‘Auditors must take a more active role’

A conversation with Rients Abma, director of investor organisation Eumedion

Rients Abma, director of Eumedion – an interest group representing institutional investors – calls for external auditors to take a more active role in identifying and assessing the impact of climate risks. In conversation with Wytse van der Molen, member of the executive board and chair of PwC's Assurance practice, he discusses developments in the area of sustainability reporting, the changing role of the external auditor and the expectations of institutional investors.

Reliable information on sustainability

‘The information that one places in an investment model as an investor must be reliable,’ Abma begins. ‘The external auditor adds this degree of reliability – now only for financial figures, but in time also for sustainability information. Institutional investors already include sustainability information as standard in their investment models. Pressure from the stakeholders of institutional investors, such as pensioners and employees as well as from customers of asset managers, to take this information into account is increasing.’

Increasingly important alerting function

'Nederlandsche Bank, the Dutch Authority for the Financial Markets and the European Central Bank are paying more attention to sustainability in their supervision. And not unimportantly,’ Abma adds. ’Many pension fund managers and asset managers have a natural belief that a positive impact on society leads to higher returns in the long-term. Especially with an investment horizon of thirty or forty years.’

‘The “key audit matters” section in the auditor’s report – an opinion from an independent expert – will give the external auditor an increasingly important alert function. The more information this statement contains, the greater value it has for investors. Whereas investors used to pay little attention to the auditor’s report, this is now almost the first thing they look at. Especially at company-specific findings and conclusions. There are still major steps to be taken in the areas of climate, fraud and continuity.’

Assessing climate-related information

Eumedion believes that external auditors have a key role in assessing and articulating climate-related information in the auditor’s report. This is a recommendation that PwC has put into practice at all listed companies where it acts as external auditor. 'I find this very encouraging,’ compliments Abma. ’By setting out this important issue in the auditor's report, you show as an auditor that you are at the centre of society. You have also included company-specific texts which, unfortunately, we don't see everywhere.’

'What we do wonder is why climate risks are not always considered key audit matters for 'high emitters'. In the case of Dutch companies we don't see that at all. While climate risks may appear here and there in key audit matters in relation to the valuation of certain assets, we expect auditors to play a much more active role. They should really challenge company boards on the different scenarios set out in the reports of the Intergovernmental Panel on Climate Change and the International Energy Agency. What is the long-term impact of these scenarios on the company? And how is the company responding to this?’

Auditing financial and non-financial information

There is also still room for improvement in the number of ESG audits. Companies are now doing this voluntarily and the numbers are still very low. At European level, the question even arises as to whether other parties, rather than auditors, should be auditing non-financial information.

‘It is Eumedion’s preference that the same auditor should audit and sign off on financial and non-financial information,’ says Abma. ‘It is ultimately about valuation issues that directly affect certain items in the annual accounts. They cannot be separated from each other and it would be strange to have this done by different parties. As an investor, you also want to be able to call one person to account at the shareholders' meeting.

‘Furthermore, we have been arguing for some time that we should be able to see and question the external auditor not only at the shareholders' meeting but also outside that meeting. This would make for a better dialogue, as we already have with boards and supervisory boards.’