UK watchdog to scrutinize how companies, auditors calculate climate risk

Britain's financial accounting watchdog plans to review how companies and auditors assess and report the impact of climate change on their businesses, as investors push for better disclosure of the risks.

Climate change has surged to the top of the agenda for investors as policymakers demand companies step up efforts to drive the global transition to a low-carbon economy.

"Auditors have a responsibility to properly challenge management to assess and report the impact of climate change on their business," Financial Reporting Council (FRC) Chief Executive Jon Thompson said in a statement.

Many money managers are concerned the information they are given by companies and the accounts signed off by auditors do not give a full picture of the risks, leaving them vulnerable to steep losses.

In response, the FRC said its review will look into the extent to which British companies and auditors are responding to climate-related issues to ensure reporting requirements are met.

The FRC said it would check company reports and accounts for their compliance with reporting requirements, and audits to see how auditors reflect climate risk, both in terms of the judgements they make and any related disclosures.

CURRENT AND FUTURE PRACTICE

As well as assessing the resources auditors such as KPMG, EY, Deloitte and PwC devote to evaluating the impact of climate change, it would also gauge the quality of future risk disclosures under Britain's new Corporate Governance Code.

Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change, said the review provided an opportunity to clarify the responsibilities of auditors and ensure climate risks were properly evaluated.

"Assessing the impact of climate change on asset values for companies with high carbon assets must be a crucial aspect of the auditing process," she said. 

Doug McMurdo, chair of the Local Authority Pension Fund Forum, said he backed the FRC's plans as climate change would have accounting consequences, "irrespective of what current accounting standards require".

Getting a measure of the longer-term risks posed by climate change, including through the provision of better data and more rigorous stress-testing under a range of scenarios, is increasingly a central concern of global policymakers.

Bank of England governor Mark Carney, who leaves in the coming weeks to take up a role as climate envoy at the United Nations, has said the issue will be an area of focus at the United Nations' climate conference in Glasgow in November.

Carney has also championed the roll-out of the Task Force on Climate-related Financial Disclosures framework (TCFD), which helps companies frame their climate-related risks in a more structured way, and has suggested it could become compulsory.

Ahead of that, the FRC said it would evaluate whether the Financial Reporting Lab's recommendation for companies to report in line with the TCFD had been adopted.

Also on Thursday, the European Commission launched a public consultation for possible reforms to its Non-Financial Reporting Directive, following concern the current rules are not tough enough. 

"Tackling climate change has implications across the board, including on corporate reporting," Valdis Dombrovskis, the Commission's Executive Vice-President for an Economy that Works for Peoples, said.

"As things stand today, there is currently a sustainability reporting gap that is hampering progress towards a sustainable financial system."