BlackRock CEO Larry Fink has called on publicly listed companies to commit to net-zero emissions by 2050. What progress are your clients making toward that goal?
Wang Some companies are just starting out and determining their strategy. They are beginning the environmental, social, and governance (ESG) dialogue with their boards and management, including discussions on reporting past and setting future carbon-related goals. Other companies have been reporting for years and even obtain third-party assurance on their greenhouse gas emissions and other select ESG metrics. Fink’s letter is telling companies that, in addition to making a commitment to net-zero emissions by 2050, they need to disclose an actionable plan for how their business model will be compatible with a net-zero economy and how this plan is incorporated into their long-term strategy. A plan like this requires strategic focus, investments, milestones, progress monitoring, and accountability for results. More importantly, the underlying commitment requires a cultural shift in thinking for many firms.
Bialick Companies are at various stages on their climate journey, but a common theme is the importance given to building strong information gathering processes to understand the current state, support program development, and promote reliable reporting. When committing to net zero, they may not have all of the answers on how to get there yet, but they do understand that transformation is needed in every sector of the global economy and all parts of the world to be successful together.
How does big investors raising questions about climate commitments change the urgency for companies to address climate risk?
Bialick Requests from investors for enhanced climate disclosures is making this a topic that reaches the agenda of both executives and the board. The risk approach they are adopting is leading to a shift in the nature of the discussion, an evolution from managing the company’s impact on the environment toward understanding the impact of the changing climate on the company. This brings a new lens on climate-related risks and opportunities and the need to transform the business accordingly. And while investors continue to drive the discussions, expectations from other stakeholders — employees, customers, business partners, and regulators — are rapidly changing. From the Biden administration’s focus on the climate crisis, to the New York Department of Financial Services’ request for companies to disclose climate risks using the Task Force on Climate-related Financial Disclosures (TCFD) framework, to the multiple countries committing to net-zero goals, compliance must remain front and center.
Wang The most recent announcements by investors and others have raised the bar and the urgency of climate risk in the context of broader ESG reporting for all publicly listed companies worldwide and on all major stock exchanges. Requests from current and prospective clients have risen dramatically in just the last few months. Boards and management now feel pressure because of the investor salvos that have been issued on climate risk, change, and transition, along with the emergence of regulatory initiatives and activist efforts. It is a fair bet in the U.S. that the new chair of the Securities and Exchange Commission will accelerate efforts for consistent and uniform disclosures of carbon emissions and plans to reduce them (Note: This interview took place in early March). Comparability creates transparency, and transparency breeds increased pressure.
How are clients using the pandemic to look more closely at how they can reduce their environmental impact?
Wang In the past year, companies have placed focus on the social in ESG as a result of the pandemic and social justice issues . And because of less commuting and business travel, the reduction of their environmental impact also is being evaluated. As Larry Fink describes in his letter, “the pandemic has presented such an existential crisis — such a stark reminder of our fragility — that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives.” With this reminder of our fragility, along with droughts, fires, and floods, companies are starting to see a direct financial impact to their assets. They also need to focus on how this opportunity to adapt to climate change cannot only benefit the environment but also be a key differentiator in establishing competitive advantage in the marketplace.
Bialick COVID-19 has reinforced the fragility of the systems upon which our economies and societies are built, and it has exposed our vulnerabilities to not only global pandemics but other systemic global shocks, including climate change. In response, there has been a resurgence of action on climate across the public and private sectors. Hundreds of global companies have set the ambition to go net zero, and the pandemic has created momentum for many to take a new look at how they operate. For example, reconsidering how office space is used, the necessity of business travel, and the use of technologies to stay connected and collaborate as we develop hybrid office and home working models are trends that have been accelerated. But beyond those, some companies are reinventing how they produce and deliver their products and services throughout their value chain. As part of PwC’s commitment to become net zero by 2030, we are working with our clients to enable this transition, while also tackling our own operations.
What is internal audit’s role in assessing the organization’s carbon impact?
Bialick Internal audit can provide comfort over ESG by leveraging its understanding of internal controls, business processes, data, and systems; its overview of enterprise risk management (ERM); and its objectivity and independence with direct access to the audit committee. More specifically, auditors can assess the effectiveness of controls over the climate and ESG program, metrics, data, and reporting; link ESG risks to ERM risks, business objectives, and mitigation plans; and verify the completeness and accuracy of data reported.
Wang Internal audit can play many impactful roles, including providing objective assurance of reported disclosures and metrics. Consistent with The IIA’s Definition of Internal Auditing, there are several assurance and consulting projects that internal audit can perform to add value. Another example is helping the organization integrate climate and other ESG factors into its ERM program, which the Committee of Sponsoring Organizations of the Treadway Commission (COSO) has provided guidance on. We also have seen internal audit evaluate the governance of ESG programs and perform audits centered around future sustainability commitments.
What guidance should auditors be looking to when assessing the organization’s threat to climate change?
Wang Internal auditors are not climate change experts, so they should look to internal guidance and consult recognized external sources, including appropriate experts and ESG standards setters and regulators, to improve their knowledge and stay abreast of change. Their expertise around risk, assurance, consulting, validation, and evaluation of processes, policies, and controls will be helpful as they take on the issues of climate risk, change, and transition as part of their ESG efforts. Also, to better understand the impact to their business, internal auditors may want to review peer organizations.
Bialick There are multiple frameworks and guidance to help companies understand, assess, and mitigate risks, like the COSO and TCFD guidance on risk management. However, companies also need to understand where they are and must leverage their ESG data to inform their strategy, track progress, and better understand associated risks. To do so, businesses need to understand the maturity of the disclosure process and pinpoint opportunities for reporting improvements. Internal audit can help build processes and leverage technology-enabled solutions to quickly consolidate information to garner faster insights, provide benchmarking against competitors, and visualize their current state against ESG disclosure frameworks.