UK’s accounting watchdog trains sights on ESG auditors

The Financial Reporting Council (FRC) has announced plans to conduct audit quality spot checks to ensure that UK statutory financial reports accurately reflect a company’s climate and ESG-related disclosures.

The move by the UK accounting watchdog comes amid a growing regulatory focus on greenwashing worldwide, which has predominantly targeted investment managers and consumer advertising. The UK’s own Financial Conduct Authority has quietly pushed a number of managers to alter ESG-related fund disclosures but has yet to announce formal penalties, unlike its US and EU counterparts.

Auditors will be assessed against FRC guidance from 2022 on integrating the TCFD’s climate reporting framework into annual reports, as well as other regulatory thematics, guidance and examples of best practice related to ESG issued by the watchdog.

The FRC contacted the UK’s seven largest audit firms in the final weeks of 2022 with the results of a firm-level policy review, which found that only a minority of firms had designated resources for climate change issues and retained climate change specialists to work on risky cases.

The firms were also told to invest in staff training and guidance to develop the technical complexity needed to assess climate and ESG considerations.

Details of the FRC’s work programme for 2023 was set out in the watchdog’s annual statement on ESG enforcement, published today. Improving transparency on climate and wider ESG risks and opportunities is “a critical part of the FRC’s role as an improvement regulator”, said FRC executive director of regulatory standards Mark Babington.

The watchdog is due to put out a report later this year which expands its existing TCFD guidance to include disclosure of corporate climate transition plans, in line with a key UK commitment to introduce mandatory reporting on the subject.

The FRC also committed to capture any new changes in sustainability reporting which could result from new anti-greenwash rules drafted by the FCA, which are still to be finalised.

Finally, the FRC will undertake a revision of the UK Corporate Governance code to account for “the growing importance of ESG reporting and [its] importance to the work of company boards” in 2023.

Auditors are expected to play a key role in signing off climate and ESG disclosures under new regimes being developed by the US Securities and Exchange Commission, the European Commission and the International Sustainability Standards Board.

These developments seems to have already impacted forward planning at accounting firms, with EY reportedly planning to keep climate change and sustainability services within its audit business in the planned decoupling of its consulting and auditing arms later this year.