By Soyoung Ho
Investors in the past several years have been asking for companies to provide more information on environmental, social, and governance (ESG) matters as more and more people put high information value on, for example, what companies are doing to reduce greenhouse emissions with climate change. And companies have increasingly been providing ESG or sustainability reports in response.
With increasing demand and supply of such information, there has also been an increase in private organizations that come up with standards that companies can voluntarily use. But with a plethora of ESG standard-setters—such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), the World Economic Forum’s International Business Council (IBC), just to name a few—it may have created an unintended consequence: confusion in the marketplace.
The Government Accountability Office (GAO), in an early July report about ESG reporting, said that a variety of voluntary disclosure regimes leave companies unsure about what standards to use. Moreover, because there are different sets of reporting standards depending on what companies use, the lack of comparability and consistency would make the different ESG reports provided less useful for investing analysts.
Fortunately, there are efforts to solve some of the problems.
For example, the SASB and the GRI recently announced that they would collaborate to promote clarity and comparability of sustainability reporting.
“SASB and GRI understand that the sustainability disclosure landscape can appear complicated,” the two organizations said in a July 13, 2020, statement. “For companies that use both standards, the reporting effort can be high. To help address this, the two organizations will collaborate to demonstrate how some companies have used both sets of standards together and the lessons that can be shared. GRI and SASB also aim to help the consumers of sustainability data understand the similarities and differences in the information created from these standards.”
The SASB writes standards that are industry-specific which identify the subset of sustainability related risks and opportunities most likely to affect a company’s financial condition. The GRI’s standards focus on the economic, environmental, and social impacts of a company, and its contributions—whether they are positive or negative—towards sustainable development.
Successful collaboration between the two groups is likely to increase ESG reporting.
Desire Carroll, CPA, a senior manager for assurance and advisory innovation with the Association of International Certified Professional Accountants, said that companies already tend to use more of the popular reporting frameworks, narrowing the field for standard-setters.
“SASB is growing in use in America as well as around the world,” Carroll said, adding that investment management company BlackRock, Inc. urged companies to use standards set by the SASB and the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD).
“While no framework is perfect, BlackRock believes SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics,” according to the company’s white paper—Towards a Common Language for Sustainable Investing—issued in January. “For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework.”
The AICPA’s Carroll explained that historically and probably at this juncture as well, the most widely used standards have been the ones set by the GRI as the organization has been around the longest.
“We are starting to see a lot of traction with SASB and TCFD recommendations as well as others,” she said.
While efforts are under way to try to converge on a set of standards, the AICPA in the meantime is working to help companies that are looking to provide ESG reports.
“The Association is in the process of developing short introductory documents on each of the key sustainability reporting standards/frameworks aimed at helping companies determine which sustainability reporting standards/frameworks are most appropriate for their needs,” Jackie Hyland, a spokesperson for the AICPA said. “The individual documents are going to start being released from the end of July 2020.”
Assurance on ESG Reporting on the Rise
On a related matter, just as more companies are providing ESG data, investors have increasingly called on the companies to get some level of assurance on the information.
Carroll said that in 2018, about 38 percent of companies in the Standard & Poor’s 500 Index that provided an ESG report got some sort of assurance on it.
“We only see that number growing in the future because there is a lot more interest in it,” she said.
There may also be a convergence on the level of assurance companies are getting.
Companies engage accountants or auditors to review or examine their ESG information. Carroll explained that an examination engagement, which is more comprehensive than review engagement, is similar to the audit of the financial statements, providing a reasonable assurance that the ESG report was prepared according to whichever standards the company used.
While it is up to the company to determine whether it wants a review or an examination, she believes that there is a trend towards the stronger assurance. A few years ago, most companies opted only for reviews.
But now, some companies opt to get a more comprehensive examination of their sustainability reports because investors want a higher level of assurance, for example.
“As this field is developing and maturing, some companies have been doing this many years already, some are just starting. What I am kind of seeing is companies more than in the past are starting to seek examination engagements,” Carroll noted. “They are still not the majority, but there is more interest in examination engagements whereas initially there was just very strong interest in reviews.”
No matter which engagement companies choose, the trend towards getting assurance will surely go up. Among other things, for companies that have not voluntarily gotten their reports checked, there is an incentive for them to do so.
“Some of the rating agencies, where they sort of rate companies based on their ESG disclosures, will award additional points where the information has been subject to assurance,” she said.
This article originally appeared in the July 20, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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