November 16, 2021

UK Investors Warn Auditors of “Against” Votes If They Don’t Integrate Climate Risks in Financials

A coalition of UK-based investors representing $4.5 trillion recently announced – just ahead of the COP26 summit – that it had sent letters to PwC, Deloitte, KPMG and EY that escalate a years-long engagement about reflecting climate change risks in financial statements. Each letter starts off like this:

Many of us wrote in January 2019 seeking assurance that [audit firm] was integrating material climate risks into its audits wherever relevant. Specifically, we asked that [you] alert shareholders where company accounts were not considering the financial implications of either the current decarbonisation pathway, or the global transition onto a 1.5C pathway . We are writing again now as an even larger group of investors following analysis of carbon-intensive companies’ financial statements published by Carbon Tracker, which details the broad failure of both directors and auditors to act on our expectations. We would like to understand what you plan to do to address these weaknesses in [audit firm’s] audit process.

The body of the letter contains details about the particular firm’s audits, and then it goes on to threaten action at upcoming annual meetings:

We began our engagement with you almost three years ago. We cannot afford to wait another three years for [audit firm] to act. From next voting season, you should increasingly expect to see investors vote against [audit firm’s] reappointment as auditor where you fail to meet the expectations we have clearly set out in our previous correspondence, the November 2020 IIGCC paper and underlined again here.

It remains to be seen whether this shaming endeavor will spur the Big 4 to take any actions that they aren’t already taking, and whether this is a bellwether for US expectations. As Lawrence blogged earlier this year, PwC announced that it’s investing $12 billion and planning a 100,000 increase in headcount relating to ESG work. The whole industry is gearing up for what they clearly expect to be in-demand work.

With those wheels already in motion, this threat really just underscores that in the future, the Big 4 may be competing with each other on ESG expertise (or more accurately, their ability to market their ESG expertise). It’s pretty unlikely that all of the big firms will suffer a string of low votes that send huge companies to move their work to smaller firms, and that’s probably not exactly the outcome that the investors want either. But as Lawrence has written, tracking ESG progress and accurately validating ESG data will also require more than a focus on financial audits. A few places are recognizing that – here’s one that’s hiring.

Liz Dunshee