The “Big Four” auditing firms have become the latest target of Republican attorneys general in their efforts to clamp down on ESG-related activities.
Deloitte, EY, KMPG and PwC received a letter signed by legal representatives of 16 US states raising “concerns over climate-related financial activism”, led by Nebraska attorney general Mike Hilgers alongside the state lawyers for Texas, Alaska and Florida.
“The Big Four’s climate commitments force clients to make burdensome climate-related disclosures that drive up the costs of their services and place onerous requirements on farmers and small businesses,” Hilgers said.
The 38-page letter questions the auditors’ relationship with sustainability initiatives including the Task Force on Climate-related Financial Disclosures (TCFD), the International Sustainability Standards Board (ISSB) and the now-closed Net Zero Financial Service Providers Alliance (NZFPSA).
“The Big Four’s climate commitments to the TCFD, ISSB and NZFSPA conflict with core professional accounting standards of materiality, neutrality and error avoidance,” the letter argued.
“These commitments create an appearance that the Big Four have agreed to compromise their independence in favour of pursuing climate-related goals external to the audit.”
Neither the TCFD nor ISSB require supporters to make commitments and the NZFSPA, which was global coalition of financial services firms, ceased to operate as a standalone initiative in January.
The four auditors had not responded to a request for comment by the time of publication.
Targeting financial players
The attorneys general acknowledged that the NZFSPA had been discontinued, but highlighted the initiative’s statement that “participants would ‘focus on individually implementing firm-level objectives’”.
They warned the auditors that any violation of their professional duties arising from their support of climate-related disclosures could risk penalties, along with state and federal contracts.
The letter also includes 38 questions and requests for information, including copies of all the auditors’ materials relating to the TCFD, ISSB and NZFSPA.
In recent years, attorneys general from several Republican states have interrogated the sustainability activities of different players in the financial system.
Asset managers, banks and insurers were initially targeted over their activities and net zero alliance memberships, followed by proxy advisers coming under growing pressure over their voting recommendations.
In April, Moody’s, S&P Global and Fitch Ratings received a letter from 23 US attorneys general over their integration of ESG factors into credit ratings.
NZFSPA
Launched in September 2021 as part of the Glasgow Financial Alliance for Net Zero (GFANZ), NZFSPA aimed to bring together investment advisers, credit rating agencies, auditors, stock exchanges, index providers, ESG research and data providers, and proxy research providers to “fill the gap for net zero” in the financial sector.
As part of the initiative, signatories committed to align relevant products and services with net zero by 2050.
As reported by Responsible Investor, the subgroups were later reduced to four: index providers, research and data providers, auditors and stock exchanges. Some references to credit rating agencies and proxy advisers were also removed from the alliance’s website.
Unlike other groups in the initiative, the auditors self-convened and operated independently.
Over the years, like other net-zero alliances, NZFSPA saw exits, including Moody’s, Deloitte and S&P Global.
When Deloitte left, a spokesperson told RI that its engagement with NZFSPA and GFANZ was related to its audit and assurance services.
“We will continue to ensure appropriate consideration of sustainability as we deliver these services with quality, integrity and objectivity, adhering to all relevant laws, regulations and professional standards,” they said.
When NZFSPA ceased operating in January, it said this followed the publication of target-setting frameworks across its groups.