As companies find that customers and investors are looking for more and more disclosures of what they are doing about environmental issues, climate change risks, and diversity and racial justice, accounting firms are starting to provide assurance and attestation services around environmental, social and governance reporting to meet that growing demand.
While the Big Four have been providing sustainability-related services for years, smaller firms are starting to move cautiously into the space. They are leveraging some of the standards that have been developed by groups like the Sustainability Accounting Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, the Climate Disclosure Standards Board and the Carbon Disclosure Project. Those groups are currently working on harmonizing their standards and frameworks, laying the groundwork for an international sustainability standards board that the International Financial Reporting Standards Foundation has proposed creating, and which it would oversee alongside the International Accounting Standards Board.
Outside the reporting frameworks, some certifications are also gaining corporate adherents, such as the B Corp certification from B Lab, and accounting firms are helping clients gain compliance. “We launched our Sensiba Center for Sustainability in the fall of last year, and it really hit the ground running,” said Jennifer Cantero, director of marketing and sustainability at Sensiba San Filippo, a Regional Leader in Pleasanton, California. “We’ve got some folks reaching out for B Corp certification assistance. A lot of our current clients and new clients — folks we haven’t even had a chance to meet yet — are reaching out because we are one of the few firms that are doing this right now.”
Besides B Corp certification, Sensiba also offers SASB compliance services. “In the private company world, we don’t have any required reporting under SASB, but the SASB framework provides a really good roadmap for businesses to look at,” said audit partner Scott Anderson. “It’s more introspective. What do we need to do to be more sustainable? What are the risks we aren’t currently thinking about? It’s just a really good framework to be able to evaluate your business on.”
Reporting what matters
The increasing popularity of ESG funds among investors has prompted the Securities and Exchange Commission to focus more on the trend under its acting chair, Allison Herren Lee. In particular, the SEC has sharpened its focus on climate-related financial disclosures. The SEC issued a risk alert in April about “potentially misleading statements regarding ESG investing processes and representations” during examinations of investment advisors, registered investment companies and private funds engaged in ESG investing.
Accountants and auditors could provide better assurance around such claims to investors. “There are a lot of companies saying they’re eco-friendly or environmentally conscious when really it’s greenwashing and marketing spin,” said Cantero. “This actually gets a stamp where we’ve literally had our assessment audited by a third party and say we’re doing all of the things in terms of governance, how we treat our customers, how we treat our clients, how we treat our community, and then how we’re treating our resources and environment.”
Accounting groups like the American Institute of CPAs and the Institute of Management Accountants have been encouraging accountants to get more involved in ESG reporting. The AICPA is promoting the concept of attestation and assurance services for ESG reporting.
“Of the S&P 500, 90 percent of those companies published sustainability reports in 2019, and only 29 percent of those 90 percent who reported sustainability information actually subjected it to an external assurance engagement,” said Desiré Carroll, senior manager with the Association of International Certified Professional Accountants. “Firms are really anticipating an increase in demand for those services.”
“In outreach we did with some of our members toward the end of last year,” she continued. “we heard from those firms that are performing these services that the majority of them anticipate the need for assurance services to increase significantly over the next few years. In addition to the assurance services that they’re providing, they’re also being engaged on the advisory side to help companies with the measurement and reporting of their ESG information, and as part of that, helping implement appropriate processes, systems and internal controls over the reporting, very much the same way they do over financial reporting.”
The AICPA is recommending that companies incorporate management of ESG risks into their broader enterprise risk management processes, as well as determine what key performance indicators are most relevant and important for stakeholders, and the sustainability reporting standard or framework that will be used for reporting.
“They need to identify what their material ESG matters are, and then integrate that into their broader strategy for risk management, and also then build appropriate processes, systems and internal controls around the data gathering and reporting of that information,” said Carroll. “One of the ways firms are helping companies prepare as they’re trying to improve their data quality and determine whether they’re ready for assurance engagements is helping them by performing assurance readiness assessments.”
Are clients ready?
One firm that’s been helping clients with ESG reporting while leveraging assurance services from the AICPA is Berkowitz Pollack Brant, which has been providing such services for almost two years.
“This has become a focal point,” said Brent Leslie, director of audit and attest services at the Miami-based Top 100 Firm. “We’ve gotten a lot more involved with it and we’ve learned a ton about it. Something like 90 percent of public companies are publishing their ESG reporting on their website. The problem is that for a long time there was no set of rules or regulations for what could be published, so companies have been able to just basically publish anything they want and it’s not been substantiated.”
The firm started offering the services because of a request from a client that was applying for an international award and needed an independent opinion or attestation for its ESG data to qualify. BPB started doing attestation arrangements for the client, including reviews and examinations of where they were in the ESG process.
“An examination of a financial statement is more equivalent to an audit, whereas a review is more equivalent to a review of the more traditional financial statement things,” said Leslie. “But in order to get to that point where you can audit, they have to have processes, controls and documented procedures. We found that a lot of companies aren’t quite ready for that step yet, but we can get to a review opinion and understand their processes.”
In some instances, clients haven’t been far enough along for a full review opinion either, and the firm helps them with agreed-upon procedures and recommendations to help them get to the next step so they will be ready for a review or an examination in future years. Their readiness may depend on the industry they are in.
“Of the ones that we’ve talked to so far, I would say 50 to 70 percent of them are probably able to get to that review level, but don’t quite have all the documentation they need to get to a full audit opinion or a full examination opinion on that work,” said Leslie. “Then there are the people that are dabbling in this and saying, ‘We want to get there. We know we’re not ready. What are the next steps? How do we do this?’ That’s probably about 25 percent of what we’ve seen.”
Companies are using ESG reporting in different ways than financial statements. “Whereas financial statements are pretty much to attract lending or capital or investors, I think these are being used to attract everything from new employees to customers,” said Leslie. “There are all kinds of uses of this information. In some countries there are even governmental uses where they’re required to report this information to their governments. Also in the Northeast, now that a carbon tax has started to take hold, they’re going to have to have something similar to this to be able to substantiate how much their carbon output was. There’s a myriad of potential uses.”
Big Four firms like KPMG have been involving their audit departments with ESG assurance services. “The information that companies report on is only as good as its underlying reliability,” said Larry Bradley, global head of audit at KPMG. “Reliability will be driven by consistency. Consistency will be driven by adhering to the standards. There is a significant role to play by the profession in this regard.”
PricewaterhouseCoopers has also been involved in providing assurance on ESG information for clients. “How does a board know that the data is high quality and investment grade? That’s where assurance comes in,” said Wes Bricker, vice chair and assurance leader at the Big Four firm. “Boards are looking for assurance that the information is at the same level of quality that investors expect, and we’re responding to that call with assurance offerings.”
Firms of all sizes are starting to see the need to provide assurance on ESG services to clients as more stakeholders demand such information. “I think sustainability is the biggest disrupter in business right now,” said SSF’s Cantero. “We’re right on that tail of the upward swoop. It is here, and it is not a matter of if somebody is going to be doing this reporting, but only a matter of when.”
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