Preparations pick up for ESG reporting requirements

Association leaders in the environmental, social, and governance space discuss fast-approaching standards and what finance professionals need to do to prepare.

On a global scale and a national one, new standards related to ESG reporting requirements are mere months away from being published.

The details of what will be required of accounting professionals as a result are still to be determined, but the mindset that will be required to navigate the changes already is coming into focus.

"Get used to the idea of connecting sustainability information with financial information."

Those were the words last week from Jeremy Osborn, FCMA, CGMA, CPA (Australia), hired earlier this year to the newly created role of global head of environmental, social, and governance (ESG) for the Association of International Certified Professional Accountants, representing AICPA & CIMA.

Last Thursday, hours after Osborn participated in an ESG forum hosted by London-based consulting firm Falcon Windsor, Ami Beers, CPA, CGMA, senior director–Assurance and Advisory Innovation, representing AICPA & CIMA, made a similar appearance at The Wall Street Journal Pro Sustainable Business Forum.

She delivered a similar message.

"Some companies have been thinking about this for a while and have started to report this information and engage with their auditors," Beers said, but she added: "There's probably a lot of work to be done in this area, looking at the breadth and depth of the SEC's proposal."

Beers discussed rules the US Securities and Exchange Commission (SEC) proposed in March to enhance and standardise climate-related disclosures. According to the proposal, those rules are to go into effect for companies that traded in the US markets in December, though it's not known whether the recent reopening of the proposal's comment period will affect its effective date.

Osborn discussed IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-related Disclosures, the first two global sustainability standards released — in exposure draft form — by the International Sustainability Standards Board (ISSB) in March. The ISSB is now part of the IFRS Foundation, and panellist Jonathan Labrey, chief connectivity and integrated reporting officer at the IFRS, reiterated that IFRS S1 and IFRS S2 are to be issued as early as possible in 2023.

In preparation for the new standards and the growing mandates for disclosure of ESG information in the UK and beyond, Osborn has been canvassing many of the world's largest auditing firms to gauge their thoughts.

"They recognise that it is a challenge. They also recognise that if capacity is to be built into the system as a whole, then it's essential that auditors are able to provide assurance over the material sustainability information," Osborn said. "They have a variety of different models of how to achieve that, but fundamentally, it comes down to upskilling the auditors so that they have a solid working knowledge and supplementing the teams that might be providing the service to an audit client with subject matter experts.

"You would have an auditor who understands the basic concepts of materiality such as single or double materiality, and also understands how to interpret the stakeholder engagement that may have been done that's led to that long list of material issues. But then you would have a subject matter expert who may be a deep specialist, for example, in climate change or water scarcity, who brings that topic specificity to the table.

"It's not that audit firms expect their professionals to be masters of all trades; rather they want them to be able to apply their skills to the particular processes needed to provide assurance and to help them reach a baseline of knowledge around sustainability. That's where the institutes, like our own and the other leading accounting institutes, have a really important role to play, which is helping support that training and that upskilling."

The Association, as part of its commitment to the finance professionals it serves, has been tracking companies' preparedness for potential reporting responsbilities related to ESG, Beers said. While participating in the workshop "Taking Assurance to a Higher Level", Beers discussed a joint report with the International Federation of Accountants showing that more than 90% of companies reported some ESG information in 2020. On the other hand, for those companies that obtained assurance over their ESG disclosures, about three out of five companies relied on the expertise of audit firms; only about two in five companies in the UK did so.

"I will say that companies have been thinking about this for a while and have started to engage and report and disclose on this information," Beers said. "But this potentially could be new for many companies, so we really need to get educated in this area.

"It's really important to form the right teams, get the right expertise, and if that expertise is not in-house, consider obtaining it by bringing in an expert. Understand the option for third-party support and what you should be looking for in a competent third-party provider.

"Finally, there are many resources that are out there that are available to companies and auditors."

Beers said she's seeing "a huge evolution" in the ESG reporting space.

Osborn said that traversing the changing landscape will take everyone's effort.

"Those who understand the financial statements don't necessarily understand sustainability and vice versa, but bring those two teams together, have a rich conversation, and get used to the idea that one group has to start working with the other to understand what the meaningful connections are between these," Osborn said. "Ultimately, that will help with the question of how is this contributing to enterprise value creation, which is the underlying economic premise of IFRS S1 and IFRS S2."

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