As the concerns over climate change, depletion of natural resources (i.e., deforestation and water scarcity), and health and safety issues are reaching new levels, there has been growing sentiment among business leaders, investors, consumers and regulators that innovative business strategies and risk management practices are necessary to sustain profitability. Here are a few eye-opening statistics:
- A
global study published in February by the Association of International Certified Professional Accountants and the International Federation of Accountants found that 98% (99% in the U.S.) of companies publicly disclosed some level of environmental, social and governance information. And 69% (88% in the U.S.) have obtained some level of assurance. - The CDP Global Supply Chain Report in 2021, a study of over 200 supply chain members with $5.5 trillion in procurement spending, shows that over 90% of companies are engaging suppliers on environmental performance, representing over 41% in year-over-year disclosures.
- A recent study by another large accounting firm indicates 74% of M&A participants have ESG considerations as part of their agenda; a similar survey by another firm stated that 57% of inventors view sustainability information as “critical” in evaluating investments.
These trends demonstrate the momentum in measuring and reporting information around sustainability, specifically how sustainability strategies translate into longer-term financial performance and cash flows, new products and technologies, and ethical business practices.
What standards are companies using to report its sustainability or ESG information? ESG reporting has had a long history of inconsistency. The above-referenced AICPA and IFAC survey shows that 87% (93% in U,S.) of companies reported under multiple ESG reporting frameworks. However, the past few years have seen a flurry of consolidation, standardization, and alignment in this space that has paved the way for regulations to come into play. Again, this activity is driven by the need for consistent, accurate and relevant data that can be used by stakeholders in making decisions.
Importantly, ESG reporting is investor-driven. The International Sustainability Standards Board, established in November of 2021, has consolidated international frameworks and standards for ESG reporting and passed its first two rules in June 2023. The European Union formally adopted the European Sustainability Reporting Standards that inform the Corporate Sustainability Reporting Directive rule in July 2023 that allows for interoperability with the ISSB’s new standards.
In the U.S., the Securities and Exchange Commission passed its climate disclosure rule in March 2024, requiring publicly traded companies to report on Scope 1 and 2 emissions, when material. California passed two sets of regulations for greenhouse gas emissions reporting and ESG reporting in October 2023. Illinois, New York, Colorado, Vermont and Maine all have regulations pending in various stages of approval related to ESG reporting and compliance.
Many technology solutions have entered the market to make data aggregation and ESG reporting achievable.
In the coming months and years there are sure to be challenges to ESG reporting regulations in the United States. It is likely that lawsuits will argue claims related to a state’s extraterritorial authority (e.g., requiring Scope 3 emissions from a company’s value stream outside of a state’s jurisdiction). The SEC rule has already been met with significant legal challenges, and the SEC has voluntarily issued a stay pending judicial review. And many are awaiting for the results of the upcoming elections to act. But what is clear in this space is that standardization and consolidation of frameworks have increased significantly, and as a result of this alignment, regulations are being promulgated across the globe and are here to stay. Furthermore, these regulations impact U.S. companies.
The EU’s ESRS are already effective and apply to multinational companies with significant EU operations. These requirements are expected to affect over 3,000 companies in the U.S. The related assurance requirements begin to rollout in 2025.
Regardless of what happens with the SEC standards, there remains a strong desire from many stakeholders in the United States to formalize regulations for GHG emissions and ESG reporting modeled after the ISSB framework and standards. Many expect the state regulations will fill the gap left by less stringent national regulations, but perhaps at a cost to more complicated, fractured reporting requirements.
The importance of assurance
To ensure stakeholder’s confidence in the ESG data being disclosed, many companies have started engaging third-party firms to provide assurance on the ESG information. As referenced above, 88% of U.S. companies reporting ESG information obtained some level of third-party assurance. The trend toward greater assurance is evident; however, the high percentage does not tell the full story. For one, 82% of assurance was provided in the form of “limited assurance”. Limited assurance, or review engagements, are much less rigorous than audits. As the use of ESG information continues to increase we should start to see a move from limited to “reasonable” assurance.
To date most assurance has been voluntary; however, that trend will likely start shifting to mandatory in the coming years as new sustainability reporting standards require assurance. We are already seeing this in Europe with the ESRS. The recent SEC and California regulations also have assurance requirements.
A further look at the firms providing assurance is noteworthy. Most of the assurance service providers in the U.S. are not CPA firms, but rather boutique, engineering and consulting firms. In fact, only 23% of the firms providing assurance in the U.S. were traditional CPA firms. This presents a significant opportunity for the accounting profession.
Similar to sustainability reporting standards, a global baseline for assurance has not existed. That is about to change with the expected issuance of International Standard on Sustainability Assurance 5000 expected to be issued by the International Auditing and Assurance Standards Board by the end of the year.
All of these factors point to the need for the accounting profession to prepare for the increasing demand for assurance services.
The role of the accountant
What does this all mean for the accounting profession? The evolving landscape of ESG reporting, coupled with the increasing global demand for high-quality, accurate sustainability information, means a significant opportunity for CPAs and accountants to add value to business. CPA firms are perfectly positioned to provide advisory and assurance services, given their infrastructure around audit quality, independence requirements, and professional development.
The technical training accountants receive in enterprise risk management, internal controls and financial reporting are essential building blocks to the skills needed to implement a successful sustainability reporting program. Just as important are the critical thinking and communication skills needed to influence change across an organization. One of the keys to implementing a successful ESG reporting infrastructure and providing quality assurance services is applying the concept of materiality to business risks and opportunities; this has also been one of greatest challenges to ESG reporting. This is another area CPAs are familiar with.
There is no question that CPA firms will need to invest in cross-functional capacity building and training around the evolving ESG reporting and assurance standards to meet the demands of stakeholders. Firms will also need to establish relationships with subject matter specialists that may not reside within the firm. Many tools have developed in recent years to assist firms in this regard.
As ESG reporting and assurance requirements expand, companies, investors and other stakeholders will turn to the trusted accounting profession. Those CPA firms that focus now will be best prepared to meet the demand expected in the next few years.
Credit: Source link
