ascertain whether the financial statements as a whole are free of material misstatement. Climate risks and the energy transition can have a pervasive effect on financial reporting today and may well trigger critical audit matters. This is so whether or not a company has made a climate pledge.
And here is another excerpt:
It seems some auditors are starting to give investors true insights about climate impacts, but more need to follow suit. As Ross explained, “Some auditors have played a leading role in providing clear communication that directly links a critical audit matter with a climate issue, such as when the auditor for National Grid highlighted the relationship between the company’s climate strategy and its estimates of the length of useful life for certain assets. That resulted in real insights about the range of material effects the climate strategy could have on asset depreciation.”
National Grid is a U.K. power company with securities trading on the NYSE. Let’s hope its example lights the way for auditors of more companies on U.S. markets to consider climate impacts as a CAM. I think that every audit report should include a CCAM. If it does not, investors should vote against the firm and/or the Chair of the Audit Committee. Of course, what I think isn’t all that important. So, I asked someone whose opinion counts, Anne Simpson, Managing Investment Director, Board Governance & Sustainability at CalPERS. Her view is:
“For an investor like CalPERS, we have a demanding day job. We need to allocate capital for the long term to pay pensions to our members. The valuation of assets and the financial flows that follow is vitally important to that task. Investors need accounts to be prepared on the basis of sustainable assumptions. That much is clear. We then need auditors to bring their independent expertise to bear and set out in their report how they have considered the challenge climate change brings to those stocks and flows. We have supported the inclusion of Critical Audit Matters in audit reporting from the outset. Climate change is both critical, and unarguably an audit matter. Audit committees and auditors need to prepare.”