Sustainability reporting grows, but questions remain about accuracy

While corporate sustainability reporting continues to grow amid demands from investors and regulators, problems persist with the reliability of the information and the role of accounting firms in vetting the disclosures.

KPMG released the latest edition of its global Survey of Sustainability Reporting: Big shifts, small steps, on Tuesday. The report found that all of the top 100 U.S. companies provide environmental, social and governance disclosures and, of the world's top 250 companies, 96% are providing some form of sustainability reporting. Within the U.S., 23% of the top 100 companies have sustainability representation at the leadership level. Many companies are overhauling their governance structures over ESG, forming steering committees made up of executive leaders who make strategic decisions about commitments, actions and disclosures. 

While the Global Reporting Initiative standards are the most popular reporting standards around the world, the Sustainability Accounting Standards Board standards are the most popular in the U.S. with 75% of the top 100 companies reporting against it. SASB and its parent organization, the Value Reporting Foundation, were consolidated into the International Sustainability Standards Board earlier this year. The Financial Stability Board's Task Force on Climate-related Financial Disclosures recommendations are popular as well with 64% reporting in line with it. Both the ISSB standards and the proposed climate-related disclosures from the Securities and Exchange reference the TCFD framework.

For U.S. companies, the KPMG report also found that 43% of the survey respondents acknowledge climate change as a risk to the business, while 13% acknowledge social elements as a risk to the business. Only 4% acknowledge governance elements as a risk to the business in their annual financial or integrated report.

Bartek Sadowski/Bloomberg

The accelerating pace of climate change is a growing concern to companies facing risks from floods, wildfires, hurricanes and other natural disasters. High-profile United Nations climate conferences and urgent reports from the Intergovernmental Panel on Climate Change have so far produced little impact on driving down temperatures and sea levels. 

"Last year, scientists from the IPCC warned the world was on 'Code Red' for human driven global warming," said John McCalla-Leacy, head of global ESG at KPMG International in a statement. "It was followed by a number of commitments from political leaders at COP26. As we head towards COP27, immediate action is now needed to avert human and environmental tragedies on an ever-increasing scale."

Accounting firms are increasingly offering ESG assurance services to help companies prepare their disclosures and check them. The Center for Audit Quality has been analyzing the ESG reports from S&P 500 companies and how many of them have been receiving assurance services from auditing firms and other providers. On Tuesday, the CAQ published its latest analysis reflecting 2020 trends. It found that over 60% of S&P 500 companies that issued an ESG report disclosing data received some form of assurance or verification from a third party. The analysis also found that 15% of the assurance providers engaged were accounting firms, a slight uptick from the CAQ's previous report (see story). This time, the CAQ also looked at the scope of greenhouse gas emission assurance and found an upward trend in assurance over Scope 3 items, which relate to emissions from third parties such as suppliers and customers.

Even companies that are getting assurance from accounting firms on their sustainability efforts may be falling short. A report released this month by Carbon Tracker found that of 134 multinational companies responsible for up to 80% of corporate industrial greenhouse gas emissions, 98% did not provide sufficient evidence that their financial statements include the impacts of climate-related matters. The companies surveyed by the group included multinationals in the fossil fuel, mining, manufacturing, automotive and technology sectors. None of the companies met all the Climate Action 100+ Climate Accounting and Audit Assessment (CAAA) methodology metric requirements, which includes analysis of company financial statements. Only eight, or 6%, received "partial" scores by providing all the

information required by the CAAA methodology for at least one of the seven metrics used to assess them. The remaining 126 companies and their auditors did not meet any of the requirements.

"Even after adjusting for changes in the methodology since last year and despite some improvements in disclosure, no CA100+ focus company provided all of the information required by the relevant standards or requested by investors," said Barbara Davidson, Carbon Tracker's head of accounting, audit and disclosure, in a statement. "This is despite the fact that most companies operate across a range of high emitting sectors including oil and gas, mining, transportation and industrials. Many asset and liability values rely on forward-looking assumptions.  When companies don't take climate-related matters into account, their financial statements may include overstated assets, understated liabilities and overstated profits." 

When the reports were available, analysts at Carbon Tracker also reviewed audit committee reports or the equivalent, but found they often don't mention climate risks. Even when they do, most audit committees fail to consider the impacts of climate-related issues on company financial statements, suggesting that audit committees are not providing enough oversight on these matters.