Climate change is a focal point for organisations around the globe and audit has a key role to play in ensuring businesses embrace the challenge. Gillian Karran-Cumberlege, Head of Board Advisory and co-founder, Fidelio Partners, explains why.
Climate change competence and the path to net zero are now focal for organisations. It is clear that if their boards are to provide effective climate leadership, audit and assurance will play an essential role as business embarks on this major transformation.
The science of climate change has been clear for many years, and has become more obvious as a result of recent extreme weather events. But against this worsening backdrop, businesses are embracing the challenge of planning for a carbon-neutral future: climate change has risen to near the top of the board agenda. It has major implications for audit, both external and internal, with significant expansion of scope and responsibility, and reporting and analysis extended beyond the traditional areas.
Responding to the challenge
In contrast to what is often seen as sluggish government action, the business world has been responding to the climate challenge with a range of initiatives and a plethora of targets – all of which will need some level of audit and assurance.
As regulators mandate climate reporting, the complexity of the information flow across the regulatory interface is set to increase: here again audit has a fundamental role in providing regulatory comfort that all is accurate and well-founded.
“The business world has been responding to the climate challenge with a range of initiatives and a plethora of targets – all of which will need some level of audit and assurance.”
Companies have to manage a wide range of stakeholders of the board in ensuring good governance, yet the generally low levels of ‘climate competence’ on boards have been criticised. Nonetheless, at Fidelio we see a very strong interest in upskilling of boardrooms and executive committees. Many boards are establishing ESG or sustainability committees, and larger companies are appointing sustainability officers. Climate change is impinging on all aspects of business.
Among key issues for boards is the integrity of reporting, as all board members need confidence in internal and external reporting on climate change, which in turn demands a robust internal audit process.
Maintaining data integrity
As the scope and complexity of non-financial disclosure increase, maintaining data integrity is a key concern for audit professionals. The stakes are high: companies have been sued by activists for alleged mismanagement of climate risks, while regulators, investors and NGOs are increasingly challenging business for creating misleading advertising and making ambiguous claims about their green credentials.
Though climate disclosures have not been a part of the finance role historically, they are now gravitating toward the finance function and becoming subject to sign-off by the Audit Committee of the board. Once the standards have been approved by the International Sustainability Standards Board, it is likely that these will become the reporting benchmark for all listed businesses, and that ensuring compliance with these will fall under the remit of the finance function. Internal audit will be called on to integrate oversight of climate reporting into their workplans, and to apply the same rigour to these as has historically been applied to financial statements.
We expect existing audit methodologies to prove generally fit for this purpose, but some adaptation is likely to be required, in particular because of the high level of uncertainty, as well as significant training of staff in climate data collection and reporting. It is also clear that this expansion of the internal audit task list will require adequate resourcing and that, in many cases, additional recruitment will be required if the existing level of scrutiny of internal financial processes is to be maintained. So far, it is not clear what level of external validation – ie external audit – of climate reporting will be mandated.
This is a rapidly changing field, and it is pleasing to see finance and audit professionals coming forward to provide integrity of reporting, and ensuring that they are keeping abreast of developments in the area of climate disclosures, and associated reporting standards.
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