The first few months of 2021 witnessed some major milestones in investors’ and regulators’ efforts to get public companies to provide shareholders with more information about environmental, social, and governance (ESG) issues.,
In March, the SEC published a request for public comments about ESG disclosures. The move followed the launch of an Enforcement Division task force to uncover flawed ESG-related disclosures that violate its regulations. Additionally, shareholders are becoming more assertive in getting companies to lessen their reliance on fossil fuels.
A month before the SEC’s moves, the Center for Audit Quality (CAQ) published ESG Reporting and Attestation: A Roadmap for Audit Practitioners to help auditors guide clients in how they should approach ESG disclosures.
During a virtual session Monday, Kristen Sullivan, CPA, CGMA, a partner with Deloitte & Touche LLP and the firm’s Americas region sustainability services leader, gave an overview of the concerns public companies, directors, and auditors have about the new regulatory focus on ESG disclosures. To date, ESG disclosures have tended to be separate from regulatory filings. But the CAQ’s road map is meant to help guide capital market participants through the frequency and consistency of the disclosures and whether the information is comparable from company to company, Sullivan said.
“All are much more in the spotlight as the growing attention to ESG disclosure continues to intensify,” said Sullivan, who also chairs the AICPA Auditing Standards Board’s Sustainability Task Force. The developments regarding ESG disclosures are also presenting auditors with a new host of responsibilities.
“We’re seeing a conversation around the role and the value of assurance provided by independent auditors,” Sullivan said.
Typically, new rules and regulations impose an unwelcome burden on financial reporting professionals and their auditors. But the trend toward ESG reporting comes with a twist — the demands for the information have been coming from so many different corners of the market that the development of new standards and reporting regulations may simplify life for CFOs, corporate controllers, and audit committee members.
“Companies are being inundated because there are no standards in terms of reporting and disclosure,” said Margaret Smyth, CPA, CGMA, the CFO for National Grid USA Services Co. Inc. “It would be really good to have some guidelines, standards. It would reduce the amount of information requests. It would also promote consistency among the disclosures people are making.”
The groups pushing for more ESG information have responded to the market’s demands for a more standardized regime and begun to coordinate their efforts. For example, the Sustainability Accounting Standards Board (SASB) is scheduled to complete its merger with the International Integrated Reporting Council (IIRC) at the end of May. Last December, the SASB and IIRC teamed up with CDP, the Climate Disclosure Standards Board (CDSB), and the Global Reporting Initiative (GRI) to issue a prototype climate-related financial disclosure standard.
The IFRS Foundation trustees, meanwhile, are considering creating a new international global sustainability reporting standards board that would operate under the trustees’ governance. A proposal is expected by the end of September.
If the push that’s underway from the SEC and other bodies leads to a regulatory regime for ESG reporting and disclosure, it will also give companies a reason to establish governance processes and internal control environments that address the recording and reporting of the necessary information and documentation, Smyth said. Companies may also realize some benefits as external auditors and an independent attestation processes are brought into the reporting flow.
“As a result of having an external lens on it, the company will get better at the process for pulling the information together, making sure that it’s in a good format,” Smyth said. “It protects the company.”
Judging from data collected by the CAQ, approximately 80% of the large companies the group surveyed are obtaining some form of assurance on portions of their reported ESG information, but only approximately 11% are relying on public company auditors for this assurance, said Julie Bell Lindsay, the CAQ’s CEO.
SASB CEO Janine Guillot expects the reliance upon external assurance to increase, particularly as regulators in the United States and overseas issue ESG requirements.
“I think we’ll see increasing pull from audit committees as audit committees come to understand this information is being used by investors,” Guillot said.
“The more you can position that information, that communication, in a manner that can be more easily consumed, accessed, and acted upon, the more valuable that will be,” Sullivan said, explaining why she expects the demand for external attestation to increase.
The interest in ESG information among corporate boards and directors is already on the upswing, said Deborah DeHaas, the CEO for the Corporate Leadership Center. One company for which she is a director went as far as establishing a board committee focused on ESG topics. The focus is also tied into executive compensation practices, and external auditors may be required to ensure that companies are properly documenting and reporting ESG metrics and whether they’ve been achieved.
“That will bring the audit committee into this conversation,” DeHaas said.
For their part, the SEC’s leadership believes they need to address significant gaps in the existing regulatory regime as they relate to ESG matters.
“We must not operate under the false assumption that the securities laws already effectively elicit the information investors need,” SEC Commissioner and Acting Chair Allison Herren Lee told attendees at Monday’s virtual session.
Even if regulators and standard setters were not making concerted efforts to require companies to divulge more information about their efforts to address sustainability and ESG concerns, companies and their auditors would probably have to add more detailed disclosures on these topics to meet investor demands.
“Our investment policies formally recognize that ESG factors can affect risks and returns,” said Scott Zdrazil, senior investment officer of the Los Angeles County Employees Retirement Association.
Ray Cameron, head of the Americas for BlackRock Inc.’s investment stewardship practice, said ESG concerns are now a regular topic of discussion between BlackRock representatives and executives and directors at the companies it invests in when they consider the resolutions that can be expected to come to a shareholder vote at annual meetings. ESG matters have in recent years become a primary concern for the investors among BlackRock’s client base, and BlackRock and its clients now consider ESG performance when assessing a company’s prospects as a long-term investment.
“We think the disclosures are critically important in terms of helping investors understand where companies are on their journey, how they’re assessing risks,” Cameron said.
— Joseph Radigan is a financial writer based in New York. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s editorial director, at Kenneth.Tysiac@aicpa-cima.com.