ESG offers growth opportunities for 2022

Focus on environmental, social, and governance issues is rising amid investor and regulator interest.
By Chris Baysden

IMAGE BY ORBON ALIJA/ISTOCK
IMAGE BY ORBON ALIJA/ISTOCK

As accounting firms plan their business development initiatives and finance professionals in business develop their strategies for 2022, experts say they need to keep three letters in mind: ESG.

Demand for action on environmental, social, and governance issues hasn't been as urgent in the United States compared with Europe and some other parts of the world. But increased interest from investors and regulators seems certain to cause the practice area to heat up in the coming year. As ESG becomes a more prominent business priority, it also will become a growth opportunity for accounting firms looking for new revenue streams to offset any declines in practice areas that are being transformed by technology, such as some tax offerings.

ESG isn't new, of course. For years, companies have assembled reports to show how their operations affect the environment. As social justice issues heated up, some companies began disclosing data regarding diversity, equity, and inclusion. And ESG impacts for accountants aren't limited to reporting; they also scrutinize other business issues including supply chains, business models, risks, etc.

Meanwhile, investor demand for companies to act and provide information on these issues has grown significantly (see the chart, "Skyrocketing Demand," below). In 2020, for example, BlackRock Chairman and CEO Larry Fink announced that the giant asset management firm would put sustainability at the center of its investment approach.

Skyrocketing demand
Source: 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor Survey.


Businesses are paying attention. Many automakers, for example, have announced intentions to dramatically increase their production of electric vehicles in the coming years, and 19% of 4,000 significant entities examined in a global survey by the U.K. not-for-profit Energy & Climate Intelligence Unit had net-zero targets in place in late 2020.

Numerous accounting associations from across the globe also have made net-zero pledges (see the sidebar, "Accounting Associations Make Net-Zero Commitments," at the bottom of the page).

So what new business opportunities for accountants are emerging from these developments? First, technology is creating reams of new digital ESG data that companies must collect, analyze, and incorporate into their strategies. Second, someone needs to independently verify that reports compiled by companies are accurate. That's especially true with more and more regulators worldwide weighing in on what they want to see from companies.

REGULATORY CHANGES COMING

For instance, the SEC is exploring the possibility of proposing ESG requirements for public companies that would presumably include penalties for companies not in compliance. SEC Chair Gary Gensler has asked commission staff to develop a mandatory climate risk disclosure rule proposal. The SEC also endorsed Nasdaq's move to require board diversity disclosures from companies listed on the exchange.

"The market has moved in terms of the broader set of information investors are taking into consideration to make their decisions," said Wes Bricker, Esq., CPA, vice chair and US Trust Solutions co-leader at PwC US. "The regulators are coming in to raise the bar."

In addition to regulatory requirements, the standards-setting environment is also undergoing a significant transformation. In April the IFRS Foundation proposed the formation of an International Sustainability Standards Board (ISSB) in response to the 2020 Consultation Paper on Sustainability Reporting, which explored the need for the foundation's involvement in sustainability accounting and reporting standards development. This new ISSB, which is subject to final approval, will sit alongside the International Accounting Standards Board (IASB) and be subject to the same governance oversight.

Here's where CPAs come in. Accountants are not only the "gold standard" in terms of accounting standards, but they also have significant expertise in evaluating risks of all kinds in organizations. They are also experts in designing and evaluating controls over voluminous amounts of data throughout every part of an organization. While the collection mechanisms are different, CPAs are well positioned to help companies design methods to track and analyze ESG data whether they're dollar figures or tons of carbon emitted in a manufacturing process.

Auditors, meanwhile, provide just the type of attest services that clients now need to show that their ESG reports are trustworthy and not just public relations-driven greenwashing.

"Yes, it's a significant opportunity for the profession. It's not really that different from financial accounting except that with ESG we're providing assurance on gallons of water or metric tons of carbon emissions," said Christine Robinson, CPA, a partner, Sustainability and ESG Services, Deloitte & Touche LLP.

The Big Four have already recognized the opportunities. Over the summer, PwC announced a $12 billion investment over five years to add 100,000 new jobs to help clients grapple with ESG reporting and other issues (e.g., artificial intelligence). The firm will expand training for specialists on key ESG topics, create a global ESG Academy that will help all PwC partners and staff to integrate the fundamentals of ESG into their work, and expand reporting on its own operations.

Markets operate most efficiently when they have access to high-quality data, Bricker said. In the modern world, there's a lot of intangible value outside the balance sheet that investors, other stakeholders, and regulators need to be aware of in order to make decisions.

GROWTH OPPORTUNITIES AVAILABLE

An analysis released over the summer by the Center for Audit Quality (CAQ), which is affiliated with the AICPA, gives some insight into the growth opportunities available to accounting firms that work with public companies.

Just 31 of the S&P 500 companies use public company auditors to perform assurance on their ESG reporting, according to the CAQ study. Meanwhile, 235 members of the S&P 500 used a nonaudit firm assurance provider, and 236 did not get assurance on ESG information. (Note: The numbers add up to more than 500 because two companies used both an audit firm and a nonaudit firm to provide assurance.)

These assurance engagements are voluntary, but they indicate potential new business. If investors' demand for assurance keeps growing and regulatory requirements for assurance are forthcoming, companies may be more likely to seek out the higher-quality assurance services that CPAs provide, because CPA firms are subject to firm quality controls and outside reviews or inspections and they are experts in conducting assurance engagements. Nonaudit firms (e.g., consulting firms or other service providers) do not have the same responsibilities to the public. But there also is a risk of inaction. If accounting firms don't embrace the opportunity, other types of consultants will instead. "CPAs in particular don't have an option for standing still," said Bricker, who notes that the demand for ESG is now evident in both private and public capital markets. Investors and other stakeholders (including customers of) private companies also will want to see ESG reports to understand the companies' ESG performances.

For instance, an international survey by the U.S.-based National Retail Federation in 2020 found that 57% of consumers were willing to change their purchasing habits to reduce the negative impact on the environment.

"It's not a big firm thing. It's not a small firm thing," Bricker said. "It's an every firm thing."

Armanino LLP is one of the firms embracing the business opportunities presented by ESG. The San Ramon, Calif.-based firm announced in September that it was launching an ESG Advisory Services practice.

The practice consists of about a dozen core leaders in addition to senior managers and support staff, according to Jeff Bogan, Esq., CPA, managing director at Armanino. Various skills sets are represented, including tax, internal audit, data analytics, project management, and subject-matter experts — such as in decarbonization and supply chains.

"I think this is becoming real for businesses," said Bogan, who adds that he's seeing more tax incentives and tax credits related to ESG. "It will provide more opportunities and more jobs."

A LOOK AT THE OPPORTUNITIES

So what opportunities should accounting firms look to capitalize on in the coming year? The experts interviewed for this article see several:

  • Companies often track multiple ESG frameworks and need help figuring out which ones are best and how to scale them.
  • Companies want to work with firms that can help them build out controls, as well as tracking systems and dashboards.
  • Companies need firms to provide attest services that verify the integrity of the data being reported to customers, investors, and regulators, as well as decision-makers in the C-suite.

To take advantage of these opportunities, firm and section leaders need to familiarize themselves with ESG standards and frameworks such as those issued by the Value Reporting Framework (VRF), which is the new entity formed by the merger of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC); the Task Force on Climate-Related Financial Disclosures (TCFD); the Global Reporting Initiative (GRI); and the Global Steering Group for Impact Investment.

CPAs can get ESG-related education, while firms and companies can develop training modules for their employees. It's also important to pay attention to ESG-related events such as the recently held COP26 UN Climate Change Conference.

"Education is a big part of it," Bogan said.


Accounting associations make net-zero commitments

Thirteen accounting bodies from across the globe, including the Association of International Certified Professional Accountants, announced in October that they have committed to reach net-zero carbon emissions as soon as possible.

The accounting bodies, which together represent more than 2.5 million professional accountants and students, will publish in the next 12 months their plans for reaching net zero. They will report annually on their progress toward this goal.

Barry Melancon, CPA, CGMA, the CEO at the Association of International Certified Professional Accountants, representing AICPA & CIMA, said in a news release that it is abundantly clear that to address environmental risks and achieve climate-goal ambitions, accounting organizations must work together and lead the profession by example.

"Public and management accountants have an important role to play improving an organization's integrated thinking and decision-making capabilities to promote responsible and sustainable business practices," Melancon said. "They have the necessary skills and expertise to help effect meaningful change in this area. As an organization, we are fully committed to doing our part and will continue to help our members, their organizations, and their clients across the globe support this mission."

In addition to the Association, the following bodies made net-zero commitments: AAT, ACCA, Chartered Accountants Australia and New Zealand, Chartered Accountants Ireland, Consiglio Nazionale dei Dottori Commercialisti e degli Esperti Contabili, CPA Australia, CPA Canada, ICAEW, ICAS, Institut der Wirtschaftsprüfer in Deutschland e.V. (IDW), Regnskap Norge, and the Japanese Institute of Certified Public Accountants (JICPA).


About the authors

Chris Baysden is a JofA associate director. To comment on this article or to suggest an idea for another article, contact him at Chris.Baysden@aicpa-cima.com. Ken Tysiac, the JofA’s editorial director, contributed to this report.


AICPA RESOURCES

Articles

"How Climate Risks Are Reflected in Current Financial Statements," JofA, Sept. 14, 2021

"ESG Assurance an Elusive but Promising Opportunity for Auditors," JofA, Aug. 19, 2021

"AICPA, CAQ Support SEC's Exploration of Climate Change Disclosures," JofA, June 14, 2021


LEARNING RESOURCES

AICPA & CIMA ESG Online Conference

CONFERENCE: Dec. 13, live online. The global trend to incorporate ESG (environmental, social, and governance) data in mainstream financial reports is accelerating. Join this conference to understand what this is all about.

Sustainability Assurance Engagements

CPE SELF-STUDY: Covering sustainability, greenhouse gas emissions, and attestation engagements, this self-study online course will assist you with interpreting and applying the clarified attestation standards (SSAE No. 18).

For more information or to make a purchase, go to aicpa.org/cpe-learning or call the Institute at 888-777-7077.

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