About the Author
Mr. Attique ur Rahman, Deputy Director (Federal Government Audit), is an officer of the Pakistan Audit and Accounts Service (PA&AS) since 2011 and possesses multidisciplinary qualifications – M.Sc (Hons) Agriculture Biotechnology, Pakistan and M.Sc Forensic Audit and Accounting, United Kingdom. He has conducted and supervised a variety of audits, including forensic audits, performance audits, regularity audits, environmental audits, and special studies.
According to the World Economic Forum Global Risk Report (2017) ‘Extreme Weather Events’ and ‘Failure of Climate Change and Adaptation’ are the top two likeliest world risks to materialize and are both in the top 3 risks in terms of impact.
Over the course of the past decade, a cluster of environment-related risks – notably extreme weather events and failure of climate change mitigation and adaptation as well as water crises – has emerged as a consistently central feature of the GRPS [Global Risks Perspectives Survey] risk landscape, strongly interconnected with many other risks, such as conflict and migration. This year, environmental concerns are more prominent than ever, with all five risks in this category assessed as being above average for both impact and likelihood.
Besides, “more than half of all industrial emissions of carbon dioxide since the dawn of the Industrial Revolution have been released since 1988” (Dr. Peter C. Frumhoff, Director of science and policy at the Union of Concerned Scientists, 2014).
Climate change poses a significant impact in many regions of the world, with developing-country people bearing the brunt of the cost. Pakistan is South Asia's second-largest country. Sixty percent (60%) of the Indus basin's entire watershed area is located inside Pakistan's borders. The climate in the north ranges from warm winters and hot, dry summers to semi-arid and desert zones in the west and south.
2. The Carbon Profile of Pakistan
Graph 01 reflects Pakistan’s cumulative emissions as a share of global cumulative emissions. This chart shows cumulative CO2 emissions – the sum of emissions produced since 1751 to the given 2020. This allows us to understand how much of the total CO2 emissions to date have been emitted by Pakistan. Pakistan contributes 0.3% of the total global emission (Andrew, R. M., & Peters, G. P. (2021).
Pakistan’s highest CO2 emission was recorded during 2018 i.e., 238 million tons and then it declined to 234 million tons in 2020. However, globally it was 36.70 billion tons in 2018 and declined to 34.84 billion tons in 2020. The data include CO2 emissions from fossil fuels for energy and cement production and excludes land use.
Graph 1: Change in Annual CO2 emission Pakistan Vs World
Source: Andrew, R. M., & Peters, G. P. (2021).
Graph 02: GHG equivalents to CO2 - Pakistan
In Pakistan, four sectors, including agriculture, electricity and heat, transport and manufacturing, and construction, are major emitters of GHGs, as reflected in graph 02. These areas also invite the attention of policymakers and audit in Pakistan.
3. Impact of Climate Change
Due to its geographical positioning, Pakistan has been rated among the top ten nations most affected by climate change in the last 20 years, according to German Watch. According to the Global Climate Risk Index annual report for 2020, Pakistan lost 0.53 percent of its GDP, incurred US$ 3792.52 million in economic damages, and had 152 extreme weather events between 1999 and 2018. According to an ADB study, the socioeconomic consequences of environmental degradation are significant, with climate adaptation demands ranging from $7 billion to $14 billion per year. Because the government is aware of the situation, it is taking steps to mitigate the negative effects of climate change in the country at the policy, management, and operational levels (Ministry of Finance, Government of Pakistan, 2020).
Pollution is the leading source of death and disease in the world's environment. Over 124 million people in 51 countries and territories are experiencing food insecurity at crisis levels or worse, necessitating quick action (FAO, 2022).
Extreme weather disasters and natural and man-made resource scarcity have already elevated business continuity risks significantly. Higher activism, including shareholder activism, as well as increased danger of environmental legal action from entities such as Client Earth, can occur when consumers and the public in general believe inadequate action is being made.
Micheal Bloomberg, Chairman of Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) stressed the urgency of climate related risk in the Recommendations of the Task Force (2017) as below:
The risk climate change poses to businesses and financial markets is real and already present. It is more important than ever that businesses lead in understanding and responding to these risks – and seizing the opportunities – to build a stronger, more resilient, and sustainable, global economy
Particularly, for Pakistan, as a result of increased precipitation variability and glacier melting under future climate change scenarios, Pakistan's river flows are predicted to fluctuate significantly. As evaporation rates grow, so may the need for irrigation water. Wheat and basmati rice yields are predicted to fall, forcing production to move north due to a lack of water. The amount of water available for hydropower generating may be reduced. Additional air conditioning demand is predicted to increase as temperatures rise, resulting in increased energy consumption. The efficiency of nuclear and thermal power plants may be compromised when air and water temperatures rise. Heat waves of extreme severity have been connected to an increase in mortality. City drainage systems may be strained as a result of heavy rainfall and flash floods. Coastal infrastructure may be harmed by rising sea levels (Rabani et al 2008).
Graph 03: Mean Sea level Rise recorded at Karachi Coast, Pakistan (1860-2000)
Adapting to these impacts may include: development or use of crop varieties with greater heat and drought tolerance, modernizing irrigation infrastructure and employing water-saving technologies (ADB, 2017).
According to the estimate, by 2080, Pakistan would have seen a 4.38°C temperature increase. The study also found that (i) temperature increases in both summer and winter are larger in northern Pakistan than in southern Pakistan, and (ii) temperature increases in both areas are higher in winter than in summer. There is no substantial difference in the percentage of precipitation change. In southern Pakistan, however, there is a summer rise in precipitation and a winter reduction (W. Iqbal and M. Zahid. 2014).
The annual mean temperature in Pakistan has risen by about 0.5°C in the last 50 years, and the number of heat wave days per year has increased fivefold. Sea level along the Karachi coast has risen approximately 10cm over the last century. Annual rainfall in Pakistan is likely to have a considerable inter-annual fluctuation rather than a major long-term trend. By the end of the century, sea level is anticipated to rise another 60 cm, affecting low-lying coastal communities south of Karachi (ADB, 2017)
4. INTOSAI Working Group on Climate Audit
The 10th INTOSAI Working Group on Environment Audit noted that climate change adaptation has suddenly become a hot issue in auditing. The United Nations Sustainable Development Goals (SDGs) are used as audit topics by Supreme Audit Institutions. A report on a survey done every three years for SAIs throughout the globe was produced by a global Working Group on Environmental Auditing (2021).
Finally, the amount of audits performed by different SAIs varies greatly, particularly when it comes to performance audits. During the year 2018-2020, the number of environmental performance audits per SAI ranged from one to 186. Differences in SAI size might account for the variance (INTOSAI, 2021). The increased sensitivity towards auditing climate change is a welcome development in SAIs.
5.Global Trends in Audit of Climate Change
Audits reviewed indicated that auditors need to improve their consideration of climate-related risks when planning and executing their audits (FRC, 2020)
Some of the good practices and guidelines to assess climate related issues by an auditor have been developed by the Financial reporting Council (2020); Chartered Institute of Internal Auditors (2020), National Audit Office, UK (2021) and others. A brief review is given below:
5.1. How might climate change impact an audit?
Auditors must be aware of how climate-related concerns may affect the entity's annual report and how this should be integrated into the audit. This insight must be adapted to each entity's unique conditions as well as the audit's significance. This is divided into the following distinct steps, which are illustrated in the diagram below.
Fig 1: Audit Steps FRC Climate Thematic – Audit (FRC-2020)
5.2. Internal Audit
The auditors may check whether climate change and its impact on the environment are included in the scope of internal auditing and risk assessment. If they were not included, what were the possible reasons for their exclusion? Besides, the auditor may evaluate the skill sufficiency of the HR who is responsible for risk assessment posed by climate change, including carbon emissions and those who communicate assurance reports to stakeholders. Moreover, an auditor may examine whether the management conducts an impact assessment study of any strategic change impacting the operations of the business.
5.3. Organizational Strategy:
Auditors may review whether an organization’s strategic plan includes the aspect of climate change and its allied risks, as well as the long-term impact of climate change on business operations, along with risk profiling and their mitigation strategies.
“One of the challenges for auditors is ensuring the completeness of risk considerations on climate change, for example on provisions – are they properly challenging management? There are some industries like energy where it’s obvious, but I have a sense that there are certain industries that may be a bit naïve and for whom the penny hasn’t dropped. The auditor could rightfully challenge” - Investor (Financial Reporting Council, 2020)
Moreover, the auditor may assess whether the management has envisaged sustainability targets by adopting continuous mitigation practices and exploring new business opportunities, especially in the context of public sector business enterprises including airline organizations, railways and various public sector manufacturing plants, etc. The policy documents may be examined to check management’s plan to reduce carbon emissions, reduce waste, and conserve natural resources. The auditors may also see whether the innovations and outcomes in terms of service delivery or product development are aligned with the long-term climatic goals of the government. The auditors may also check whether the management expresses commitments to climate change, including recycling and reusable energy resources (like the Capital Development Authority, Islamabad, Pakistan, has constructed a plastic road to reuse plastic material).
5.4. Governance and Oversight:
The auditor may examine whether the board has allocated clear senior accountability for climate change and environmental impact within the organization; defined suitable roles and responsibilities and their implementation; cognizance of its legal and regulatory responsibilities related to climate change and environmental impact; and the availability of an adequate management and reporting framework in place to oversee the required operations and capture the necessary information for reporting.
5.5. Risk Assessment and Management
The auditor may examine whether the management of an entity has performed an assessment of the entire business model up to 20 years ahead to understand the areas where improvement is necessary; developed a climate change and environmental impacts risk register; existence of a suitable plan in place to address any known deficiencies, implement improvements, and ensure the strategic Insurance policies cover physical damage caused by the effects of climate change, and the relevant policies need to be reviewed and updated.
National Audit Office, UK (2021) developed a risk taxonomy in “Climate change risk: A good practice guide for Audit and Risk Assurance Committees”. It identified various types of climate-related risks that organizations could encounter. The risks listed below are not all-inclusive, but they are representative of the kinds of risks that public sector organizations face as a result of climate change.
Fig 02: Climate Change Risk (National Audit Office, UK, 2021)
Floods, for example, will have a substantial impact on infrastructure, causing structural damage and widespread service disruption is known as the climate change's acute physical risk. Meanwhile, the more gradual effects of rising temperatures, such as sea level rise and coastal change is chronic physical risk.
Adaptation is defined as actions that increase resilience to existing or anticipated climate change risks, including as financial and value risks, strategy uncertainties, and reputational threats (Auditor-General Department, South Australia, 2021).
Mitigation measures are those that are taken to avoid or minimise emissions and the severity of future climate change. Policy and regulatory risks, legal and liability risks, and technology risks are all examples of mitigation risks (Auditor-General Department, South Australia, 2021).
For rest of the terminology used in this risk template, the explanation may be accessed here1
5.6. Key Performance Indicators and Reporting
The auditor may check whether suitable key performance indicators have been implemented that link to government mandated targets, kept the board updated on key metrics and progress toward achieving targets; Set up the necessary external reporting and disclosure framework; set up independent verification of external reporting.
6 Some ISAs relevant to Climate-Related Risks
The table below covers some of the important aspects of risk assessment and responses to identified risks, audit evidence, and communication with those in charge of governance and auditor reporting. However, ISAs related to climate risk are shared here.
|ISA Standard||Effect on Auditing Financial Statements|
|ISA 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement||
The auditor may evaluate the implications of climate-related risks when implementing ISA 315 (Revised 2019) while acquiring an understanding of the entity and its environment, including:
Whether or not climate-related risks have an impact on, or will have an impact on, the entity's business model, particularly its supply chain. The auditor's understanding of climate-related risks extends to the components within the group if the entity's structure includes subsidiaries, divisions, or branches (i.e., a group). Furthermore, the auditor may get insight into how management and those in charge of governance see climate-related risks.
Similarly, industry, regularity and other factors may also be assessed.
|ISA 320, Materiality in Planning and Performing an Audit||The auditor's judgement of materiality and performance materiality in line with ISA 320 may be influenced by climate-related risks|
|ISA 330, The Auditor’s Responses to Assessed Risks||If the auditor's appraisal of the risk of material misstatement at the assertion level includes the implications of climate-related risks, the auditor's subsequent audit processes must take these risks into account. The greater the risk rating, the more convincing audit evidence the auditor must acquire.|
|ISA 250 (Revised), Consideration of Laws and Regulations in an Audit of Financial Statements||Other rules and regulations may include environmental regulations when it comes to climate-related risks. A violation of such regulations might have a significant impact on the financial statements, for example, a breach could result in a contingent responsibility for prospective litigation as well as fines or penalties imposed by the regulations.|
|ISA 450, Evaluation of Misstatements Identified during the Audit||Affects additional information to be provided in the entity's annual report that might reasonably be expected to impact the economic judgments of financial statement readers. Given that the majority of climate-related data is now reported outside of financial statements, this may be the case for climate-related data.|
Table 01: Some ISAs relevant to Climate-Related Risks
Source: International Auditing and Assurance Standards Board (IAASB), 2020 on “The Consideration of Climate-Related Risks in an Audit of Financial Statement”.
The auditor must identify and analyze the risks of material misstatement at the financial statement and assertion levels for classes of transactions, account balances, and disclosures using risk assessment processes. Climate-related risks may increase the risk of material misstatement in one or more important statements, such as accuracy, valuation and allocation, rights and duties, and presentation for a particular transaction class, account balance, or disclosures (IAAB, 2020).
7. The UK and Australian Legal Frameworks for making Audit Opinions regarding the Audit of Climate Change
Given that both the UK and Australia use IFRS and ISAs, the relevant auditing standards listed in the first column of Table 1 of Risky business, as well as the corresponding suggested climate risk implication listed in the second column, are both plausible, and similar relationships in auditor consideration and evaluation of accounting standard-based expectations of adjusting for climate risk are likely.
The table 02 has been reproduced from the Climate Change and Professional Liability for Auditors: a Comparative United Kingdom and Australian Analysis Paper 1(2018).
Auditors’ duties and annual accounts: examples of climate risk implications
|Relevant standards (paraphrased)||Suggested climate risk implications|
The auditor is responsible for determining whether the financial statements are produced in compliance with the appropriate financial reporting framework in all material respects.
ASA 700 Forming an Opinion and Reporting on the Financial Report
Auditors may need to assess the impact of climate risk on assumptions and estimates used in making yearly financial statements, such as:
The auditor must determine whether the accounting estimates in the financial statements are appropriate in the context of the applicable financial reporting framework or are misstated based on the audit evidence.
ASA 540 Accounting Estimates and Related Disclosures
When an auditor determines that climate risk is relevant to important assumptions used in accounting estimates, the auditor may be required to:
The auditor must first have a thorough understanding of the organisation and its surroundings, as well as the company's internal controls, in order to detect and analyse the risks of material misstatement. Among other things, the auditor must be aware of:
In light of the firm's objectives, plans, and other business risks, as well as the efficacy of its internal controls and risk management systems, auditors may need to evaluate the implications of climate risk while getting a knowledge of the organisation and its surroundings. It's possible that you'll need to know how to:
Table 02: Auditors’ duties and annual accounts: examples of climate risk implications
Source: Climate Change and Professional Liability for Auditors: a Comparative United Kingdom and Australian Analysis Paper 1(2018).
Pakistan has continuously been classified as one of the countries most affected by climate change. Climate change is widely recognized as a spatial issue, and mitigating the hazards associated with it is a massive undertaking that necessitates well-planned and coordinated national and global initiatives to reduce its negative impacts on the environment and human life. It is widely understood that history will assess the current generation's reaction to this issue, since if we fail to confront it courageously, quickly, and cooperatively, we risk condemning future generations to an irrevocable calamity. As a result, politicians, scientists, developers, engineers, and others all across the world are utilizing geographic information system technology to better grasp this complicated problem and provide real answers in a variety of climate change scenarios (Economic Survey of Pakistan, 2019-2020).
Most firms are developing guidance in this area and some are beginning to incorporate climate change considerations into audit templates. However, firms should continue to make their guidance more granular and comprehensive and to provide audit teams with more examples of good climate risk disclosures and sustainability reporting (FRC, 2020)
In the above scenario, it is the responsibility of auditors to provide deep insight into matters of climate change to policymakers so that they could take well-informed decisions in the light of recommendations and findings made by auditors.
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