The American Institute of CPAs and the Center for Audit Quality both submitted comments to the Securities and Exchange Commission expressing support for climate change disclosures by companies.
The SEC
The SEC is stepping up its work on ESG standards in line with the Biden administration’s commitment to addressing climate change by rejoining the Paris climate accord and working with other countries to reduce carbon emissions. The SEC and other international financial regulators have been pressing ESG standard-setters to harmonize their often differing standards, while the International Financial Reporting Standards Foundation has proposed the creation of an International Sustainability Standards Board that it would oversee alongside the International Accounting Standards Board.
The AICPA said it supports the SEC’s exploration of climate change and wider ESG disclosures. “In today’s global economy, as much as 80% of the value of many companies is comprised of intellectual property, brand, customer value, and other intangible assets that are not fully valued on the balance sheet,” wrote AICPA CEO of public accounting Susan Coffey in a nine-page letter to SEC chairman Gary Gensler last Friday. “It has also been noted that as much as 85% of a company’s costs are related to its people. In this context, it is increasingly important to investors that they have relevant disclosures about the collective drivers of short, medium, and long-term value, and investors having this information is critical to the effective functioning of our capital markets.”
The AICPA said it supports the SEC seeking input on climate-related disclosures to provide more consistent, and reliable information for investors and registrants. It also supports the proposition that any climate-related disclosures be based on existing frameworks and standards and be aligned with the Task Force of Climate Related Financial Disclosures (TCFD) framework, Sustainability Accounting Standards Board (SASB) standards and ultimately be compatible with emerging international developments, in particular, the formation of the IFRS Foundation International Sustainability Standards Board (ISSB) whose proposed objective is to set global sustainability standards under the Foundation’s governance structure.
The AICPA also indicated it supports the SEC’s consideration of assurance over climate-related disclosures, and contended that CPAs are uniquely qualified to enhance the reliability of ESG disclosures through assurance services. The AICPA also said it supports additional measures to ensure reliability, which includes having effective internal controls and processes in place with respect to ESG information. COSO’s Internal Control – Integrated Framework (ICIF) and the knowledge gained in using it, can be effectively leveraged and applied in the context of ESG disclosures.
The AICPA called for digitization of ESG data using XBRL to offer users a cost-effective manner to consume this information similarly to how they consume financial information, and suggested a transition period may be necessary for issuers to report complete, accurate and reliable ESG information. It believes a safe harbor from liability for forward-looking disclosures be considered.
In the letter, Coffey emphasized it’s essential that all market participants work toward a comprehensive global reporting solution that provides insight into how an enterprise leverages its array of resources to create value over the long term, including ESG disclosures.
CAQ response
The Center for Audit Quality also sent a comment letter Friday to the SEC expressing support for a globally accepted ESG reporting system. It would be built from existing standards and frameworks that can be adapted to meet the needs of investors in different jurisdictions. In its response to the SEC’s request for public input, the CAQ also said that assurance of climate-related and other company-prepared ESG information performed by a public company auditor can enhance the reliability of this information and offer increased investor protection.
“ESG reporting is no longer an emerging trend, but has become necessary information that investors have come to expect,” said CAQ executive director Julie Bell Lindsay. “Public company auditors, in their public interest role, are uniquely equipped to draw on the same capabilities that underpin the high-quality U.S. financial reporting system to promote the flow of comparable, reliable ESG reporting that secures investor protection and confidence.”
She noted that the reliability of ESG reporting is only one of the critical issues to aid investors in evaluating ESG information; comparability also proves essential to investor trust and confidence. A CAQ analysis found that 11% of S&P 100 companies get some degree of ESG reporting assurance from a public company auditor.
“The CAQ supports the SEC’s important work to seek input on climate disclosures and other ESG matters to meet investors’ information needs,” said Lindsay. “The well-established structure and standards that exist in the U.S. for reporting on a company’s financial performance and the effectiveness of internal controls over financial reporting provide important building blocks when considering the standards and assurance of ESG and climate-related reporting.”
In the CAQ’s comment letter, the group acknowledged that if the SEC determines it’s appropriate to require issuers to make certain climate-related disclosures, the CAQ staff should consider the aspects of implementation, including transition periods, needed for issuers to reliably report such information.
Other groups weigh in
The AICPA and the CAQ haven’t been alone in supporting climate change disclosures. On Tuesday, 59 organizations and three leading securities academics
“To meet investor and issuer needs, the SEC must move swiftly to finalize mandatory disclosure rules for climate risk; stewardship of a just and equitable transition to a low carbon economy; human capital management; racial, economic, environmental, and climate justice; taxes; and political spending to avoid untenable growth of climate and ESG risk within our markets that harms investors, spurs the improper allocation of capital, and may increase the cost of capital for U.S. companies,” said the signers, who include Earth Action, Friends of the Earth US, the League of Conservation Voters, the National Resources Defense Council, Oxfam America, the Rainforest Action Network, the Union of Concerned Scientists and others.
Public Citizen and Americans for Financial Reform Education Fund also
