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Date: 2024-07-15 Page is: DBtxt001.php txt00023990
ACCOUNTABILITY
Principles of Responsible Investing (PRI)

Some excerpts from a PRI report 'Flying Blind' ... and some TPB/TVM commentary


Open archived PDF: PRI-flying-blind-23990.pdf

Open PRI original PDF
Peter Burgess COMMENTARY
In September 2021 Carbon Tracker and PRI (Principles for Responsible Investment) published a report 'Flying Blind, The glaring absebce if climate risks in financial reporting'.

Frankly, nothing in this 84 page report came as a surprise ... while there has been much 'talk' about action to improve sustainability performance in the corporate world. the progress has been very little. Meanwhile, the increase in corporate earnings has been at record levels for a big part of the corporate world ... and corporate share owners have done well relative to society and the environment as a whole. How can it be that when the world has been facing a global pandemic and all sorts of economic disruptions that the stock markets are at historically elevated levels.

The answer is pretty clear ... the investment community still cares about one thing and one thing only, and that is profit performance. Everything else is totally discounted. This may work in the short run, but it is a formula for disaster in the not too distant long term.

The issue of 'sustainability' reporting by corporate organizations has been on the professional agenda for several decades. There was a working group at the ICAEW (Institute of Chartered Accountants in England and Wales) in the 1990s tasked with addressing the way in which sustainability accounting should be implemented. I collaborated with them at the time, and then the group was disbanded and the staff reassigned or fired. Bottom line, the reporting of sustainability in a meaningful way has been opposed by a lot of the people with power and influence in the business and investment world for a very long time, and they still dominate the space, no matter what it is going to cost in the future ... which is getting nearer and nearer all the time.
Peter Burgess
  1. 1 See definition of Paris-alignment used for the purposes of this study in Section 4.3 Overall Approach.
  2. 2 See Appendix 3 – List of companies. These companies have been selected by investors for engagement. The majority of the companies that we reviewed form part of the 167 Climate Action (CA)100+ focus companies, which are key to driving the global net-zero emissions transition. In total, CA100+ companies account for “over 80% of corporate industrial greenhouse gas emissions”.
    https://www.climateaction100.org/whos-involved/companies/
  3. 3 The Global Public Policy Committee (GPPC) is made up of senior representatives from BDO, Deloitte, EY, Grant Thornton, KPMG, and PwC. Its objectives include participating in global public policy matters and enhancing confidence in the [audit] profession. It is also a forum for communication with regulators and stakeholders. See Global Public Policy Committee | Deloitte | Audit, and full text of letter at gx-audit-climate-related-matters-gppcletter-to-iasb.pdf (deloitte.com).
  4. 4 A group of 38 long-term investors and members of the Institutional Investor Group on Climate Change (IIGCC). See full list of these investors here:
    https://www.iigcc.org/download/iigcc-letter-to-european-companies-on-parisaligned-accounts/?wpdmdl=4006&masterkey=5fabc9c5af24f
  5. 5 See details in Section 3. Background. There is some overlap between the signatories to these two letters.
  6. 6 See Investor groups call on companies to reflect climate-related risks in financial reporting | PRI Web Page | PRI (unpri.org) and IIGCC Letter to European Companies on Paris Aligned Accounts, authored by Sarasin & Partners LLP
    https://www.iigcc.org/download/iigcc-letter-to-european-companies-on-paris-aligned-accounts/
  7. 7 See definition used for the purposes of our study in Section 2.2 Scope and Approach.
  8. 8 Background and Future Development | Climate Action 100+
  9. 9 An informal team of accounting and finance experts drawn from the investor community and commissioned by the PRI.
  10. 10 94 of the companies that we reviewed form part of the 167 CA100+ focus companies. See Climate Action 100+.
  11. 11 See also Ceres' report:
    https://www.ceres.org/resources/reports/lifting-veil-investor-expectations-paris-alignedfinancial-reporting-oil-and-gas
  12. 12 Also referred to as ‘inputs’ in this report.
  13. 13 See description of rating system in Appendix 1– Approach to reviews and ratings.
  14. 14 Note there may be slight differences due to rounding. See description of ratings in Appendix 1-Approach to reviews and ratings.
  15. 15 For example, as part of investors’ own risk management policies, stakeholder expectations (such as demands
  16. from pension clients) and their own climate commitments. 16 See also IFAC's 'Corporate Reporting: Climate Change Information and the 2021 Reporting Cycle',
    https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/corporate-reporting-climatechange-information-and-2021-reporting-cycle
  17. 17 Current standards already set expectations beyond what companies (and auditors) are delivering. However additional steps by the SEC, such as a Staff Accounting Bulletin or the IASB such as in their Agenda Consultation and the PCAOB providing clarifications may help facilitate the requisite increase in transparency and consideration of climate matters in financial statements
  18. 18 We use financial reporting, financial statements, financials and accounts interchangeably within this report.
  19. 19 We refer to matters and issues interchangeably within this report.
  20. 20 See further discussion in Appendix 1– Approach to reviews and ratings.
  21. 21 We refer to management and companies interchangeably throughout this report.
  22. 22 For example, the 2020 financial statements of Rio Tinto and the report of its auditor illustrated this by disclosing that Rio Tinto was still determining the consequences of its 2050 net zero targets when it prepared its financials.
  23. 23 https://www.iea.org/reports/net-zero-by-2050
  24. 24 (Real Terms USD 2019) For crude oil: 2020: $37/bbl, 2030: $35/bbl, 2040: $28/bbl and 2050: $24/bbl. For natural gas: United States – 2020: $2.1/MBtu, 2030: $1.9MBtu, European Union – 2020: $2.0/MBtu and 2030: $3.8/MBtu. “Net Zero by 2050: A Roadmap for the Global Energy Sector”, Chapter 2, Table 2.1: “Fossil fuel prices in the NZE” (IEA NZE 2050). p. 51,
    https://www.iea.org/reports/net-zero-by-2050
  25. 25 As required by FASB Accounting Standards Codification 932 Extractive Activities – Oil and Gas and the SEC’s reported value requirements or “PV-10”.
  26. 26 Including, but not limited to, the inclusion of probable/possible reserves in the calculation of future cash flows for impairment accounting, and the use of a different discount rate for calculating the recoverable amount versus the 10% rate required by the SMOG methodology, which would likely reduce the estimated ‘impairment loss’. Finally, asset retirement costs are not generally included when calculating expected future cash flows in testing for impairment.
  27. 27 Used in over 140 countries, with some applying limited modifications. See
    https://www.ifrs.org/use-around-theworld/use-of-ifrs-standards-by-jurisdiction/#use-of-ifrs-standards-by-jurisdiction.
  28. 28 Some national auditing standard setters will apply limited modifications to these standards. For more information on adoption status see: Global Impact Map | IFAC
  29. 29 The Public Company Accounting Oversight Board (PCAOB), which oversees auditing standards in the United States, has not published additional guidance on climate-related risks. However, the guidance on addressing risks in financial statement audits does not significantly differ between the International Standards on Auditing (ISAs) and the PCAOB Auditing Standards.
  30. 30 In-brief-climate-change-nick-anderson.pdf (ifrs.org) (November 2019), effects of climate related matters on financial statements (ifrs.org) (November 2020), FASB Staff Educational Paper—Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards (March 2021), IAASB-Climate-Audit-PracticeAlert.pdf (ifac.org) (October 2020)
  31. 31 Effects of climate related matters on financial statements (ifrs.org) (November 2020), p.1.
  32. 32 FASB Staff Educational Paper – Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards (March 2021), p. 3.
  33. 33 IAASB-Climate-Audit-Practice-Alert.pdf (ifac.org) (October 2020), p. 4.
  34. 34 Financial Reporting Council, “Climate Thematic”, November 2020, Summary-FINAL.pdf (frc.org.uk), p. 4.
  35. 35 For example, Sarasin & Partners started engaging on this topic in 2017 and subsequently published “Are oil and gas companies overstating their position? Underpinning Company Balance Sheets” in which it reviewed eight oil and gas company 2017 financial statements and highlighted the accounting inconsistencies and flaws therein.
  36. 36 A group of 38 long-term investors and members of the Institutional Investor Group on Climate Change (IIGCC). See full list of these investors here:
    https://www.iigcc.org/download/iigcc-letter-to-european-companies-on-parisaligned-accounts/?wpdmdl=4006&masterkey=5fabc9c5af24f .
  37. Some of these overlap with the signatories of the investor group letter.
  38. 37 IIGCC Letter to European Companies on Paris Aligned Accounts, authored by Sarasin & Partners LLP
    https://www.iigcc.org/download/iigcc-letter-to-european-companies-on-paris-aligned-accounts/
  39. 38 IIGCC, November 2020, “Investor Expectations for Paris-aligned Accounts”,
    https://www.iigcc.org/download/investor-expectations-for-paris-alignedaccounts/?wpdmdl=4001&masterkey=5fabc4d15595d, p. 4.
    See also Ceres' report on investor expectations for oil and gas companies at:
    https://www.ceres.org/resources/reports/lifting-veil-investor-expectations-paris-aligned-financial-reporting-oil-andgas
  40. 39 Background and Future Development | Climate Action 100+
  41. 40 As noted, 94 of the 107 companies that we reviewed were part of the Climate Action 100+ focus companies. The remaining 13 companies were companies with obvious energy transition related financial risks.
  42. 41 Carbon Tracker also reviewed the 2019 reports for 53 of these companies.
  43. 42 The CAP company analyses are publicly available at
    https://www.unpri.org/accounting-for-climatechange/climate-accounting-analyses/7906.article .
  44. 43 The Emerging Markets ex-Asia grouping comprises Brazil, Colombia, Mexico, Nigeria, and Saudi Arabia while Asia includes China, Indonesia, South Korea, and Taiwan.
  45. 44 Sector classification is based on the Companies | Climate Action 100+Climate Action 100+ sector and sector cluster classification.
  46. 45 The individuals that performed these reviews have financial market experience; some previously worked as accountants, auditors, analysts and/or investors.
  47. 46 Task Force on Climate-related Financial Disclosures.
  48. 47 Also referred to as ‘inputs’ in this report.
  49. 48 Reference to IFRS herein includes those companies that have followed local versions of IFRS and IFRS – EU.
  50. 49 EOG 10-K 2020, p. 38.
  51. 50 BHP Annual Report 2020, p. 182.
  52. 51 bp Annual Report and Form 20-F 2020, pp. 178, 184.
  53. 52 bp Annual Report and Form 20-F 2020, p. 98.
  54. 53 Exxon 10-K 2020, p. 38.
  55. 54 TOTAL Universal Registration Document 2020 p. 330.
  56. 55 Ibid, p. 331.
  57. 56 Airbus Universal Registration Document 2020, p. 70, 71 and Airbus’ Decarbonisation Strategy at
    https://www.airbus.com/company/sustainability/environment/climate-change/decarbonisation.html
  58. 57 Continental Resources, Inc., Form 10-K for the year ended December 31, 2020, p. 20.
  59. 58 Management Report, Repsol Group Annual Financial Report 2020, p. 15.
  60. 59 (Real terms 2020). We noted that these average to $58.2/bbl for that five-year period. Financial Statements 2020, Repsol Group Annual Financial Report 2020, p. 52.
  61. 60 See further discussion in Appendix 1 - Approach to reviews and ratings.
  62. 61 There were no US company audit reports which referenced climate-related issues.
  63. 62 These exclude the US audit reports for Europe/UK SEC registrants. For these companies we only counted the local audit reports, which are included in the percentages for the ISA audits.
  64. 63 The auditors of BHP, Eni and Rio Tinto.
  65. 64 We noted other differences between PCAOB and ISA audit reports. For example, auditors of two companies included KAMs on control matters that did not appear in the US CAMs, as in the US control matters tend to be addressed in a separate report provided by the auditor. Others had topics such as revenue recognition that were only in the KAMs, but not in the US CAMs
  66. 65 These ratings exclude the audit report for NextEra Energy, Inc. which was assessed according to PCAOB Auditing Standards. Nearly all of NextEra’s fossil fuel generation capacity is rate-regulated and NextEra recently wrote down a substantial portion of the book value of a new pipeline. Accordingly, its financial risk is mostly dependent upon whether regulators disallow cost recovery for accelerated retirement. Although the auditors did not reference consideration of climate-related matters in their audit report for NextEra, we rated them with “some concerns” instead of “significant concerns” based on the remaining financial risks.
  67. 66 Due to their 30 June and 30 September year-ends, Carbon Tracker did not review the 2019 reports for BHP and Thyssenkrupp, respectively. Accordingly, this comparison omits the audit reports relating to these companies.
  68. 67 Shell Annual Report and Accounts 2020, p. 202.
  69. 68 References to ISAs include those auditors that followed a local version of ISAs.
  70. 69 Chevron Corporation, Form 10-K for the year ended December 31, 2020, p. 57.
  71. 70 bp Annual Report and Form 20-F 2020, p. 137.
  72. 71 Glencore, Annual Report 2020, p.123.
  73. 72 Shell Annual Report and Accounts 2020, p. 203.
  74. 73 As under the French audit regime
  75. 74 Such as the International Energy Agency’s Stated Policies Scenario (STEPS) or Sustainable Development Scenario (SDS).
  76. 75 bp Annual Report and Form 20-F 2020, pp.160, 166.
  77. 76 International Energy Agency, “Net Zero by 2050: A Roadmap for the Global Energy Sector” (IEA NZE 2050),
    https://www.iea.org/reports/net-zero-by-2050
  78. 77 This forms part of the IIGCC, November 2020, “Investor Expectations for Paris-aligned Accounts”,
    https://www.iigcc.org/download/investor-expectations-for-paris-alignedaccounts/?wpdmdl=4001&masterkey=5fabc4d15595d.
  79. 78 bp Annual Report and Form 20-F 2020, pp. 138, 160
  80. 79 Glencore Annual Report 2020, p. 122.
  81. 80 Shell Annual Report and Accounts 2020, p. 203.
  82. 81 As defined for the purposes of our review in Section 4. Scope, coverage and approach
  83. 82 Such as the International Energy Agency States Policies Scenario (STEPS) or Sustainable Development Scenario (SDS).
  84. 83 See definition that was used for the purposes of our study in Section 4. Scope, coverage and approach.
  85. 84 We applied a colour-coded, four-tiered rating system to facilitate comparison of the results of the six assessments across company financial statements (and the audit reports thereon). See description of rating system in Appendix 1 - Approach to reviews and ratings. Note that there may be slight differences in the percentages due to rounding.
  86. 85 For example, as part of investors’ own risk management policies, stakeholder expectations (such as demands from pension clients) and their own climate commitments.
  87. 86 See also IFAC's 'Corporate Reporting: Climate Change Information and the 2021 Reporting Cycle',
    https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/corporate-reporting-climatechange-information-and-2021-reporting-cycle
  88. 87 Current standards already set expectations beyond what companies (and auditors) are delivering. However additional steps by the SEC, such as a Staff Accounting Bulletin or the IASB such as in their Agenda Consultation and the PCAOB providing clarifications may help facilitate the requisite increase in transparency and consideration of climate matters in financial statements.
  89. 88 Or the local equivalent thereof.
  90. 89 Or the local equivalent thereof.
  91. 90 See definition for the purposes of our reviews in Section 4. Scope, coverage and approach.
  92. 91 IASB guidance: in-brief-climate-change-nick-anderson.pdf (ifrs.org) (November 2019), effects of climate related matters on financial statements (ifrs.org) (November 2020) and FASB guidance: FASB Staff Educational Paper—Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards (March 2021)
  93. 92 For example, see International Accounting Standard (IAS) 36 Impairment of assets, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, SEC Staff Accounting Bulletin (SAB) Topic 5.CC.Impairments and Topic
    *** 5.Y.Accounting and Disclosures Relating to Loss Contingencies (Codification of Staff Accounting Bulletins - Topic 5: Miscellaneous Accounting (sec.gov).
  94. 93 The September 2020 Investor group letter and November 2020 IIGCC letters.
  95. 94 IAS 1 Presentation of Financial Statements, paragraph 7. See also IFRS Practice Statement 2: Making Materiality Judgements.
  96. 95 FASB Statement of Financial Accounting Concepts No. 8, As Amended, August 2018, QC11. Additionally: “…magnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, generally is not a sufficient basis for a materiality judgment.” QC11A. See also SAB Topic 1. M.
  97. 96 IAS 1 Presentation of Financial Statements, paragraph 112 and effects of climate related matters on financial statements (ifrs.org) (November 2020) p.1.
  98. 97 SEC SAB Topic 1.M., Codification of Staff Accounting Bulletins - Topic 1: Financial Statements (sec.gov
  99. 98 ISA 320: Materiality in Planning and Performing an Audit, ISA 450: Evaluation of Misstatements Identified during the Audit, and “The Consideration of Climate-Related Risks in an Audit of Financial Statement [sic]”, *IAASBClimate-Audit-Practice-Alert.pdf (ifac.org), pp. 6-7.
  100. 99 “The Consideration of Climate-Related Risks in an Audit of Financial Statement [sic]”, *IAASB-Climate-AuditPractice-Alert.pdf (ifac.org), p. 4.
  101. 100 The most notable difference between international and PCAOB standards is that, under the Sarbanes-Oxley Act of 2002, PCAOB standards provide for an integrated audit over internal control over financial reporting in addition to the financial statement audit. Both sets of standards require the auditor to obtain reasonable assurance that the financial statements are free of material misstatement, whether due to error or fraud, based on the auditor’s judgment in planning and performing the audit to assess and address risks of material misstatement. For example, see AS 1101: Audit Risk. AS 1101: Audit Risk | PCAOB (pcaobus.org).
  102. 101 ISA 320: Materiality in Planning and Performing an Audit, and “The Consideration of Climate-Related Risks in an Audit of Financial Statement [sic]”, *IAASB-Climate-Audit-Practice-Alert.pdf (ifac.org), p. 6.
  103. 102 AS 2105: Consideration of Materiality in Planning and Performing an Audit | PCAOB (pcaobus.org).
  104. 103 ISA 701: Communicating Key Audit Matters in the Independent Auditor’s Report.
  105. 104 AS 310: The Auditor's Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.
  106. 105 ISA 620 Using the Work of an Auditor’s Expert.
  107. 106 PCAOB Staff Guidance: Supervising or Using the Work of an Auditor’s Specialist.
  108. 107 Financial Reporting Council, “Climate Thematic”, November 2020, Summary-FINAL.pdf (frc.org.uk), p. 9.
  109. 108 IFRS Practice Statement Exposure Draft ED/2021/6 Management Commentary,
    https://www.ifrs.org/content/dam/ifrs/project/management-commentary/ed-2021-6-managementcommentary.pdf
  110. 109 The SEC staff also expect that “forecasts made for [impairment testing] purposes be consistent with other forward-looking information prepared by the company, such as that used for internal budgets, incentive compensation plans, discussions with lenders or third parties, and/or reporting to management or the board of directors.” SAB Topic 5.CC, Codification of Staff Accounting Bulletins - Topic 5: Miscellaneous Accounting (sec.gov)
  111. 110 “The Consideration of Climate-Related Risks in an Audit of Financial Statement [sic]”, *IAASB-Climate-AuditPractice-Alert.pdf (ifac.org), p. 13.
  112. 111 ISA 720 (Revised): The Auditor’s Responsibilities Relating to Other Information, p.10.
  113. 112 AS 2701: Auditing Supplemental Information Accompanying Audited Financial Statements.
  114. 113 Carbon Tracker also examined audit committee reports, when available, to ascertain if the audit committees took steps to “ensure material climate risks are properly considered in the accounts and by the external auditor.” See IIGCC, November 2020, “Investor Expectations for Paris-aligned Accounts”,
    https://www.iigcc.org/download/investor-expectations-for-paris-alignedaccounts/?wpdmdl=4001&masterkey=5fabc4d15595d.
  115. 114 Defined for the purpose of our reviews in Section 4. Scope, coverage and approach.
  116. 115 This forms part of the IIGCC’s “Investor Expectations for Paris-aligned Accounts”,
    https://www.iigcc.org/download/investor-expectations-for-paris-alignedaccounts/?wpdmdl=4001&masterkey=5fabc4d15595d
  117. 116 IIGCC, November 2020, “Investor Expectations for Paris-aligned Accounts”,
    https://www.iigcc.org/download/investor-expectations-for-paris-alignedaccounts/?wpdmdl=4001&masterkey=5fabc4d15595d, p. 12.
  118. 117 The 25 O&G companies were part of the 55 companies reviewed by Carbon Tracker.
  119. 118 Ibid.


To know more visit: www.carbontracker.org @carbonbubble

The following is interesting and highlights one of many issues related to corporate responsibility. There is a 'fear' that the responsible management of wealthy corporations will do anything to proftect profit performance no matter the impact their behavior has been and is having on both society and the environment. Getting to grips with the true facts about corporate performance has become more difficult over the years in spite of wave after wave of well-meaning attempts to get more clarity in corporate reporting.
Disclaimer Carbon Tracker is a non-profit company set up to produce new thinking on climate risk. The organisation is funded by a range of European and American foundations. Carbon Tracker is not an investment adviser, and makes no representation regarding the advisability of investing in any particular company or investment fund or other vehicle. A decision to invest in any such investment fund or other entity should not be made in reliance on any of the statements set forth in this publication. Carbon Tracker is not a proxy advisor, and makes no recommendations as to the voting of shareholder proxies.

While the organisations have obtained information believed to be reliable, they shall not be liable for any claims or losses of any nature in connection with information contained in this document, including but not limited to, lost profits or punitive or consequential damages. The information used to compile this report has been collected from a number of sources in the public domain and from Carbon Tracker licensors. Some of its content may be proprietary and belong to Carbon Tracker or its licensors. The information contained in this research report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities within any jurisdiction. The information is not intended as financial advice. The information is not accounting and/ or audit advice and Carbon Tracker does not express an accounting and/or audit opinion. This research report provides general information only. The information and opinions constitute a judgment as at the date indicated and are subject to change without notice. The information may therefore not be accurate or current. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made by Carbon Tracker as to their accuracy, completeness or correctness and Carbon Tracker does also not warrant that the information is up-to-date.




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