Addressing ESG: Experts advise action but also patience

By Bryan Strickland

Sara DeSmith has headed PwC's Sustainability Assurance practice for eight years now, a tenure that takes her back to a time when many finance executives potentially in her purview didn't know what ESG stood for.

Now, however, change is in the air for the reporting and assurance landscape pertaining to environmental, social, and governance.

"It was like probably four years of knocking on doors and having them slammed in our faces," said DeSmith, CPA, a PwC partner. "I'd say the last four years have been the complete opposite. We can't answer the phone fast enough."

The timeline for release of the SEC's first rule on climate-related disclosures — expected to be a defining moment for ESG reporting in the United States — isn't clear, but SEC leadership has made it clear that its impetus for the rule is investors' calls for comparable data related to ESG. It's literally in the name of the proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors.

At last month's AICPA & CIMA Conference on Current SEC and PCAOB Developments, investors, preparers, and assurers alike discussed ESG. While the SEC rule will begin the process of standardizing what is expected from an ESG reporting standpoint, it likely signals only the beginning of DeSmith's phone ringing off the hook.

Still, that doesn't mean everyone affected by ESG will be expected to have all the answers right away.

"The financial reporting world has been evolving over 90 years or so, and I think there's this expectation that we need to get this reporting squared away in 90 weeks," said Kristin Sterling, an EY partner in the firm's Climate Change & Sustainability Services who serves on the AICPA Assurance Services Executive Committee Sustainability Task Force. "I think overall there's a little bit of grace that we have to give ourselves collectively, but certainly being transparent about it through your disclosures and your reporting about the assumptions and estimates that you have made is really, really key so that users can understand the information and its limitations. And it is expected that it will improve over time and that things will change."

Those on the investor side have been seeking comparable, reliable data related to ESG for quite a while now, but those who participated in a conference panel echoed Sterling's sentiments.

"The way we're looking at it, it's more of a journey," said Todd Castagno, CPA, executive director in Morgan Stanley's research division. "The first shot of this data is probably not going to be ideal, the 'perfect' that everyone wants — both investors and preparers — but it's an evolution. There will be interpretations. There will be better methodologies for measurement. There will be better disclosures over time."

Sheryl Burke, chief sustainability officer and senior vice president of corporate social responsbility at CVS Health, encouraged those soon to be charged with delivering ESG data to make sure the pursuit of perfection doesn't deter the pursuit altogether. While many ESG-related disclosures aren't yet required, her company is among many being proactive about reporting.

"We can't let perfect get in the way of our progress," Burke said. "We have a strong partnership with our finance teams and have embedded them into our work, yet they still want perfection. They want us to be able to say, 'This is exactly how much greenhouse gases, this is precisely what our plastic use is,' but we don't know those things. We know them to the best of our ability right now and recognize this is not a perfect science and they're not perfect measurements.

"Getting comfortable enough that your data is accurate and reliable and moving forward would be a piece of advice."

Burke said in a follow-up email that the data would improve over time as companies and their suppliers better understand how and what to measure.

DeSmith, participating in a panel moderated by Sue Coffey, CPA, CGMA, CEO–Public Accounting for AICPA & CIMA, together as the Association of International Certified Professional Accountants, was asked about her clients' current pain points related to the ESG journey. Her perspective touched on the perfect-versus-progress question.

"It's almost pre-Sarbanes-Oxley in terms of maturity of the data gathering and the consolidation process. And it's also coming from operational parts of the business, these datapoints, that are not used to having the rigor of a monthly financial close or don't appreciate the need for having things done the same way every single month," DeSmith said. "It's been a convergence of the finance organization finally getting pulled in and having to get involved in this reporting and then realizing that 'Oh, wow, not only are the company's systems not set up to handle this, but the people that own this data don't necessarily understand disclosure controls and procedures and the rigor that has to go into that type of process.'

"It's been painful, I think, for clients to try to impose that type of rigor that goes from the financial statement process onto these nonfinancial areas and work with people that they're not used to working with. So bringing parts of the business together to do really high-quality, investor-grade reporting can be a challenge when you're not working with traditional systems."

Even so, DeSmith can see a light at the end of the tunnel.

"We're bringing a lot of really valuable, well-experienced people out of core audit and teaching them ESG," DeSmith said. "Fear not, ESG standards are just a different kind of recipe book. You're used to managing huge amounts of data and having to apply new accounting standards that come out of the FASB. Just think of the greenhouse gas protocol or SASB standards or these other regulations as just another recipe that you need to learn, and it's the same thing with auditing. Once you understand the flow of data, we can apply your auditing skills against that."

That paints a promising path forward that interested investors would welcome — even if it's a long path.

"We started out this conversation with, 'This is a journey.' I think another way of looking at this is this is a marathon and not necessarily a sprint," said John Miller, director, ESG and Sustainability Policy at Cowen & Co. "I think it's an important responsibility to on occasion say, 'Let's slow down, let's do this correctly, let's have all the infrastructure in place, let's make sure we're reporting on the correct pieces of information and then we're consistent on that going forward.'

"That will be much more well accepted than going quickly, throwing out a lot of information, and having to constantly change what you're producing. That's not helpful at all for the investor."

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.

Where to find February’s flipbook issue

The Journal of Accountancy is now completely digital. 

 

 

 

SPONSORED REPORT

Get Clients Ready for Tax Season

This comprehensive report looks at the changes to the child tax credit, earned income tax credit, and child and dependent care credit caused by the expiration of provisions in the American Rescue Plan Act; the ability e-file more returns in the Form 1040 series; automobile mileage deductions; the alternative minimum tax; gift tax exemptions; strategies for accelerating or postponing income and deductions; and retirement and estate planning.