ESG is the wild west of finance, but times are changing. The International Financial Reporting Standards (IFRS) formed the International Sustainability Standards Board (ISSB) to consolidate ESG standards and create new standards it hopes will be adopted worldwide.
The European Union (EU) created the EU Taxonomy, a green classification scheme for specific economic activities – a de facto ESG dictionary. And most recently, the U.S. Securities and Exchange Commission (SEC) proposed its regulations on what ESG information United States public companies should report.
Financial and other stakeholders have been pushing for consolidation and codification of ESG standards. Owners, investors, bankers and customers are all looking for meaningful ESG information that can be acted upon and support the basis of financial decisions. Investors and bankers are interested in identifying sources of non-financial risks and long-term opportunities, whereas customers look to companies’ ESG information to guide purchasing decisions. So, the clarification on standards is a welcome change for all stakeholders, but it’s still missing one critical piece — that’s where CPAs enter the area and drive the future of ESG.
The Future of ESG
First, imagine ESG data the same way one might consider financial data. Companies have detailed guidance on measuring, reporting and verifying financial data. However, without proper internal controls (control environment) and objectivity, financial reporting would be suspect and unactionable. The same is true for ESG. It is this analogy that leads me to say CPA firms will dominate the future of ESG just like they do for financial reporting.
Over time, the ISSB, SEC and the American Institute of Certified Public Accountants (AICPA) will codify ESG standards, and the independent CPA will issue audit reports stating that ESG standards are correctly applied and accurately reported. The SEC is already looking to require audited ESG information, and soon bankers will see its value and follow suit.
In the next chapter in the evolution of ESG, companies will follow codified standards, robust internal controls, and industry-specific disclosure requirements. That said, as ESG reporting standards become more standardized by the ISSB, AICPA, and other regulators, the importance of internal controls over ESG disclosures will become comparable to those that govern the reporting of financial information. Soon companies, big and small, will treat ESG no differently than financial information. ESG data providers will issue SOC reports, corporate boards will establish internal control structures and the independent CPAs will dominate reporting. In this soon-to-be reality, ESG information will easily be incorporated into the everyday financial decisions of owners, investors, bankers and customers.
If you want to see the future of ESG, look no further than how financial information is reported today. Just like in finance, stakeholders can make informed financial decisions based on material non-financial information they trust is complete and reported without bias. This is squarely in the realm of the CPA and why CPAs will dominate the future of ESG.
Don’t get left behind the curve when it comes to the future of ESG reporting. Reach out to us today to prepare for tomorrow’s standards, controls and requirements.