Climate change: internal audit must act now

One of the key issues for discussion at our recent successful annual conference was climate change and we were delighted to
hear from one of the UK’s leading environmentalists, Jonathon Porritt, founder director of Forum for the Future, who gave an inspiring and provocative keynote speech on the issue.

The conference took place just days after thousands of activists from the Extinction Rebellion campaign group had brought the streets around the conference centre to a standstill, protesting about what they argue is a climate change emergency. Whether or not you agree with their tactics, there is clear evidence that climate change is accelerating at an alarming rate, with increasingly damaging consequences. Indeed, according to research by the World Economic Forum, five of the top ten risks facing the world in the next decade are environmental.

As you would expect, Jonathon Porritt’s message to the conference was that, as a profession and as a society, we must now take decisive action to manage and mitigate the growing risk of climate change. 

The issue is already moving rapidly up the agendas of internal audit functions. Our Risk in Focus 2020 research found that 14 per cent of chief internal auditors cited “environment and climate change” as a top five risk, compared with only eight per cent last year. Yet, as a profession, are we really taking the issue of climate change as seriously as we should be?

While it is difficult to ascribe individual weather events to climate change, there can be no doubt that the frequency of extreme weather events is increasing – whether we are talking about wildfires in New South Wales and California, or floods in Yorkshire, and the impact on business can be significant. In 2018 alone, extreme weather events and natural disasters caused around $160bn of damage, of which only $80bn was insured.

As an internal audit profession, we must step up to the plate to ensure that business takes the climate change challenge seriously. In order to protect the long-term sustainability of organisations it is vital that we play a key strategic role in climate change preparedness.

Internal audit has a big role to play in helping to ensure that directors on the boards of the businesses we serve are carbon literate. We should be asking tough questions about the processes and internal controls that businesses have adopted to meet their climate change obligations. Is there a mechanism or process in place that enables the business to assess the risks posed by climate change? Is there a climate change strategy? Is the strategy being implemented in a way that is commensurate with the challenge?

Another big question for internal audit is whether the business has the appropriate ethics and culture? This is fundamental to addressing sustainability issues effectively. Are we aligned with the views and expectations of our investors, customers and other stakeholders? What could the impact of inaction or a deficient climate change strategy be on the organisation’s reputation?

And there are also opportunities to be harnessed in the response to climate change. One good example is the renewable revolution. Renewables is now a massive industry and the rapid expansion of off-shore wind power has made the UK a world leader.

There is a huge amount that internal audit functions can be doing to ensure that our organisations are adapting their business models to embrace fully the new business opportunities created as a result of climate change. Our organisations can either harness these opportunities and become a disrupter in the field of climate change – or they can sit back, take no or limited action, and wait to be disrupted by competitors.

As Jonathon Porritt argued, internal audit has a big role to play in helping businesses to do some of the heavy lifting on climate change, and the positive news is that if people act in the next decade we can avert an environmental catastrophe. So, let’s ensure we all step up to ensure our organisations are taking the climate change challenge as seriously as they should be.

This article was first published in January 2020.