Lawsuit Challenges Failure to Report Climate Change Risk

A fascinating case brought against the Commonwealth Bank of Australia charges that failure to include climate change risk assessment is a material omission.

a. CBA knew, or ought to have known, that CBA’s Climate Change Business Risks might have a material or major impact on the operations, financial position, and prospects for future financial years of CBA’s business and CBA’s Customers;
b. CBA had, or ought to have had, one or more business strategies to manage CBA’s Climate Change Business Risks; and
c. CBA’s Members would reasonably require, in order to make an informed
assessment of the operations, financial position, business strategies, and prospects for future financial years, of CBA: a summary of CBA’s Climate Change Business Risks and of the business strategies employed by CBA to manage those risks (including whether it had any strategy or strategies to manage those risks)

Recommendations of the Task Force on Climate-related Financial Disclosures

The Financial Stability Board’s industry-led “Task Force on Climate-Related Financial Disclosures” has issued its final report with standards and guidance for voluntary climate-related financial risk disclosures in SEC filings.  The most significant aspects are the imprimatur of the G20 and the credibility and support it lends to investor initiatives calling for portfolio companies to adopt its recommendations. The report notes:

As you know, warming of the planet caused by greenhouse gas emissions poses serious risks to the global economy and will have an impact across many economic sectors. It is difficult for investors to know which companies are most at risk from climate change, which are best prepared, and which are taking action.

The Task Force’s report establishes recommendations for disclosing clear, comparable and consistent information about the risks and opportunities presented by climate change. Their widespread adoption will ensure that the effects of climate change become routinely considered in business and investment decisions. Adoption of these recommendations will also help companies better demonstrate responsibility and foresight in their consideration of climate issues. That will lead to smarter, more efficient allocation of capital, and help smooth the transition to a more sustainable, low-carbon economy.

The industry Task Force spent 18 months consulting with a wide range of business and financial leaders to hone its recommendations and consider how to help companies better communicate key climate-related information. The feedback we received in response to the Task Force’s draft report confirmed broad support from industry and others, and involved productive dialogue among companies and banks, insurers, and investors. This was and remains a collaborative process, and as these recommendations are implemented, we hope that this dialogue and feedback continues.

Since the Task Force began its work, we have also seen a significant increase in demand from investors for improved climate-related financial disclosures. This comes amid unprecedented support among companies for action to tackle climate change.

Investors fear use of clever accounting to trip bonuses

Large investors fear FTSE 100 companies are using clever accounting techniques to trigger high executive bonuses and mask poor financial performance.The concerns come as research shows the difference between stated and adjusted operating profits for the UK’s top-100 quoted companies is at 51 per cent — the widest gap in a decade. In 2007 the split was just 15 per cent.

Russ Mould, investment director at AJ Bell, the investment company that carried out the research, said the figures suggested equity markets were nearing “the top of a cycle”.

“As growth gets harder to generate, there is a temptation to employ different financial tactics to generate it, either to appease return-hungry shareholders or hit bonus triggers,” he said.

“If a share price suddenly turns and the economic cycle turns with it, investors [will be left] wondering why something that looked like a sound investment on paper is now a terrible one in reality.”

The growing use of revised profit figures have made shareholders and analysts increasingly wary of these numbers, according to Andrew Millington, head of UK equities at Standard Life Investments, one of Britain’s largest fund companies….

David McCann, an analyst at brokerage Numis, said more companies were reporting adjusted profit figures as “it is becoming harder to deliver growth in a low return environment”.“Companies are looking for ways of showing optical growth so they don’t have to report declining results. Manager pay is increasingly being linked to earnings-based measures, so there is increasing motivation to boost those measures,” he said.

Source: Investors fear use of clever accounting to trip bonuses

On The ESG Horizon — Achieving A Global Standard

ESG integration was once a topic left to the public relations department of the average organization. Now that institutional investors are seeing how responsible integration positively affects a company’s valuation, talks of mandatory government regulation around the world are increasing.

“The pace and scope of regulation as it relates to ESG has risen exponentially since 2005,” says Michael Lewis, a Managing Director who leads the ESG Thematic Research team at Deutsche Asset Management. “Regulation has typically been voluntary, and grouped into four broad themes.”

Those themes, according to Lewis, are:

• Corporate and investor disclosure such as the EU non-financial reporting directive;

ADVERTISING• Stewardship codes and laws which encourage asset managers to engage with investees;

• Regulations aimed specifically at asset owners to incorporate sustainability into their investment decision making;

• Regulations to shift capital to green and sustainable assets.

However, the days of the voluntary regulation practices are coming to a close. Mandated regulation will, before long, be the new global standard in relation to ESG integration.

Source: On The ESG Horizon — Achieving A Global Standard

The space between climate change and financial statements

The TCFD wants to improve the quality of climate-related financial disclosures, and that means company filings that capture the impact of climate change on businesses over time.This goal goes beyond just producing, as the TCFD calls it, “forward-looking” climate information. It also requires that both the risks and opportunities of climate change be broadly integrated with financial statements.

But big challenges arise from the TCFD recommendations. The obvious one is that there are no specific standards or methodologies to integrate such disclosures into accounting practices.Financial accounting standards do not mention “climate change” and by definition are backward looking, designed to produce financial statements that portray the true and fair position of a company at a year-end. They are a snapshot of the past, not the future.

Jon Williams, a member of the TCFD and PwC Sustainability & Climate Change Partner, says: “In my view, rather than trying to spend the next decade coming up with a new climate-change reporting standard, it will be useful for the TCFD or another body to produce an interpretation of accounting standards through the lense of climate change.”

The TCFD final report highlights the “interconnectivity of its recommendations with existing financial statement and disclosure requirements” of the IASB and FASB. It explicitly mentions IAS 36 (impairment of assets) and IAS 37 (provisions, contingent liabilities and contingent assets).

Source: The space between climate change and financial statements

The Materiality of Social Media Attacks

VEA Vice Chair Nell Minow is quoted:

Still, consumer-facing companies, which are particularly vulnerable to social controversies, should outline such risks and response strategies in financial filings, said Nell Minow, vice chair of corporate governance consulting firm ValueEdge Advisors. “They need to let their investors know that they’re prepared to deal with it promptly and effectively to prevent a material deterioration of the stock price,” Ms. Minow said. “It’s very much like cyberattacks—it’s a relatively recent phenomenon that every company has to be prepared to deal with.”

Source: United, Pepsi Outcry Unlikely to Hurt Financial Results – WSJ

KPMG scandal highlights problem of auditing’s revolving door

This week Big Four accounting firm KPMG fired six US employees over a scandal that calls into question efforts to ensure that public company accounts are being properly scrutinised.

Here’s what happened: KPMG recruited an employee from the Public Company Accounting Oversight Board, which is charged with overseeing the nearly 2,000 accounting firms that audit US companies. The watchdog inspects the Big Four and other firms annually by taking a random sample of audits and checking them for deficiencies and conflicts of interest.

KPMG says that its new employee received a heads up from someone who still worked at the PCAOB about which audits would be inspected. The new employee then shared the information around. Eventually, five partners, including the head of the US audit practice, “either had improper advance warnings” or were aware that others had received this information and “failed to properly report the situation in a timely manner”, the firm said. All six people have been fired.

Source: KPMG scandal highlights problem of auditing’s revolving door

Sample Sustainability Disclosure: Host

Corporate Responsibility. Our corporate responsibility strategy focuses on a set of complementary objectives across three themes:

Responsible Investment: During the acquisition of properties, we assess both capital investments that may include sustainability opportunities and climate change related risks as part of our due diligence process. During the ownership of our properties, we seek to invest in proven sustainability practices in our redevelopment and ROI projects that can enhance asset value while also improving environmental performance.

Environmental Stewardship: We seek to improve the environmental footprint of our properties. We have established measurable goals to reduce energy consumption, water usage and carbon emissions from across our portfolio and will continue to report on actual performance in our environmental disclosures. In our redevelopment and ROI projects, we may target specific environmental efficiency projects, equipment upgrades and replacements that reduce energy and water consumption and offer appropriate returns on investment.

Corporate Citizenship: We are committed to being a responsible corporate citizen and strengthening our local communities through financial support, community engagement, volunteer service, and industry collaboration. Our approach is reinforced by our Code of Business Conduct and Ethics and periodic engagement with key stakeholders to understand their corporate responsibility priorities.

In March 2016, the Sustainability Accounting Standards Board (“SASB”) issued the provisional standard, Real Estate Owners, Developers & Investment Trusts Sustainability Accounting Standard. The provisional standard outlines proposed disclosure topics and accounting metrics for the real estate industry. The recommended energy and water management metrics that best correlate with our industry include energy consumption data coverage as a percentage of floor area (“Energy Intensity”); total energy consumed by portfolio area (“Total Energy Consumption”); water withdrawal as a percentage of total floor area, or number of units (for our calculation we use occupied rooms) (“Water Intensity”); and total water withdrawn by portfolio area (“Total Water Consumption”). The energy and water data we use is collected and reviewed by third-parties who compile the data from property utility statements. These metrics enable us to track the effectiveness of water and energy reduction ROI projects.

We reference key aspects and metrics of our sustainability efforts through the Global Reporting Initiative (“GRI”) Index, in accordance with the GRI framework and, beginning in 2015, contracted with a third-party to provide further verification of our energy and water consumption data. The charts detail our Energy Intensity, Total Energy Consumption, Water Intensity and Total Water Consumption for 2013 through 2015, the last three fiscal years for which data is available.

Latest Dodd-Frank reversal bill could exempt a third of public companies from giving auditor warning – MarketWatch

ValueEdge Advisors Vice Chair Nell Minow is quoted in this story about a possible proposed change to Dodd-Frank that would make it easier for companies to hide accounting problems from their investors, creditors, and suppliers.

 The sweeping package to reform the Dodd-Frank bank reform law introduced in Congress has a provision that would curtail the reporting of accounting problems from about a third of issuers.

Rep. Jeb Hensarling, the Texas Republican who chairs the House Financial Services Committee, has suggested modifications to his legislation introduced last September, according to a memo leaked last week to journalists, that would uproot Dodd-Frank to raise the limit for companies to comply with the requirement for an outside auditor’s opinion on a company’s internal controls over financial reporting, or ICFR.

That requirement was originally mandated by Section 404(b) of the Sarbanes-Oxley Act of 2002. In the memo, referred to by several new outlets who obtained a copy as Choice 2.0, Hensarling doubles the permanent exemption threshold from the original bill of last September, to $500 million in market capitalization from $250 million. The current exemption is $75 million. In Hensarling’s legislation, the exemption was also extended to depository institutions with less than $1 billion in assets.

Nell Minow, a corporate governance expert and the vice chairwoman of ValueEdge Advisors, told MarketWatch, “This is an outrage. It isn’t just that investors and consumers will not have this information; the more significant problem is that knowing it will not be public, boards will think they do not have to investigate and make corrections.”

The Dodd-Frank exemption threshold of $75 million “is a perfectly acceptable number for establishing materiality,” said Minow. “Raising it allows companies to ignore significant problems until they become too big to fix.”

Source: Latest Dodd-Frank reversal bill would exempt a third of public companies from giving auditor warning – MarketWatch

Center for Audit Quality: the First Decade

The Center for Audit Quality celebrated its 10th anniversary with a conference that included assessment of its progress since it was created in response to the Enron-era series of accounting failures and some thoughts about upcoming developments. Unabashedly committed to the notion that accounting is “a force for good,” director Cindy Fornelli emphasized the profession’s commitment to “independence, objectivity, and skepticism.” Many of the participants pointed to more attention to cybersecurity and sustainability (including non-GAAP reporting) and coordination with international standards as increasing challenges, necessary for corporate managers, directors, investors, and other stakeholders. In general, the speakers endorsed the Sarbanes-Oxley legislation, though former SEC Chair Harvey Pitt would have preferred the additional flexibility of making it a part of the 34 Act. Some expressed concern about overloading the board, especially the audit committee, and the consensus was that with issues like cybersecurity, the committee should be responsible for ensuring a system is in place, not for performing the checks itself. Some of the participants expressed concern that the new administration’s more insular, protectionist approach might lead to withdrawal from essential international coordination efforts, leaving a gap in leadership. Pitt said, “If we do not participate, it will diminish our impact…and our ability to compete in a global marketplace.”