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Sustainability Reporting May Become an Issue for Auditors

Investors in the past few years have increasingly demanded that companies provide more information about their operations’ effect on the environment and society. Regulators like the SEC and the PCAOB are taking notice and are considering the steps they should take to carry out their responsibility to investors.

Investors have made sustainability information a priority for years, and now the regulators are following suit.

SEC Chair Mary Jo White said “the issue has our attention” during a speech at the International Corporate Governance Network’s annual conference in San Francisco on June 27, 2016.

On June 28, PCAOB member Steven Harris asked an investor conference how regulators should address environmental, social, and governance (ESG) matters.

Regulators’ recent focus on ESG reporting is not surprising, given the growing public interest in corporate sustainability policies and practice. In the past few years, investors have been increasingly demanding more information about the effect of a company’s operations on the environment and society.

The SEC in April said it wants feedback about disclosure rules it should write in Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K. The preliminary rulemaking document solicits comments on ways to improve the information that public companies disclose apart from the financial statements, and it includes several questions on sustainability reporting. Comments are due July 21.

“I think this [concept release] is an essential first step in addressing some extremely serious issues of concern to investors,” Harris said. “Given the needs of investors and the momentum created by so many other countries throughout the rest of the world, I think more comprehensive, higher quality ESG disclosures in the U.S. is inevitable—particularly as they relate to the mandatory disclosures of the material impacts of environmental and climate related changes.”

Even as the SEC ponders its next regulatory steps, including a mandate for sustainability reporting, Harris said he wants investors to get involved in the issue and work with the SEC, the FASB, the PCAOB, and public companies to see whether such information should be independently verified. Because sustainability is not part of the financial statements, there are no audit requirements even as auditors today “read and consider” the materials outside the financial statements for consistency.

He noted that 69 percent of the respondents to a CFA Institute survey said independent verification is necessary. But it was not clear whether these investors felt the information should be subject to an auditor’s examination and covered by PCAOB requirements. Of the respondents who said that sustainability reporting should be independently verified, 53 percent said professional services firms that have expertise in ESG matters should provide the verification, while 31 percent said independent professional services firms like accounting firms should take on the role.

Today, public companies are required to disclose any matters that are material. But investors have complained that the guidance about the material effect of climate change in the SEC’s Release No. 33-9106, Commission Guidance Regarding Disclosure Related to Climate Change, from 2010 has been of little use, and they would like to receive more information.

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