Discussion Paper

✖This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy (https://www.aicpa-cima.com/help/privacy-policy) to learn more.

Journal of Accountancy

Why sustainability information matters to CPAs As demand for ESG data grows, so does the opportunity for accountants to help businesses meet reporting requirements.

By Janis Parthun, CPA June 1, 2024

PHOTO BY AVTG/ADOBE STOCK

As demand for ESG data grows, so does the opportunity for accountants to help businesses meet reporting requirements.

The increasing demand for sustainability data presents an opportunity for accountants and finance professionals. Driven by regulatory pressure and customer and investor demands, public and private businesses are increasingly required to produce environmental, social, and governance (ESG) information.

Public companies face an expanding canon of international, national, and domestic regulatory requirements to report and disclose sustainability and social matters. These requirements extend into supply chains. That means smaller private companies doing business with larger companies will also feel pressure to provide ESG information — because make no mistake, the term ESG may be falling out of favor, but that doesn’t change reporting requirements for greenhouse gas (GHG) emissions.

Take, for example, the new rule the Securities Exchange Commission adopted in March 2024, which is on hold for now because the SEC has issued a stay pending judicial review. The climate rule includes GHG emissions disclosure requirements and requirements to obtain independent assurance for the numbers reported. (See the chart “US Regulations,” below.)

Companies are encountering rising demand for incorporating ESG issues into their strategies and business models and are being held accountable to achieve their goals, because ESG-related information affects the cost of capital, risk management, and employee sentiment, as well as customer requirements through the supply chains.

Recent studies from McKinsey and NielsenIQ show that consumers are shifting their spending toward products that claim to be environmentally and socially responsible; products labeled “eco-friendly,” “fair trade,” and “environmentally sustainable” have averaged higher cumulative growth over a five-year period. Also, this past year, the European Banking Authority (EBA) proposed requirements to include environmental and social risk considerations in bank reserves and encourage the inclusion of environmental and social factors as part of external credit assessments by credit rating agencies.

For accountants and finance professionals, this presents a significant opportunity to use their financial reporting skills, help interpret the implications around reporting ESG-related data, advise companies to prepare for the assurance requirements, or be the preferred assurance partner for ESG-related information.

REGULATORY PRESSURES TO REPORTING AND OPERATIONS

GHG emissions are accounted for as direct emissions, also known as Scope 1, which are controlled by a company, and indirect emissions, which are divided into two distinct types. Scope 2 emissions are generated by the production of electricity, steam, heat, or cooling that a company purchases. Emissions generated by external parties a company uses to create and deliver products or services are referred to as part of the value chain, or Scope 3 emissions. (See the sidebar “Regulatory Demands Are Deepening Transparency,” near the bottom of this article.)

Indirect emissions from a company’s supply chain may be significant. On average, they amount to 11.4 times a company’s direct emissions, according to CDP, a not-for-profit that helps investors, companies, and governmental entities manage their environmental impact disclosures.

As public companies are required to disclose appropriately, here are some key regulations to provide perspective of how private companies are also affected:

In March 2024, the SEC adopted rules requiring public companies and companies in public offerings to provide climate-related disclosures. Large accelerated filers will have to initially disclose climate-related activities for fiscal years beginning in 2025 (to be filed in 2026) but have additional time to report Scope 1 and Scope 2 GHG emissions in the following year. Limited assurance requirements will apply to fiscal years beginning in 2029 (to be completed in 2030) and reasonable assurance four years after. Applicable accelerated filers will follow with disclosure of Scope 1 and 2 GHG emissions for fiscal years beginning in 2028, with limited assurance three years after and exempt on reasonable assurance requirements. (See the chart “US Regulations.”)

The California Senate is also pushing for companies to report and disclose organizations’ climate impact. California recently enacted two laws requiring companies to report their carbon emissions–related activities (Cal. S.B. 253 and Cal. S.B. 261). These rules also apply to public and private companies that “do business in California,” which will likely be determined by payroll or sales taxes in the future. And the requirement to first report in 2026 means gathering 2025 data, which is less than a year away. (See the chart “US Regulations.”)

On the international front, the push for broader regulations on ESG-related disclosures is happening quickly and advancing further than in the United States. (See the chart “International Regulations,” below.) First, there is the International Sustainability Standards Board (ISSB), which was created by the IFRS Foundation, a public interest

organization that develops globally acceptable accounting — and now sustainability — standards. The ISSB issued two standards in June 2023, which are mandated if a country or jurisdictional authority decides that companies should comply. Brazil was one of the first countries to announce its adoption of the standards.

In the European Union (EU), the European Commission adopted a new rule, the Corporate Sustainability Reporting Directive (CSRD), that requires companies to publish detailed information on sustainability matters. The objective is to increase a company’s accountability and prevent divergent sustainability standards. This rule has a significant ask: 10 specific topical areas to report, spanning from climate to workforce to business conduct.

One of the biggest challenges organizations will continue to face in 2024 is navigating the complex ecosystem of regulations and standards related to ESG and climate-related reporting disclosures from different regulatory or organizational bodies, each communicating some element of reporting standards or requirements. Companies are pushing for consolidation or alignment from the regulatory bodies, and we are seeing some progress. For example, the Task Force on Climate-Related Financial Disclosures (TCFD) framework is now under the oversight of the ISSB standards in 2024.

COLLECTING AND BUILDING TRUST IN ESG DATA

Collecting ESG data to perform calculations or understanding if the data is reliably complete and accurate can be challenging for organizations. Accountants and finance professionals can help tackle these challenges.

For example, an organization may be in an early stage of reporting ESG-related metrics, e.g., a private company or a company in a middle market obtaining data from external parties. That data could include, for example, power usage from leased buildings, with the data obtained through property management; refrigerant usage from HVAC systems of buildings owned, with the data collected when the external party comes in to service the equipment or building; or for a company in the food industry, having to obtain supplier data from, say, farms of all sizes to determine Scope 3 emissions. Because this data comes from third parties, some estimation approach may be necessary.

Once the data is collected, there may be data quality issues. The quality of information reported may be inconsistent across an organization or have varying degrees of reliability — which can happen in public and private companies.

Incorporating governance and risk management into processes can ease stakeholder concerns around data quality and manage reputational risk for the company. Leveraging technology to automate and streamline processes can also be beneficial. But building internal controls into an organization’s ESG reporting efforts would elevate the trust around what is being reported out and minimize risks if your organization intends to undertake an audit.

Accountants and finance professionals can provide process structures for sustainability reporting. This could include developing standard processes for data collection with associated reviewers and workflow with signoff functions; building similar support structures such as a collaboration site to centralize communication of requirements with dates, processes, and sources; and training.

The same holds true for operational reporting, as organizations are setting goals and targets to monitor and working across multiple stakeholders. Finance professionals can bring structure and precision to the process outcome.

They can also play a role in educating nonfinancial process or data owners, who may not have been involved in regulatory reporting or an audit, to strive for or achieve the level of detail and quality of information expected.

ESTABLISHING GOVERNANCE, OVERSIGHT, AND RISK MANAGEMENT

To have a purposeful ESG program, it is essential to have a governance structure to manage the ecosystem of ESG information across functions, minimize associated organizational risks, and make decisions appropriately and timely. Organizations should also have a governance structure at the management level, with committees or working groups established to have a formal management oversight structure, reporting lines, and accountability.

These are key internal control principles and focus elements to governing ESG matters, such as the assignment of responsibility over ESG disclosures and control considerations over the completeness and accuracy of the metrics disclosed.

As the governance and oversight matures, the ESG-related information disclosed can be increasingly audit ready for independent assurance purposes. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued supplemental guidance (https://www.coso.org/new-icsr) last year for organizations to achieve

effective internal control over sustainability reporting (ICSR), using the globally recognized COSO Internal Control — Integrated Framework (ICIF).

Governance includes having board oversight. This is a key component to disclose in a number of regulatory requirements, but not all board members are comfortable with ESG topics, particularly around environmental risks or how to best provide oversight. According to a recent survey from the Nasdaq Center for Board Excellence and business management consultants WTW, 75% of board members said a coherent ESG strategy with clear priorities helps create organizational value and stronger financial outcomes, and 48% said there are opportunities to improve education on how to address environmental concerns.

To have board oversight, board members charged with oversight responsibilities regarding sustainable business will also need to have the knowledge base and skill set to be effective, and this is where education is key to addressing possible knowledge gaps. Education and understanding the topic at hand are key components of effective board oversight.

As an organization may have a significant number of data points reported, it’s important to prioritize what information disclosed may be at a higher risk, have the policies and procedures to support current processes, and have checks and balances or segregation of duties in the processes. It’s also important to use relevant information and create a traceable audit trail that can incorporate review and approval processes, so that the information is meaningful and represents a company’s actual underlying activities. The other aspect is to have a monitoring system that can support a strategic reassessment and help a company reflect on its commitment on a periodic basis.

There is an increasing need for a cross-functional leader who can be the partner to the sustainability office and across the various business units or divisional leaders to form the necessary governance structure and establish accountability across functions. This function, sometimes referred to as sustainability controllership, has an essential responsibility to contribute to higher-quality ESG-related disclosures.

Companies are the most successful when the governance structure, ownership, and accountability exist to successfully execute on these reporting efforts and address the regulatory requirements.

Regulatory demands are deepening transparency

To slow the rise in global temperatures, regulatory demands focus on more transparency around disclosing greenhouse gas emissions. That includes direct emissions generated by sources controlled or owned by an organization (Scope 1), purchased utilities that generate emissions (Scope 2), and indirect emissions generated by activities from assets not owned or controlled by the reporting organization (Scope 3). (See the graphic, “Scopes and Emissions Across the Value Chain,” below.)

About the author

Janis Parthun, CPA, is vice president of project consulting services and a thought leader for finance, accounting, and risk, and ESG reporting at RGP, a global business consultancy. She is based in San Francisco. To comment on this article or to suggest an idea for another article, contact Jeff Drew at [email protected] (mailto:[email protected]).

LEARNING RESOURCES

AICPA & CIMA ENGAGE (https://www.aicpa-cima.com/cpe-learning/conference/aicpa-cima-engage-2023)

Advanced accounting and auditing and corporate finance and controllers are two of the nine tracks delivering up to 42 CPE hours at the biggest accounting conference of the year, held at the ARIA in Las Vegas and also available online.

June 3–6

CONFERENCE

Sustainability Assurance Engagements (https://www.aicpa-cima.com/cpe-learning/course/sustainability- assurance-engagements)

Attestation engagements involving sustainability information are explained from engagement acceptance to issuing an opinion or conclusion.

CPE SELF-STUDY

Fundamentals of ESG Certificate (https://www.aicpa-cima.com/cpe-learning/course/fundamentals-of-esg- certificate)

Kick-start your understanding of ESG (environmental protection, social inclusion, and governance) issues with this course, designed to help you learn how the landscape has developed and the key role CPAs and finance professionals have to play.

CPE SELF-STUDY

For more information or to make a purchase, go to aicpa-cima.com/cpe-learning (http://aicpa-cima.com/cpe- learning) or call 888-777-7077.

AICPA & CIMA RESOURCES

Articles

“Sustainability Reporting, Assurance Rates on the Rise Globally (https://www.journalofaccountancy.com/news/2024/feb/sustainability-reporting-assurance-rates-on-the- rise-globally.html),” JofA, Feb. 22, 2024

“How Accounting Leaders Can Embrace ESG for a Strategic Advantage (https://www.journalofaccountancy.com/issues/2023/oct/how-accounting-leaders-can-embrace-esg-for-a- strategic-advantage.html),” JofA, Oct. 1, 2023

“The Key Role Accountants Will Play in the Shifting Definition of Value (https://www.journalofaccountancy.com/podcast/cpa-news-the-key-role-accountants-will-play-shifting- definition-value.html),” JofA, June 29, 2023

“Understanding the Opportunities Presented by ESG (https://www.fm- magazine.com/podcast/understanding-the-opportunities-presented-by-esg.html),” FM magazine, April 19, 2023

Websites

Climate & Sustainability/ESG (https://www.aicpa-cima.com/topic/sustainability-esg)

Sustainability-Related Assurance (https://www.aicpa-cima.com/topic/sustainability-esg/sustainability-esg- greater-than-sustainability-assurance)

(https://www.aicpa-cima.com)

© 2024 Association of International Certified Professional Accountants. All rights reserved.