For the third year in a row, more big global companies disclosed environmental, social and governance (ESG) matters than in previous years, with 95 percent having done so in 2021, the latest year available. The percentages were 92 in 2020 and 91 in 2019.
This is according to a third report about ESG disclosures and assurance practices around the world by the International Federation of Accountants (IFAC) and the Association of International Certified Professional Accountants.
The data is based on the largest companies in each jurisdiction by market capitalization for fiscal years 2019 and 2020, and March 21, 2022, for fiscal year 2021.
In particular, 1,283 of 1,350 companies reported ESG information in 2021, compared to 1,283 of 1,400 companies in 2020.
“Significant hurdles remain, however, when it comes to providing consistent, comparable and high-quality sustainability information for investors and lenders,” the two groups said on Feb. 27, 2023.
The findings come as companies today are voluntarily providing ESG information, mostly using different rules set up by private standard-setters that have no regulatory authority.
Thus, regulators and standard-setters around the world have been working on proposals to require some standardized ESG reporting requirements, though they are first focusing on information related to climate change.
In the United States, the SEC is close to finalizing a March 2022 climate change proposal. Europe is also working on ESG reporting requirement. There is no global regulatory requirement, but the International Sustainability Standards Board (ISSB) is also close to issuing its sustainability disclosure standards. When these are published, each jurisdiction needs to decide how and whether to adopt for domestic use.
The regulatory effort is largely in response to demands by many investors who believe sustainability information is material to their capital allocation and voting decisions. Moreover, they said that they want the information to be reliable.
“The inability so far to coalesce around agreed upon global standards continues to create challenges, however,” the two organizations stated.
The study found that 86 percent of the companies reviewed used multiple standards and frameworks to present sustainability information.
The use of standards set by the Sustainability Accounting Standards Board (SASB), which is now part of the ISSB, has increased sharply by 29 percent in 2021 over 2020. More companies have also used the Financial Stability Board’s task force on climate-related financial disclosure framework (TCFD) with 30 percent increase over 2020.
For climate change, both the U.S. SEC and the ISSB borrow a lot of the elements from the TCFD recommendations.
Still, companies primarily look to the Global Reporting Initiative (GRI) standards and UN Sustainable Development Goals (SDG) to prepare their sustainability reports. In 2020, almost three quarter, or 72 percent, used GRI in 2020, and that figure went up to 74 percent a year later. A bit more than three quarter, or 76 percent used SDG in 2020, and in 2021, it was 79 percent.
“We continue to believe this practice neither supports consistent, comparable, and reliable information, nor provides a foundation for globally consistent, high-quality sustainability assurance,” IFAC Chief Executive Officer Kevin Dancey and Association of International Certified Professional Accountants CEO Susan Coffey said in a foreword of the report.
ESG Assurance
The study finds that 64 percent of companies obtained some level of assurance over at least some ESG information in 2021, an increase from 51 percent from 2019. In 2020, it was 58 percent.
While the rate of assurance has increased, most engagements were focused on greenhouse gas (GHG) metrics, the research found. For example, 94 percent got some assurance on GHG in 2021, down slightly from 95 percent in 2020. For social data, 74 percent of companies got assurance in 2021, with governance coming in last with 56 percent.
Unlike financial statements, there is no restriction on who can provide assurance over the voluntary ESG data. The U.S. SEC is contemplating allowing other firms other than accounting firms to also provide assurance. Thus, engineering firms, for example, could provide the assurance over climate change disclosure.
The study found that 57 percent of engagements were conducted by audit firms in 2021. This is 516 of 913 assurance reports from 818 companies. This is a decrease from 2020 when 61 percent of assurance engagements by audit firms. In 2019, it was 63 percent by audit firms.
In terms of global assurance standards, those issued by the International Auditing and Assurance Standards Board were primarily used with 70 percent in 2021. While this is lower than 72 percent in 2020, it is higher than in 2019 with 68 percent.
“Assurance enhances trust and confidence in ESG information and the systems and controls used to collect and report data. It also supports informed capital allocation decisions,” Dancey and Coffey wrote in the foreword. “We believe professional accountants are best positioned to conduct engagements that connect sustainability assurance with financial statement audits—all based on rigorous and widely accepted professional, quality management, and ethical standards.”
In the latest study, the two organizations for the first time examined the extent to which companies provide forward-looking statements to reduce emissions.
About one third in both 2020 and 2021 had not set targets.
In 2021, about one fifth, or 22 percent, said that they hoped to get to net zero in Scopes 1, 2 and 3 GHG emissions while 27 percent said they want to achieve net zero in Scopes 1 and 2 only. Scope 3 measures emissions in the company’s value chain.
Less than one fifth, or 18 percent, had targets other than carbon neutrality or net zero.
This article originally appeared in the Feb. 28, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.
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