Don’t forget audits and just transition in climate change policies, investors urged

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Asset owners with an ESG commitment must ensure that companies’ narrative on climate change is reflected in their accounting and considered by the auditor, while also being conscious of the social impact the green transition can have, investor representatives have said. 
 
Accounting is the less exciting part of climate change disclosures but arguably the most important, showing whether a company will be able to make the changes necessary to adjust to a lower carbon economy. 
 

Disclosure of climate change assumptions in figures is slow 

 
Speaking at the UKSIF Ownership Day 2021 on Thursday, senior investment manager at RPMI Railpen Caroline Escott said there was no point in having statements on climate change from companies without the required capital expenditure and allocations in their accounts to help that ambition. 

Companies need to assess future operating profits and value their assets factoring in climate change, she said, which means auditors will also need to consider this aspect. 
 
However, “it’s fair to say the picture still emerging”, she added. “A lot of focus by companies has been very much on the narrative side of things” to date, she said. 
 
When assessing annual reports, RPMI Railpen looks at whether the notes to the financial statements mention climate change, and if there is consistency between the number of times climate change is mentioned in the narrative part of the report and the numbers. Whether the Paris Agreement is mentioned at all and whether the auditor has included climate change as a key issue in audit matters are all being considered as well. 
 
Escott said that of 50 companies in carbon intensive industries, only six mentioned the Paris Agreement, and within these six, only one auditor mentioned climate change across both the 2019 and 2020 disclosures. “It feels slow,” she said, but noted that various organisations are working with some of these companies, making her “cautiously hopeful”, although not for this year. 
 
Despite the slow pace, she urged asset owners to adopt a “constructive tone” as some company managers are nervous that if they disclose their climate assumptions in particular, “it will be leapt upon, attacked, [and] there might be legal action”. 
 
Voting is an important tool, but RPMI Railpen will refrain from “using the nuclear option” in the first year of companies reporting; and while voting against a relevant director sends a powerful signal, a vote against the full audit committee would be “maybe for later on”.  
 
The scheme tends to vote against the reappointment of an auditor, however, believing that more needs to be done to improve audit quality. Escott said it “might well end up doing something like that this year”. Ideally, she wants to see the provision of advice on this as part of standard proxy voting advisory service. 
 

The risk of stranded communities 

 
As efforts to decarbonise the economy intensify, so do the concerns about the social impact of this. Colin Baines, investment engagement manager at the Friends Provident Foundation, said the foundation made a climate emergency declaration in 2019, but stressed that a rapid transition must take into account “the risk of stranded people and communities, as well as stranded assets”. Investors should seek to integrate the social dimension into their climate change strategies more, including the opportunities it presents, he said. 
 
Baines cited the risk that as people increasingly have energy sources like solar panels at home, the cost of maintaining a grid should not be piled on those least able to afford it, and ensuring global supply chains do not sidestep labour rights. 
 
The foundation sees utility firm SSE as a positive example of taking workers into account in the transition and is using its strategy, together with a set of expectations the foundation came up with for different market segments, to engage other utilities. The response has been positive on the whole, he said, but enforcement of stewardship action is not being ruled out for two companies. 
 

‘Asset managers can’t claim to support net zero and by default vote against climate resolutions’ 

 
Baines also highlighted the need for consistency by asset managers and avoiding greenwashing. Together with other charities, the foundation ran the ESG Olympics, a competitive tender for investment managers, listing requirements and areas that, he said, “if left unaddressed, risk damaging ESG as a concept”. 
 
The first requirement is the presumption that asset managers will vote in favour of climate and ESG resolutions, on a comply or explain basis. “Asset managers can’t claim to support the net zero transition and then by default vote against those stated objectives. It’s ridiculous, quite frankly,” he said. 
 
Another requirement is the adoption of an escalation policy, whereby ever more sanctions are imposed on investee firms if they fail on ESG, including voting against management. “Claims to ESG engagement are pretty unconvincing without such a policy, a willingness to vote against management. It can’t all be tea and biscuits,” he observed. 
 
Greenwash is rife across the sector, he believes, saying that asset owners play a pivotal role in changing this by making it clear what they expect. “It should be our social licence to operating,” he said. 
  

How is your scheme approaching greenwashing, the just transition issue and climate accounting?