More global companies are doing sustainability reporting on environmental, social and governance issues, with some vetting by their accountants, but multiple standards and frameworks are getting in the way, according to a new report.
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"Even as we see companies increasingly report on ESG and sustainability, the data we're tracking reveals continuing fragmentation around the world in terms of which standards and frameworks are used," said IFAC CEO Kevin Dancey in a statement. "Eighty-six percent of companies use multiple standards and frameworks. This patchwork system does not support consistent, comparable, and reliable reporting. Importantly, it also does not provide the necessary foundation for globally consistent, high-quality sustainability assurance."
The report also looked at the extent to which companies provide forward-looking information on emissions reduction targets and plans. While two-thirds of companies disclosed emissions reduction targets, they lag the rate at which companies report their historic greenhouse gas emissions (97%).
"Steady increases in reporting and assurance are significant, yet more companies need to take the additional step to obtain assurance to build trust and confidence in what they report," said Susan Coffey, AICPA & CIMA's CEO of public accounting, in a statement. "Our profession's role in providing that assurance is crucial. CPAs have unquestioned competence, professional judgment and operate within a robust system built with public protection in mind. We should be the clear choice for instilling trust and value in ESG data around the world."
The report also found that use of standards from the Sustainability Accounting Standards Board and the Taskforce on Climate-related Financial Disclosures framework have increased significantly between 2019 and 2021, with a 29% increase for SASB standards usage and 30% for the TCFD framework.
While accounting firms perform more engagements, their market share — at 57% of sustainability and ESG assurance engagements — has actually declined from 63% in 2019, with other types of providers such as engineering and consulting firms competing for such engagements. When companies obtained assurance from a professional accountant, they chose their statutory auditor 70% of the time.
The use of stand-alone sustainability reports has declined globally over the 2019-21 reporting periods, with Canada, China's mainland, Hong Kong, South Korea and the U.S. being notable exceptions. Elsewhere ESG reporting in integrated reports (Brazil, France, Japan, India, Turkey, Singapore) and annual reports (Germany, Spain, Saudi Arabia, Indonesia, and Singapore) has increased. Over the three-year period studied, fewer companies relied on stand-alone sustainability reports while use of integrated and annual reports for ESG disclosures increased. Use of integrated reports surged in France from 2020 to 2021, increasing 44%). Thirty of the 50 companies reviewed included ESG information in a report consistent with the Integrated Reporting Framework. Globally, the number of reporting companies has steadily increased. In Saudi Arabia, reporting on ESG increased 24% in 2021, mainly in annual reports.
Globally, the International Auditing and Assurance Standards Board's International Standard on Assurance Engagement 3000 (Revised) remains the most popular standard when providing assurance, with 95% of firms providing assurance use ISAE 3000, up from 88% in 2019, and 38% of non-accountant service providers use ISAE 3000, up from 34% in 2019.The findings more or less agree with a
CFOs and internal auditors are also getting involved in ESG reporting. "If you think about ESG reporting and the role of the CFO in the past several years, with increasing frequency, they are less the financial reporting arm of the company and more of the purveyors of data," said Chris Wright, managing director and global lead of finance transformation and transaction services at the consulting firm Protiviti. "If you think about public companies, although they aren't currently required, unless it's material on climate related to doing reporting, it's a box with numbers, and if it's the CFO or the CEO who is going to be responsible for it, it's probably the CFO. Since it's her issue, the CFO is engaging with it, and of course, chief audit executives are being asked to make sure that data has had a good look before it goes out. Companies are aligning around frameworks, understanding how they're going to ensure data quality, and get consistency of reporting."
Dedicated ESG reporting tools are still a work in progress. "A lot of them are doing their early reporting using everyone's favorite reporting tool, Excel, and will look quickly to automate that, so that's not an exercise that has to occur in that way every 90 days for some of their quarterly reporting," said Wright.
He pointed to the results of the CAQ report as showing the diversity of standards and frameworks currently being used.
"It's not currently required, but something like 95% or more are already voluntarily reporting," said Wright. "A third or more are using four or more frameworks, and just under a third are using three, and more are using two than one. That's a lot of frameworks."
The International Sustainability Standards Board, which operates under the purview of the International Financial Reporting Standards Foundation, is hoping to unite companies around its standards for sustainability and climate-related disclosures. However, the Securities and Exchange Commission is also preparing to release its own rule on climate-related disclosures this year after its proposed rule received thousands of comments last year.
ISSB chair Emmanuel Faber said the board had been poring over the thousands of comments it received on its proposed standards during an IFRS Sustainability Symposium earlier this month in Montreal, incorporated the feedback received on the proposed standards and is moving to a balloting process. "Our substantial decisions are made," said Faber. "The substance of our final standards is now final. We're now moving into the balloting process with a view to publish the standards at the end of Q2 this year within an effective date of 2024."
Most midsized businesses aren't doing any ESG reporting at this point. According to a recent survey of 250 executives from public and private mid-market companies by UHY Advisors, only 45% of respondents said that their businesses were either "fully or partially compliant with any ESG requirements." Only 5% of respondents indicated they are "aggressively seeking consulting assistance for ESG implementation," while 50% of the respondents said they didn't view ESG as "an immediate priority." When asked what the biggest barriers to ESG implementation were, respondents cited cost (29%), consensus of relevant stakeholders (22%), and the complexity of the ESG risk management process (11%) as the biggest hurdles.
