Financial reporting is getting a green makeover. The global trend to incorporate ESG (environmental, social, and governance) data in mainstream financial reports is accelerating.
“Companies that haven’t begun thinking about sustainability reporting and how ESG topics will impact them should start doing so, regardless of their size,” said Corinne Dougherty, CPA, a partner at KPMG who serves on the AICPA Sustainability Assurance and Advisory Task Force. “They should factor ESG topics into their strategic plans and core business activities. They need to understand why ESG topics matter to their long-term performance.”
Many major companies issue sustainability reports, but these are separate from their financial reports, making it difficult to see connections between financial and sustainability performance. But the accounting profession is rethinking how company performance is measured as a result of the integration of ESG disclosures, given investor calls for such disclosures.
The IFRS Foundation Trustees also are considering creating a board to create a set of sustainability accounting standards that could be applied worldwide in a uniform fashion. These developments are likely to create additional opportunities for CPAs to provide assurance on the ESG information reported by companies.
“This is a very big development. Our members expect the need for ESG-related assurance services to increase significantly over the next three years,” said Desiré Carroll, CPA, an AICPA senior technical manager and the staff liaison to the Sustainability Assurance and Advisory Task Force.
With this issue taking center stage, the AICPA has identified five steps accounting professionals can take to create reliable data to increase stakeholder trust. The AICPA recommends organizations take these measures for enhanced ESG reporting and assurance:
Blend the management of ESG risks into the company’s overall risk management. In the absence of uniform standards, “there’s no cookie-cutter approach to ESG,” Dougherty said. Each company should define its ESG policy in a way that relates to its own business, values, and how it speaks to stakeholders. The strategy should identify and prioritize the particular key ESG areas that contribute the most to its business, she said.
Set key performance metrics. Leaders must ask how a company can improve its impact related to ESG and where it adds the most value, ideally in areas that are most important to stakeholders and most relevant to the company’s sustainability reporting. “Any organization can identify ESG innovations such as reducing packaging, limiting water use in water-stressed areas, and thinking about how best to transition to a net-zero economy,” Dougherty said.
Implement effective internal control over the ESG data collection, processing, and reporting process. “At first a company may not have any systems in place around the collection or consolidation of data or any controls in place to ensure the accuracy and reliability of the data,” Carroll said. Appropriate processes, systems, and internal controls must be created to help ensure this information is accurate, reliable, and timely. The systems must also produce consistent results that are comparable over time.
Create board oversight of critical ESG issues. “As with other critical company matters, board members should also be involved in the governance and oversight of material ESG matters,” Carroll said. The board has an important role to play in setting the tone and seeing that company ESG efforts are appropriately prioritized. Further, just as boards play a role in providing independent oversight and establishing and maintaining effective governance over financial reporting, boards should play a similar role in sustainability reporting.
Hire a CPA firm to conduct a readiness assessment. This will help prepare for an assurance engagement regarding ESG data. “Many companies see ESG reporting as a competitive advantage — a way to stand out against their peers,” Dougherty said. “Having a CPA firm conduct an audit will also give stakeholders and investors confidence about the reliability of the ESG data being reported and improve a company’s ESG ratings.”
Opportunities also exist from an advisory perspective, according to Carroll. “If a company wants to get started with ESG reporting but doesn’t know how to, a CPA firm can advise them on how to get started on their reporting journey,” she said. “It’s absolutely an opportunity for a CPA firm to grow its business.”
The explosion of interest in ESG is being driven by social, investor, and political expectations about issues such as climate change, diversity, and racial inequality.
“The bottom line is businesses now actively compete for capital based on ESG performance, and that competition needs to be open, fair, and transparent,” acting SEC Chair Allison Herren Lee said last year. The SEC, she added, should “get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy.”
Though no uniform sustainability reporting standards currently exist, “it’s important that accountants help bring the same level of rigor to the measurement and reporting of sustainablility information as is applied to financial reporting. That’s where they have a critical role to play,” Carroll said.
— George Spencer is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com), the JofA’s editorial director.