Strategy and reporting on environmental, social, and governance (ESG) matters are certain to evolve in the wake of the COP26 climate summit held earlier this month in Scotland.
For many accountants, the most important news to come out of the summit was the announcement by the IFRS Foundation that a new International Sustainability Standards Board (ISSB) has been created. The standard-setter will develop "a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors' information needs," according to the IFRS Foundation.
More than three-fourths (79%) of investors believe that ESG risks are an important factor in investment decision-making, according to a recent PwC survey, but just one-third of survey respondents think the quality of reporting they're seeing is sufficient. It's hoped that satisfaction with ESG reporting will improve as a result of the ISSB's standard-setting.
"The principal goal was to bring sustainability reporting under the same roof as financial reporting," said Charles Tilley, OBE, FCMA, CGMA, board member and senior adviser, Value Reporting Foundation, during a recent webcast by the AICPA & CIMA, the Center for Audit Quality, and the Value Reporting Foundation. The webcast, "COP26 Debrief and a Look Ahead for ESG Standards", discussed the status of global sustainability guidance, new considerations around climate goals, US Securities and Exchange Commission rulemaking, and the outlook for internal controls and assurance.
The IFRS Foundation will consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation, which includes the Integrated Reporting Framework and the Sustainability Accounting Standards Board's standards. An IFRS Foundation working group has also published prototype climate and general disclosure requirements for consideration by the ISSB.
In the past, there has been a virtual "alphabet soup" of standard-setters offering ESG standards and frameworks, according to the webcast participants. That can make it difficult to understand which rules a company is following. The large number of ESG reporting frameworks currently in use has caused confusion and hindered comparability, webcast participants said. "The idea [of the ISSB] was not to add another acronym but to consolidate standards from existing organisations into cohesive guidance," said Janine Guillot, CEO of the Value Reporting Foundation.
In another significant development at COP26, the Glasgow Financial Alliance for Net Zero announced that it had raised over $130 trillion in private-capital, finance-sector commitments to be used to make economic changes needed to transition to a net-zero greenhouse gas emission economy over the next three decades. One in three of the largest public companies in G20 countries now has a net-zero target, noted Veronica Poole, Deloitte global IFRS and corporate reporting leader, NSE head of accounting and corporate reporting.
As companies set such targets, finance professionals will have to work with the CEO and the regulatory team to understand the commitments that have been made, either by the company or industry, said Nadja Picard, partner, global reporting leader, PwC Germany, so that they can consider them when preparing their financial statements and answer questions from users of year-end reporting.
Auditors will need to take those commitments and strategies into account when auditing material judgements and related disclosures, Poole said. The impacts could be significant because companies will have to adjust their business models, develop credible implementation plans, and execute them.
How companies are making the shift
The ESG reporting and assurance landscape today is largely voluntary for US public companies, noted Dennis McGowan, vice-president, professional practice, at the CAQ. As the US Securities and Exchange Commission continues to examine ways to respond to the growing demand for information in this area, that could shift to something more prescriptive or mandatory, he said.
Many companies are already well along in their ESG reporting journeys. The fashion brand Guess? Inc. issued its first sustainability materiality assessment and report for fiscal year 2015 as a result of a shareholder resolution, according to webcast participant Jaclyn Allen, the company's director, corporate sustainability. Guess? Inc. conducts a sustainability materiality assessment to identify, update, and prioritise sustainability topics and inform the company's vision for sustainability. "We look into topics that arise in our sustainability materiality assessment and drop them into our [Enterprise Risk Management] (ERM) assessment," she said. In 2021 the company reported on nearly 100 metrics, with reasonable assurance given by external auditors on some ESG disclosures.
At Salesforce, "ESG and climate considerations are fully integrated into our business strategy, metrics, culture, decision-making, and financial planning," said Joe Allanson, executive vice-president of ESG finance. Challenges in ESG reporting have included which conceptual framework or standard to rely on and determining the right places to communicate ESG data. Given the many options — such as in a 10-K report or proxy statement, on the website or stakeholder impact report — it's critical to understand the communication strategy to stakeholders, he said.
Board engagement in ESG issues
Stakeholders are asking about ESG reporting issues, which has made them a top board agenda item, according to Kimberly Ellison-Taylor, CPA, CGMA, the CEO of KET Solutions, another webcast participant. Board members "are racing for knowledge", said Ellison-Taylor, a member of several boards and former chairman of the American Institute of CPAs and of the Association of Certified Professional Accountants. She said that questions boards might ask various teams in an organisation include:
- How ESG metrics are chosen.
- Whether the company has the people, processes, and systems to perform ESG reporting.
- What level of assurance is being used and why or why not.
- How the company's ESG reporting compares with others in the industry.
- Whether strategies have been revised to ensure that ESG reporting is integrated across the organisation and is not simply an overlay on existing data.
- How the company tracks risks in this area, including legal, financial, strategic, health and safety, diversity and inclusion, and others.
"Boards don't want to meddle, but we will be asking the questions," she said. "We want to know how the company is preparing for what could happen next."
— Anita Dennis is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, FM magazine's editorial director, at Kenneth.Tysiac@aicpa-cima.com.