Firms grapple with sustainability reporting and assurance

Most companies are providing some disclosures about their sustainability efforts, but not as many are getting assurance on their numbers from auditing firms. Many of the biggest greenhouse gas emitters aren't disclosing their true impact on the climate.

The International Financial Reporting Standards Foundation, which oversees the International Sustainability Standards Board, hosted a symposium Thursday in New York to discuss climate-related disclosures, sustainability reporting standards and assurance. The symposium occurred as a pair of reports emerged that provided conflicting views of progress on those efforts.

"The question is, what is the momentum that we want to create?" said ISSB chair Emmanuel Faber. "It's a question of acting because no one that acts for promoting and creating the global, comparable consistent framework that we are proposing is actually supporting the tipping point of fragmentation. It's a call for action here in this audience, and also beyond this room. We won't succeed alone. We are working in the public interest of capital markets. We believe that with better information, capital markets will make better decisions, and that's going to be good for businesses. That's going to help capital providers as well because they will price the risks and opportunities appropriately, which they can't today. If you think at the macro level, it means that the language that we're developing may mean that the local needs for more resilient economies can be met by global finance if that language prevails. The choice if it prevails or not is in our hands."

He announced that the ISSB is publishing a widely expected document previewing its guide for implementing its sustainability and climate disclosure standards in various jurisdictions around the world, as promised to the International Organization of Securities Commissions. "We committed to IOSCO last summer that this document would be available for jurisdictions, regulators and national standard-setters," said Faber. "Think about the best way and the appropriate way for them to start engaging on the journey of establishing sustainability disclosure systems, and what is the role that they want the ISSB standards to play in this journey for them. This guide will help us support jurisdictions in a proportionate way, in a manner that will help them succeed because if they do not succeed, there will not be success in our mission."

He noted that over 15 jurisdictions are now consulting or preparing to consult on the S1 and S2 standards for sustainability and climate-related disclosures that the ISSB has prepared. The ISSB released the standards last year.

"Those jurisdictions probably account for about half of the global greenhouse gas emissions in the world," said Faber.

Contrasting reports

Sustainability reporting is spreading, but assurance on vetting those reports is lagging. A separate report released Thursday by the International Federation of Accountants and the AICPA & CIMA found that the majority of companies reported some level of detail on sustainability, while many also get assurance on at least some of their sustainability disclosures. The study found that over half of companies use Sustainability Accounting Standards Board standards and the Task Force on Climate-related Financial Disclosures framework, which are both now overseen by the ISSB. 

The report found that nearly all the companies reviewed (98%) report some information on sustainability. That's an increase from 91% in 2019, when IFAC and AICPA & CIMA first began conducting research in this area.  Approximately 1,400 companies were reviewed for the report — 100 from each of the largest six economies, with 50 companies reviewed in the remaining 16 jurisdictions. 

However, use of standalone sustainability reports has declined by 27 percentage points in the past three years. Only 30% of the companies in the study used a standalone sustainability report in 2022, reflecting the growing inclusion of that information in companies' annual or integrated reports.

Meanwhile 69% of companies obtained assurance on at least some of their sustainability disclosures, up five percentage points from last year and 18 percentage points from 2019. The scope of assurance areas has expanded, but remains limited in general.

Accounting firms (as opposed to consultants or other service providers) handled 58% of the assurance engagements related to sustainability in 2022, one percentage point better than the previous year.  Some markets, such as the U.S., fall well below 50%.

"When companies use accounting firms for sustainability assurance, they're more likely to choose the same firm they use to audit their financial statements," said Sue Coffey, CEO of public accounting at the AICPA & CIMA, in a statement. "Because the level of confidence with and reliability on sustainability disclosure should be the same as financial information, we expect more companies will recognize that accounting firms are best suited for this critical work. We think this is a likely driver behind the increase from 16% to 23% for U.S. accounting firms performing this work."

Greenhouse gas emissions impact

However, a separate report released Thursday by the Carbon Tracker Initiative found that 140 of the biggest emitters of greenhouse gas emissions are still failing to report on their true climate impact. It noted that only 40% are providing some information in financial statements and audit reports, barely up from 35% a year ago. Only 37% of companies' financial statements provide investors with some information on how they incorporate climate-related financial risks. But investors in the remaining 63% of companies cannot see whether the corporate balance sheets reflect climate impacts. Nevertheless, all of the Big Four audit firms have committed to the goal of achieving net zero emissions by 2050, as members of the Net Zero Financial Service Providers Alliance, and over 100 of the 140 companies have set net zero targets, even though they're among the highest greenhouse gas emitters.

"Our focus isn't actually on sustainability reporting," said Robert Schuwerk, executive director of Carbon Tracker's North American office. "It's on the actual corporate financial reporting where they are obligated to apply additional scrutiny. Our concern is that we've seen the standard-setters indicate that climate risks, like other risks, need to be taken into account as part of the audit evaluation. We are not seeing evidence that is transpiring. That doesn't mean it hasn't happened, but we're not seeing evidence of that in the reports."

Of the 140 companies in the study, 60% failed to provide meaningful information on whether and how climate risk and the energy transition will affect their balance sheets and audits today. Auditors continued to lag behind companies in providing transparency, with 80% providing little to no evidence of consideration in their audits, according to the report. Of the 32 U.S. companies assessed by Carbon Tracker, none of the audit reports indicated consideration of climate matters — even when identifying assets or liabilities that are exposed to climate-related risks as critical audit matters. Approximately 20% of the audit reports showed signs of at least some assessment of climate matters in the audit. Of these, four auditors improved their year-on year scores for evidence of consideration, but only one, Deloitte, met both audit report metrics, for its audit report on BP.

The Securities and Exchange Commission is reportedly close to finalizing the long-awaited climate disclosure rule it proposed nearly two years ago, but it's unclear how much of the original proposal will be scaled back as the SEC has come under pressure from business interests. Nevertheless, the final rule when it's issued could prompt more companies to make sustainability disclosures and get assurance on them.

"One part of the consultation deals with the financial statements, and both reiterates the obligations that already exist and provides a more prescriptive set of requirements related to the disclosure not only of assumptions, but also the potential impact of climate-related matters on those assumptions," said Schuwerk. "We don't know what form that will survive in the final rule. But to the extent some of it does, I would fully expect that's going to be onboarded by U.S. companies. And it would be helpful too because what our reporting shows is that even on very, very basic things, we see American companies underreporting compared to peers in the same sectors in Europe, for example."

Setting worldwide standards

At the IFRS Foundation Sustainability Symposium, the progress on standards in different parts of the world, such as the European Sustainability Reporting Standards, was a topic of discussion. 

"We have worked very closely with the EU on the development of their standards to try to ensure as far as we possibly can in the context of climate in particular where the sets of standards overlap," said ISSB member Richard Barker. "We've managed to ensure that European standards use the same definition of investor materiality that was built into our standard. So embedded within the umbrella of ESRS in effect is IFRS. There are considerable additional disclosure requirements in ESRS, so it's a much bigger reporting exercise, but embedded within is investor reporting in a way that can be applied globally. This is absolutely critical so if you're reporting according to European standards, you could also be reporting to global standards."

The ISSB hopes to spread those standards worldwide. "We wanted to make sure that preparers around the world feel comfortable and ready to adopt our standards," said ISSB vice-chair Jingdong Hua. "It means that whether you are listed here in New York or Sao Paolo, Tokyo or Jakarta, Lagos or Johannesburg, Shanghai or Singapore, Frankfurt or Dubai, we wanted to make sure that we provide capacity-building support, to provide the enabling environment so that we can establish that global baseline of a single language of sustainability."