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European Companies Issued Warnings By Their Investors Over Climate Accounting

European Companies Issued Warnings By Their Investors Over Climate Accounting
Thirty-four investors with a combined asset value of more than $7 trillion have warned 17 of Europe's major businesses, including BP and Volkswagen, that they may challenge board directors over climate risk accounting.
The action is the latest attempt by investors to put pressure on corporations and their auditors, accusing them of not adapting quickly enough to the world's shift to a low-carbon economy or being transparent enough about the potential consequences.
The investors alerted the companies in letters reviewed by Reuters between December and February that their accounts did not reflect the impact of climate change on their assets and liabilities. Some assets, for example, may deteriorate in value faster than others, while demand for specific items may diminish.
The need for faster action to cap global warming at 1.5 degrees Celsius and mitigate its worst extremes was reiterated by U.N. climate scientists in a landmark report on Monday. read more
"Investors cannot understand the true value of a company without knowing the embedded climate risks," Natasha Landell-Mills, partner and head of stewardship at investment manager Sarasin & Partners, one of the signatories to the letters, said in an interview.
HSBC's fund arm, the French state pension system ERAFP, and BMO Global Asset Management EMEA, a division of US asset management Columbia Threadneedle, are among the others to sign.
Investors have already attempted to press corporations on the problem. They put out a sequence of steps boards needed to take to align their accounts with the Paris Agreement on climate change in 2020, through the Institutional Investors Group on Climate Change, including revising key accounting assumptions.
Most firms failed to respond adequately, according to the investors, triggering the new round of letters warning boards that they will face opposition at their upcoming annual general meeting.
"From next voting season you should increasingly expect to see investors vote against Audit Committee directors’ reappointment, where high-risk companies fail to meet the expectations," the letters said.
Shareholders might also vote against a company's decision to keep its auditors or a request to approve its financial accounts, according to Landell-Mills.
Letters were also sent to Air Liquide, Anglo American, Arcelor Mittal, BMW, Daimler, Enel, Equinor, Glencore, Rio Tinto, Saint-Gobain, Shell, Renault, CRH, ThyssenKrupp, and TotalEnergies.
The principal audit partners of the corporations were copied on the letters. Separately, the investors contacted the country's top accountants in the United Kingdom, the United States, and France.
The newest annual reports would impact votes, according to Landell-Mills, and Sarasin had resolved to vote against the financial statement and auditor at Rio Tinto's AGM, as well as abstain on whether or not to reelect the Audit Committee's chair.
She was also delighted to see Shell include a'sensitivity analysis' in the notes to its accounts, which showed impairments may reach $27-$33 billion based on average pricing from four 1.5-2C climate change scenarios, which was revealed after the letter was delivered. Landell-Mills said she was still curious about the effects of a pure 1.5C scenario on impairments.
Both Air Liquide and Saint Gobain stated that companies were in contact with the IIGCC, a European membership group for investors collaborating on climate change, and that climate risks were taken into account in their financial statements. Anglo American stated that it was in contact with the IIGCC.
Mercedes-Benz, formerly Daimler, stated that it is in "continuous and constructive" conversation with investors and would update its sustainability strategy on April 11. Equinor described their energy transition strategy as being "Paris-aligned."
Enel said it would not comment on shareholder meetings. Glencore declined to comment on the letter, but it does provide a sensitivity analysis in its 2021 annual report.
ThyssenKrupp revealed a letter it issued to IIGCC member Rathbones Investment Management in response to their request for more specific information, saying it was "currently exploring how we may implement your query."
Requests for comment from the other companies went unanswered.
While many firms have vowed to achieve net-zero emissions and are under increasing pressure from regulators to reveal their progress, the majority of them, according to the investors, have yet to integrate their business processes, particularly their accounting, with the goal.
"We can’t rely on 'business as usual' accounting assumptions as the energy transition unfolds. Along with our commitment to be a net zero investor, ensuring company accounts are aligned to a 1.5°C degree future is a crucial first step," said Matt Crossman, stewardship director at Rathbones.

Christopher J. Mitchell

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