With the SEC poised to release a final rule regarding climate-related disclosures and the IFRS Foundation preparing to finalize the first two standards in a global baseline for the reporting of sustainability-related financial information, 2023 is setting up to be a year of learning for accounting professionals.
"Sustainability Disclosures Priorities for 2023," a recent webcast co-sponsored by AICPA & CIMA, together as the Association of International Certified Professional Accountants, brought together industry leaders to discuss what to expect and how to prepare.
While accounting professionals in the United States recognize the potential impact of the SEC's proposed rule, some might wonder whether the IFRS Foundation's sustainability standards will affect them. The webcast, co-sponsored by the IFRS Foundation (IFRS), as well as the Center for Audit Quality (CAQ) and CPA Canada, set out to make the connection.
Keynote speaker Sue Lloyd is vice chair of the International Sustainability Standards Board (ISSB), which was formed by the IFRS a year ago and is responsible for the exposure drafts being finalized for release by IFRS as early as possible in 2023.
"We're working really hard to make sure that our global baseline can be made available to benefit investors and companies around the world, but we're really aware that we need to be interoperable with jurisdictional needs," Lloyd said. "So, if you look at the U.S., the SEC in the U.S. is looking out to make sure that U.S. investor needs are met, and Europe is looking at public policy needs. We want to make sure that our baseline can form the underlying framework or building block that can be built on by jurisdictions like Europe and the U.S. to meet their particular jurisdictional needs.
"To facilitate that, we've set up a jurisdictional working group — a group with countries that includes the U.S. and Europe but also the U.K., Japan, and China, and with IOSCO [International Organization of Securities Commissions] — the international securities regulators — as observers. The whole purpose of that forum is to get those countries to assist us, along with others, to build a global baseline that we can all get behind."
Added Scott Bandura, partner, national and global accounting consulting services, PwC Canada: "It's important that companies that have a global presence think about subsidiaries for example in some of the jurisdictions that are adopting ISSB standards. Will those be captured in the scope? Obviously, that's still in flux in terms of how those standards would be applied in local regulatory jurisdictions, but it's something to keep on top of, certainly."
Along the same lines, Bandura pointed out the possible impact on U.S. companies of the European Parliament's recent adoption of the Corporate Sustainability Reporting Directive.
"The scope of the EU standards is very broad, and there could be some North American companies that are captured in that," he said. "For example, from a non-EU parent company, in certain cases that parent company — if they are an in-scope European subsidiary and if they have revenue of more than €150 million generated as a group in the EU — there could be some consolidated global reporting requirement. So even though it's a non-EU parent, in some cases, consolidated global reporting may be required."
The webcast opened with a panel discussion featuring ESG leaders at their respective U.S. companies.
Richard Manley, managing director and head of sustainable investing for CPP Investments, also serves as chair of the ISSB Advisory Group. While the formation of the ISSB by IFRS may have helped clear the way for a global baseline for sustainability reporting, Manley said that, from the perspective of investors seeking reliable sustainability information, there's still much to be done.
"We are still in a situation today where the voluntary nature of ESG reporting means that I don't have a single datapoint reported comprehensively across the globe that's reported on the same basis and is independently assured for any sector," he said "I'm living in a world effectively somewhere along the lines of 1940s, 1950s financial reporting. Unfortunately, I don't have a century to wait, so we need to see an acceleration of forms of ESG reporting that gets us where we need to be in pretty quick time.
"That's why we've been so supportive of the decision to stand up the ISSB and move this from a voluntary framework to a standard that regulators can engage in and enforce across the globe."
Sophia Mendelsohn, chief sustainability officer and head of ESG at Cognizant, and Beth Sasfai, senior vice president, corporate governance and chief ESG officer at Verizon, followed up with steps that companies should consider taking now — related to technology but also to human capital — in anticipation of the fast-approaching releases by the SEC and IFRS.
"Issuers, we're saying, 'We spend too much time on this. It's too confusing. It's too time-consuming. I'm reporting instead of creating change management and impact,'" Mendelsohn said. "And then you have investors like Richard saying, 'Great, you're spending too much time on it? I still don't have a single useful datapoint.' I think the way through this in part is consolidation through IFRS as Richard mentioned, but also technology on the issuers' behalf.
"What people like Beth and I are doing in our organizations right now are saying, 'Sustainability? ESG? We got what we asked for. We're coming into the law. We're coming into regulatory reporting. Investors care. Now what?' Now we realize that we're actually not prepared on the issuers' side.
"The number one thing I would recommend from a technology perspective is automating your carbon emissions. Your carbon footprint, whatever industry you're in, is the most heavily scrutinized piece of data, the most likely to be included in any regulatory environment, both in the U.S. and in the EU, and the one you should be moving from no audit to limited audit to reasonable assurance."
Said Sasfai: "One of the most instrumental things that I think companies are doing right now is making sure that there's a real partnership between finance and internal audit and ESG. For us at Verizon, we've set up a cross-functional team that's really focused on standardizing our ESG data governance. We are working on automating data-governing processes where possible, trying to get that data to be more reliable and trying to be able to get that data a little quicker as we try to think about things like measuring emissions."
Sasfai echoed Manley's call for a global baseline as soon as possible, saying, "It would be very helpful to have a standardized process and to have something quickly."
To that end, COSO's universally utilized Internal Control — Integrated Framework is being updated to bring consistency to sustainability reporting.
Bob Hirth, senior managing partner at Protiviti, was COSO chair at the time of the framework's last update in 2013. He's co-authoring this update, and he shared on the webcast that he's hopeful it will be released in January.
"Obviously we all know today that financial reporting is integral to understanding any company, but we also now know that reporting is not adequate or enough, so we've seen the expansion of corporate reporting to now include sustainability reporting or ESG reporting or corporate social responsibility reporting. So the obvious question comes up, 'What about the verifiability of that information?'" Hirth said. "The COSO board concluded there was a need to provide some additional guidance as to how you take that really good COSO 2013 internal control framework that has been used so extensively around the world for financial reporting — how do you apply that to sustainability reporting? That's the crux of our project."
Bob Herz, former chair of FASB, also is a co-author. He was involved in COSO's initial look at sustainability reporting in 2017.
"The COSO board came to us earlier this year and said, 'Gee, it would be great to expand and update that 2017 study.' So that's what we're doing," Herz said. "We've interviewed hundreds of people, seen what lots of companies are doing, talked to the accounting firms and many others involved in sustainability reporting, and we continue to believe that accountants — whether you're inside a company as finance and accounting folks or internal audit or external audit — you need to get engaged in this subject. Really the world needs you."
If you're looking for more help with your preparations for ESG requirements, the new Fundamentals of ESG Certificate offers a comprehensive introduction to ESG and sustainability reporting.
— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.