Audit committees must take climate change “a lot more seriously”

The recognition of climate-related matters among audit committees has not been strong enough despite a spate of recent events highlighting the significance of the issue for organisations, market participants have said.

“Boards and audit committees need to start taking the risks associated with climate change a lot more seriously, accelerate their mitigation plans and discuss what action they are taking on a more regular basis,” said Anthony Carey, head of board practice at Mazars.

Carey went on to argue that recent climate events and the COP26 conference in Glasgow should have acted as a “wake-up call”.

New research by Deloitte validates Carey’s concerns. A survey of more than 350 audit committee members found that nearly half (42 percent) believe their organisations’ climate responses are too slow.

Just six percent said they discuss the topic of climate change at every board meeting, and 48 percent said they believe the committee lacks the “information, capabilities and mandate” to fulfil its climate-related responsibilities.

Audit committees are a key element of the governance structure within organisations and are principally focused on areas such as risk, reporting and audit. Climate change, an increasingly prominent organisational risk, also falls under the remit of the modern audit committee.

But according to Gavin Hayes, head of policy and external affairs at the Chartered Institute of Internal Auditors (CIIA), many boards and audit committees do not view climate change as a dominant risk impacting their organisation right now.

“They see it as something that will impact them years into the future,” said Hayes, who also oversees the Institute’s Climate Action Plan.

We know that from an internal audit point of view, climate change is the most dynamic new and emerging risk moving up organisations’ risk agendas.”

However, Hayes also cites the CIIA’s new Risk in Focus survey, noting that it found a 41 percent uptick in the proportion of chief audit executives who consider it to be a top-five risk.

“Vital role to play” for internal auditors

William Touche, senior partner and vice-chair at Deloitte cited three key initiatives to instil greater climate change literacy among audit committees: improving climate education, ensuring good management information as part of regular reporting to the board, and internal alignment around the company’s climate strategy.

Climate literacy implies not only a good understanding of a company’s operations and its impact on our planet but also a solid understanding of both reporting requirements and emerging standards,” he said.

Touche also noted that audit committees’ responsibilities must mirror climate impacts, arguing that “investment of time from the director” and “reliable information flows from management” are essential.

However, the Deloitte survey also found that 60 percent of participants said the lack of common global reporting standards is a key external challenge.

In addition, difficulties in keeping up with the pace of change in reporting regulations and practice were cited as a significant hurdle by 46 percent of respondents.

According to Veronica Poole, corporate reporting leader and vice-chair at Deloitte, the recent announcement of the International Financial Reporting Standards Foundation’s new International Sustainability Standards Board (ISSB) is an important step towards changing this.

The crucial next step is a successful harmonisation and application of the standards, she said.

“To be effective, the standards will need to be brought into regulation around the world, together with associated enforcement, monitoring, governance and controls, assurance, and training.

“Worldwide adoption is needed to achieve true harmonisation, to replace the alphabet soup of voluntary standards and frameworks.”

The newly-formed board will strive to produce an extensive global baseline of sustainability disclosure standards designed to reflect investors’ demands.

It will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter. The board’s inception was also accompanied by the publication of prototype climate disclosure requirements.

“Internal auditors have a vital role to play in providing assurance to the audit committee that these new requirements are being met,” said Hayes.

Audit committees and ESG reporting

Poole went on to highlight the significance of embedding environmental, social and governance (ESG) reporting principles into the organisation, arguing that a multi-year programme to build capacity and establish new KPIs will be required.

“The crux of the matter is that ESG must be integrated into the core of the business,” she said.

“Taking a holistic view of the factors that can create or erode value over time often demands organisational change, business model transformation, and a cultural shift.”

But according to Hayes, the incoming Task Force of Climate-Related Financial Disclosures framework is “the most important thing to be mindful of on ESG reporting”.

From April 2022, the framework will compel over 1,300 of the UK’s largest listed companies and financial institutions to disclose climate-related financial information.

“If audit committees aren’t yet fully up to speed on their exposure to climate risks and reporting on it, they will very soon need to be,” he said.

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