The Center for Audit Quality (CAQ) and American Institute of Certified Public Accountants (AICPA) recently released a new roadmap that provides tools for independent auditors to support companies in achieving their environmental, social, and governance (ESG) reporting goals.
The CAQ and AICPA believe the report is being released at a “watershed moment,” because investors and consumers are making more decisions based on ESG reporting and transparency and reliability of ESG information are critical.
ESG reporting has been in the spotlight in recent weeks. The Biden administration has made climate change a significant focus area of its policy agenda, including at multiple U.S. regulatory agencies.
The Securities and Exchange Commission (SEC) is working on updates to its 2010 guidance on disclosure of climate-related risks, announcing last week that it is developing “a more comprehensive framework that produces consistent, comparable, and reliable climate-related disclosures.” At his Senate confirmation hearing Tuesday, Gary Gensler, President Joe Biden’s nominee to lead the agency, indicated his support when he said, “In 2021, there’s tens of trillions of dollars of invested assets that are looking for more information about climate risk. And I think then the SEC has a role to play to bring some consistency and comparability to those guidelines.”
“The auditing profession brings accountability and objectivity to the review of company-reported information, and their skills are transferable to information like ESG data.”
Dennis McGowan, Senior Director, Professional Practice, Center for Audit Quality
Of course, ESG covers more than “environmental” issues like pollution, natural resources, and climate change. It also includes “social” issues of diversity and inclusion, employee health and safety, values, and supply chain issues; and “governance” issues like board composition, executive compensation, and corporate policies on political action committees and lobbying.
“Companies are in different places in their ESG reporting journey,” said Dennis McGowan, senior director, professional practice at the CAQ. “Some companies have been doing it voluntarily for years, and there has been some level of assurance. Auditors are playing a role, and they can continue to enhance the quality and reliability of ESG information.”
The CAQ/AICPA roadmap is a resource to all the parties in the financial reporting ecosystem: management, audit committees, and auditors. It is not detailed guidance, but instead is intended to support increased dialogue about this topic. McGowan hopes it will be a resource that can be referred to over time, not just a one-time read.
There are sections in the roadmap on where and how to report ESG information in SEC filings, whether to engage an accounting firm for attestation of the information, and auditors’ reporting on it. ESG reporting historically has been outside of SEC reporting, but increasingly there is demand for public companies to include ESG data in their annual and quarterly reports, Form 8-Ks, and proxy statements—and for auditors to attest to its reliability. “The auditing profession brings accountability and objectivity to the review of company-reported information, and their skills are transferable to information like ESG data,” McGowan said.
The roadmap includes overview and background information on the history of ESG reporting and why its use is expanding, along with risks and legal considerations for companies considering including ESG reporting in SEC filings and for auditors’ attestations. Although it highlights ESG reporting in SEC filings, it is also useful for nonpublic companies making decisions about ESG information and their auditors. There are also case studies of companies that reported ESG information in SEC filings along with an auditor attestation report on it.
The AICPA is supportive of the increasing role auditors can play in attestation of ESG information. “They have had a sustainability advisory task force with representatives from accounting firms and preparers for a number of years, and their attestation framework for public companies can be applied to attestation of ESG reporting,” McGowan said. “For practitioners to provide assurance, what needs careful consideration in this newer space is what information is included in the scope of reporting, whether the evidence about the data is suitable, and whether the framework used is acceptable under the standards.”
The roadmap includes an appendix of key sustainability reporting frameworks and standards, including the Sustainability Accounting Standards Board (SASB) and Global Reporting Initiative (GRI) standards, and their intended use and benefits. “SASB has industry-specific standards for ESG factors so companies can focus on those that are financially material, while GRI is more geared to a broader audience and the impact on people and planet,” McGowan said.
There is a separate appendix in the roadmap on establishing effective governance for ESG reporting. “Because ESG reporting is typically not within the finance function today, there is a need for good governance,” McGowan suggested.
The roadmap offers that, “establishing appropriate governance over the reporting of ESG information is a journey. Companies that are just starting out should identify their most material matters to address, begin with them, and grow from there. This process takes time.”