In recent years, investors, consumers and wider society have been intently focused on the actions companies are taking to respond to the challenges of climate change. However, as PwC set out in a report last year, there are several areas where companies can work to build greater trust in their climate reporting, including improving the quality of data and ensuring it is being properly assured.
High quality independently audited financial reporting has always been a key foundation of an effective capital market. Expectations are now growing for the same level of quality and assurance on non-financial reporting too – particularly the key performance indicators that track progress against targets relating to climate change.
In a recent article, I outlined that as sustainability strategies and the reporting against them evolve, so too will the ability of auditors to challenge the extent to which climate related risks and opportunities are factored into the financial statements. However, much of what companies disclose in relation to climate change sits outside of the financial statements and is therefore not subject to the same level of rigorous, independent assurance. This can raise concerns about how much the reporting of companies’ non-financial climate related data can be trusted, and has led to accusations of “greenwashing”. PwC's global survey of investors highlighted that nearly two-thirds felt the quality of the information they get from companies on environmental issues wasn’t good enough.
Investors have a crucial role to play in holding companies to account for the accuracy of their climate reporting. However, it is often difficult for them to assess what assurance, if any, is in place to verify the non-financial disclosures that businesses make. This is one area where the UK Government's proposal to introduce an Audit and Assurance Policy (AAP) could make a considerable difference. Under the policy, premium listed companies, and possibly eventually all public interest entities, would begin to publish an explanation of what independent assurance they intend to obtain over their reported information beyond that provided by the statutory audit.
Investors have a crucial role to play in holding companies to account for the accuracy of their climate reporting. However, it is often difficult for them to assess what assurance, if any, is in place to verify the non-financial disclosures that businesses make.
For climate reporting, a published AAP that describes a company’s approach to, for example, obtaining independent assurance over their Net Zero commitments and targets, greenhouse gas emissions or TCFD reporting, would be a big step in increasing transparency and trust in this non-financial information. It would shine a light on the variable nature and extent of assurance currently being commissioned over these important measures, the scope and quality of which can hugely vary in practice.
Ultimately, the AAP should help to build trust in non-financial reporting more broadly, and not just climate. It should highlight what's materially important to organisations, and will help identify whether there is sufficient breadth and depth of assurance over those crucial areas. When additional independent assurance is commissioned, confidence will hinge on whether it is from a trusted, experienced, and high-quality provider.
The transition to net zero relies on capital being directed towards those companies that are helping to tackle climate change, requiring investors and stakeholders to place greater trust in climate related corporate reporting. With audit reform a continuing focus for the government there’s an opportunity to ensure the assurance issues of the future are properly anticipated. The AAP, combined with the evolving role of the auditor, could have a crucial role to play.
PwC UK recently published a detailed guide for companies on how to approach the development of an Audit and Assurance Policy.
