the changing climate of audit committees
by Rachael Johnson Climate risk has been moving higher up the boardroom agenda throughout the pandemic thanks to an expanding coalition of investors calling for more transparent disclosures aligned with the Paris Climate Agreement and a cohort of central bankers, the Network for Greening the Financial System, stepping up efforts to introduce consistent global norms for integrating climate factors into prudential frameworks. This collaborative responsibility to meet the target of a net-zero economy by 2050 is centered around companies, public and private, and their integral role in limiting climate catastrophe – not just through supply lines but also by impacting value chains and ultimately the way the world consumes. This presents Boards with yet more fresh challenges. It is their fiduciary duty to drive the company’s climate change responses, and given the Paris Climate Agreement’s short-term goal to reduce carbon emissions by 50% within a decade there is a lot of work to be done by Board directors in establishing a fit for purpose framework for that. Whilst the Board oversees and assesses risk governance, it delegates climate risk reporting to subcommittees. New regulations and investor expectations are increasingly focused on that being the responsibility of the Audit Committee. This still can vary across businesses and sectors. If you consider comparing Energy and Financial Services, for example, each has a different stage of evolution given the varied organisational models and existential threats to business. It also depends on whether the company is in the business of selling carbon, selling to customers who use carbon, or financing economic development, which can either exacerbate or help climate change challenges. The Task Force for Climate-related Financial Disclosures (TCFD) has been a helpful impetus in this respect. Likewise, the Financial Reporting Council and Bank of England have played their part in calling for companies to improve their accounting for climate risks. By putting together well-recognised frameworks, they along with TCFD and other accounting standard-setters, for example the Financial Accounting Standards Board, IASB, IFAC, and IFRS, are pushing the climate agenda into Audit Committee metrics. As Audit Committees are finding, measuring carbon emissions directly and indirectly related to the company’s operations is not easy. Carbon accounting is laden with estimates, judgements, and understanding the numbers and their implications is very challenging. Although standards continue to develop and change for the better, they need to become clearer and more consistent, particularly within sectors. Investors are joining forces more and engaging with sub-sectors, for instance in Oil & Gas. In June, British Petroleum announced that it would be aligning its accounting assumptions with the Paris Agreement goals, after much engagement with its investors on improved transparency of climate change risks. 036
Intelligent Risk - November 2020
