Accounting firms and audit committees focus on ESG for Earth Day

Hanah Lopes

With Earth Day coming up on Friday, accounting firms and audit committees are turning their attention increasingly toward environmental matters to help their clients adjust to new demands for climate and sustainability reporting.

The Securities and Exchange Commission released a long-awaited proposed rule for climate-related disclosures last month (see story). Under the proposal, companies would be required to include information about climate-related risks that are reasonably likely to have a material impact on their business, the results of their operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.

“Today investors representing literally tens of trillions of dollars support climate risk disclosure,” said SEC chair Gary Gensler during a webinar last week hosted by the sustainability investing group Ceres. “Why is that? It’s because investors recognize that climate change can pose significant financial risk to companies, and investors need reliable information about those risks to make informed investment decisions.”

climate Photographer: Luke Sharrett/Bloomberg

Luke Sharrett/Photographer: Luke Sharrett/Bloo

The audit committees on corporate boards are also growing more interested in climate change risks to their companies and are looking to accountants and auditors to help with environmental, social and governance (ESG) reporting.

“This is a wakeup call for companies as they are now looking at a set of regulations they knew were coming,” said Kris Pederson, who leads the Ernst & Young Americas Center for Board Matters. “Now that they have published at least a proposal, there’s a lot in the regs to decipher from a board perspective. First, the oversight and governance of climate risk must be divulged as part of the board’s role, so I think the board gets in the game on these regs straight off.”

She sees links between climate risk, enterprise risk management and scenario analysis for audit committees in the proposed rule.

For many audit committees, the SEC proposal will represent a big change, but others have been dealing with sustainability reporting at their companies for years.

“There’s a continuum of where public companies are on climate, how it relates to financial reporting and how it’s been handled in the past,” said Patrick Niemann, leader of the Ernst & Young Americas Center’s Audit Committee Forum. “Some companies have for years issued sustainability reports or they’re very active in talking about climate on their websites and in their earnings calls and so forth. But this is the first time where there’s been a requirement to disclose certain things about climate in SEC reporting.”

That will mean different things to different companies, not just in terms of the information itself, but the sources of that information, he noted. “Climate sits in different places on different boards,” said Niemann. “For some companies, it’s a full board issue, while some have ESG committees, some have risk committees, and for some it fits in the purview of the audit committee. But if this proposal goes through, it would require financial and nonfinancial disclosures in SEC fIlings, including the 10-K document. There’s no doubt about the audit committee’s involvement in climate, and this falls squarely within the purview of the audit committee. That’s different than it might have been before with a lot of audit committees.”

Around the same time the SEC unveiled its climate disclosure proposal, the International Sustainability Standards Board, the newly established board overseen by the International Financial Reporting Standards Foundation, proposed its own standards for climate disclosure and sustainability (see story).

Both the SEC and ISSB proposals cite frameworks from the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures and the Greenhouse Gas Protocol. ISSB chair Emmanuel Faber doubts the U.S. would adopt the ISSB standards in total from a legal standpoint, but he can envision them working in tandem.

“I don’t think the SEC is going to say, let’s take and adopt everything,” said Faber during a recent Bloomberg Sustainable Business Summit in London. “We are working with jurisdictions, including the U.S., in order to make sure our standards are going to be supplemental, complementary and compatible with their rulings, and this is where the dual approach of jurisdictional dialogue and engagement, and market dialogue and engagement, is for us.”

ESG reporting and assurance can help the accounting profession move into a new and vital area. “This is an opportunity for the accounting profession to raise its game and think of this as a pivotal point in its progression as an industry and as a profession,” said Pederson. “For companies that just think of this as reporting, this is an opportunity for the CFO and the accounting professionals to think about this as a way to portray value. This isn’t just about climate disclosure. This is for companies to be able to attest in new ways of how to quantify those intangible value drivers like climate to the Street. Investors are looking for ways to level the playing field and understand truly what businesses are up to on climate. I think it’s the profession’s opportunity to help translate that value and think about quantifying those intangible drivers of value and be a strategic partner to the board and the audit committee.”

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