The Audit Committee Frontier—Addressing Climate Change

The announcement of a new International Sustainability Standards Board (ISSB) is a major milestone in global efforts to set businesses on the path to net-zero. Audit committees have a critical role to play in the new reporting landscape.

Research conducted by Deloitte Global with audit committee members during September 2021 reveals that 42 percent believed that their organizations’ climate responses are too slow and lack strength.

But, nearly 50 percent said they did not have the information, capabilities, and mandate to fulfil their climate-related responsibilities.

These responses are sobering and indicate that much work remains to be done in many of today’s boardrooms in order to come to grips with the climate emergency and its increasingly catastrophic consequences.

A clear strategy is needed

For the majority of audit committee members in the survey, the top internal obstacle is the lack of a clear and agreed carbon reduction strategy, an action plan with milestones, and a way to hold management accountable for it (65%).

Understanding how the physical effects of climate change and transition risks affect business operations and resilience is another challenge. Especially so when just under half of the audit committee members in the Deloitte Global survey do not consider themselves ‘climate literate’.

Despite environmental destruction and its dire consequences being one of the most urgent societal issues of our time, and despite growing pressure from investors for audit committees to more explicitly consider climate impacts, only six percent of respondents said that they discuss the topic at every meeting of the board’s audit committee. Most audit committee members, globally, never or rarely had climate change on their agenda (58%).

In some ways, while disappointing, the results are also not surprising; developing and monitoring new climate change measures is a new practice for most directors.

Audit committee members can also point to the lack of common global reporting standards (60%) and difficulties to keep up with the pace of change in reporting regulations and practice (46%). Fortunately, this is changing fast with the announcement at the recent COP26 meeting in Glasgow of the new International Sustainability Standards Board under the IFRS Foundation.

However, bringing the uncertainty and complexity of climate change into the core of conventional management and governance processes is challenging. Informative climate reporting requires a complex transformation of reporting systems, data collection, and new skills within the finance function. Also, 46 percent of respondents to the Deloitte Global survey identify that solutions require coalitions and alliances beyond their own organization to achieve real progress, and these are difficult to achieve.

Boards need to do more

There is much more that today’s boardrooms could do to ensure clarity in how companies report climate commitments and measure climate progress. Coming to grips with climate change means undertaking a comprehensive climate assessment and reflecting the outcomes in the financial statements. This involves organizations assessing how the changing climate affects their operations, supply chain, customers and the wider ecosystem on which they depend to create enterprise value.

Unfortunately, the vast majority of respondents to the Deloitte Global survey (70%) said that they have not completed a comprehensive climate change assessment. Most of them currently believe there will be no material impact on the organization. Just 18 percent of respondents said that their financial statements fully reflected the outcomes of a climate impact assessment. This alone indicates a clear need to accelerate activity.

‘Through greater education and engagement, audit committees can help their organizations take more decisive climate action,’ says Sharon Thorne, Deloitte Global Board Chair. ‘This means ensuring their organizations are assessing their own environmental risk profiles, establishing mitigation plans to reduce their carbon footprints, ushering in global ESG standards, and accurately reporting on their progress.’

William Touche is a senior audit partner in the London audit practice and a Vice Chair of Deloitte UK.

Veronica Poole is a vice chair of Deloitte UK, Global IFRS and Corporate Reporting leader and NSE Head of Accounting and Corporate Reporting.

Dan Konigsburg is is a Senior Managing Director at Deloitte Touche Tohmatsu Limited and leads Deloitte’s Global Boardroom Program.

Aurélien Rocher is a Senior Manager at Deloitte Legal in Switzerland where he leads the digital law offering.

Jo Iwasaki leads corporate governance and related advisory work within Deloitte’s Risk Advisory team.