Carbon Tracker Boss: Audit Inconsistency is a Huge Problem

Independent auditing should help carbon analysts precisely assess companies' progress towards net-zero. Right? Alas, it's not that simple

Valerio Baselli 19 October, 2023 | 4:18AM
Facebook Twitter LinkedIn



Valerio Baselli: We are at the Morningstar Sustainable Investing Summit 2023, and I'm joined now by Barbara Davidson. She is Head of Accounting, Audit and Disclosure at the independent financial think tank, Carbon Tracker Initiative.

So, Barbara, let's talk of what you do at Carbon Tracker. So, you basically analyse official financial statements of companies. What are you looking for and what are you seeing in the current landscape?

Barbara Davidson: So, we look at financial statements of companies because the information that companies' management use to prepare their financial statements can be directly impacted by climate risks. Long-term assumptions that they look at for impairment testing of assets, productive assets, asset lives are all impacted by the energy transition, future oil and gas prices, future demand. We look at the financial statements again because they're audited, so they're independent. They're also a window into management's actions, views. They're also used for investment decisions, obviously underlying investment valuations and executive remuneration. So, they're a key basis point.

The landscape we're seeing right now is, there still seems to be a considerable lack of consistency in the narratives that companies are providing to investors and other stakeholders. So, if they have net-zero targets and interim targets to achieve those or decarbonisation strategy, we're not always seeing that flow through to the assumptions they're using to prepare the financial statements. So, this inconsistency is a big problem.

VB: Right. And speaking of that, how can regulators help to improve the quality of information, of data that you are looking for in financial statements?

BD: So, the information we're looking for is already required today by accounting standards, global and US accounting standards. Also, auditors are already required to look for this information today when it's material to financial statements, which it is because of mainly the companies we're looking at and investors want this information. So, effectively, regulators can look for whether companies and auditors are providing information about this, providing clear, transparent information about consistent inputs, about their considerations, if they're telling the same story, if auditors are explaining the same thing. And one quick example I would say is we're seeing a difference between audit reports overseas outside of the US and in the US by the same audit network firm, similar industry, and that's a big problem. The audit regulators in the US as well as the market regulators need to assess this and start addressing these issues.

VB: Very interesting. And finally, stranded assets have been a primary field of research at Carbon Tracker. So why is this so important and how investors should manage this issue?

BD: It's a good question. I mean, there are different definitions of stranded assets. So, we talk about the carbon bubble where there are reserves that cannot come out of the ground. Those reserves, investments in reserves will be stranded. We also talk about capital at risk at companies. So, investments in productive assets or future assets that companies are thinking about future capital expenditures that are at risk of not providing investors a return, not generating the revenues that they are expecting, not generating cash flows to cover, say, owner's contracts or liabilities that are going to result from the energy transition are a big problem. And that's what we look at – well, my team looks at stranded assets on the financial statements, but the whole idea of stranded assets.

Investors have different avenues. They can look at our research. It's important for them to be able to challenge management and companies about their strategy, what they're doing, if they're continuing to invest in assets that look like they will no longer generate returns, if they're not addressing the financial risk of the energy transition. It's important for them to challenge management, talk to the audit committee, talk to the auditor if they can, look at our reports. And also, we're also happy to talk to investors about any questions they have on this matter.

VB: Thanks a lot, Barbara. For Morningstar, Valeria Baselli. Thanks for watching.

Subscribe to Our Newsletters

Sign up Now

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Valerio Baselli

Valerio Baselli  is Senior International Editor at Morningstar.

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures