Six largest accountancy firms commit to embracing materiality of climate change for audit purposes

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The Global Public Policy Committee (GPPC), which convenes the Big Four (Deloitte, EY, KPMG and PwC) and mid-tier firms BDO and Grant Thornton, has committed to “playing their part” when it comes to assuring that climate risk is properly reflected in company financial statements.

In a letter on the topic to the International Accounting Standards Board (IASB), the six accountancy firms said: “The GPPC networks are committed to playing our part. Although they added that “management and those charged with governance have the primary responsibility for the judgements, estimates and disclosures in the annual report and financial statements.”

The issue has been on the agenda of investors for the last few years. More recently, a global group of investors representing $103trn in assets published an open letter calling on companies and auditors to fully reflect the effects of climate change in their declared results.

The accountancy firms are endorsing two key guidance papers that consider climate risk as a financially material issue that should already be captured applying existing reporting and auditing standards. Both papers further reinforce the recommendations of the Taskforce on Climate-related Financial Disclosures.

The first paper endorsed by the GPPC firms is iFRS Standards and climate-related disclosures by IASB member Nick Anderson. In this influential November 2019 paper, he pointed out that, as a material issue for investors, the impact of climate change should be taken into consideration by IFRS standards.

According to Anderson, even if not explicitly mentioned, climate-change risks can be addressed by current reporting standards. Listing some of them and offering practical examples, he argued: “IFRS Standards could require companies to consider climate-related and other emerging risks when making materiality judgements about what to recognise in the financial statements, about measuring recognised assets and liabilities and about what to disclose.”

The second paper, The Consideration of Climate-Related Risks in an Audit of Financial Statement, is signed by the staff of the International Auditing and Assurance Standards Board (IAASB), an independent body that is supported by the International Federation of Accountants.

From the IAASB paper, the GPPC network highlighted: “If climate change impacts the entity, the auditor needs to consider whether the financial statements appropriately reflect this in accordance with the applicable financial reporting framework […] Auditors also need to understand how climate-related risks relate to their responsibilities under professional standards, and applicable law and regulation.” 

The move from the six largest accountancy firms comes at a critical time for sustainability reporting when new frontiers for ESG standard-setting in the EU and globally are being drawn.