The growing role of audit in ESG information integrity and assurance
Oct 27, 2022
Accountants and auditors have an expanding role to play in determining the integrity of their company’s or their clients’ disclosure of ESG topics
Environmental, social, and governance (ESG) reporting is here to stay — backed by the explosive growth in ESG investment products as well as broader stakeholder interest in ESG performance. In turn, corporations are being challenged to produce reliable, transparent ESG information that meets the needs of critical stakeholders such as investors, customers, and employees.
“From a corporate reporting perspective, this is the most consequential challenge facing the clients we work with,” says Marjorie Whittaker, Managing Director of SEC Regulatory Matters & ESG Sustainability Solutions at Grant Thornton.
CPAs, acting as auditors, have a big role to play in a their company’s or their clients’ disclosure of ESG topics. In the last 12 to 18 months, an increased level of voluntary and required disclosure by companies around ESG initiatives and priorities across the world has transpired. However, navigating what definitions, frameworks, standards, and methodologies companies should use to outline their ESG strategy and reporting components remains up to the organization itself.
Because of these self-selected requirements on what information is disclosed, this lack of transparency increases the importance of an independent audit function internally and the use of an external third-party for ESG assurance.
What is ESG assurance?
Like audits of financial statements and the internal control over financial reporting, third-party assurance enhances the reliability of ESG information and builds confidence among stakeholders. To do this, auditors conduct attestation engagements to provide assurance that ESG information is presented in accordance with certain criteria. “We help management and the board feel confident in the reported ESG information, which is important given the increased focus and attention from external stakeholders,” explains Whittaker.
More specifically, ESG assurance obtained from a certified public accountant, “involves the evaluation of processes, systems, and data, as appropriate, and then assessing the findings in order to support an opinion based on an examination [reasonable assurance] or conclusion based on a review [limited assurance],” according to the Center for Audit Quality.
Because companies are at different stages of their sustainability journeys, the breadth of ESG assurance engagements is vast. Most of Whittaker’s clients are looking at assurance over their Scope 1 and Scope 2 greenhouse gas (GHG) emissions, as this information is of increasing importance to external stakeholders. In addition, the Securities and Exchange Commission’s proposed rule on enhanced climate disclosures would require certain issuers to obtain attestation over their climate metrics. However, many companies are going beyond GHG metrics and seeking external assurance over a broader suite of ESG metrics.
As companies prepare for external assurance, they often begin with an assurance readiness assessment. This service helps clients understand what preparation they may need to undertake to be ready for external assurance.
While most companies that obtain external assurance today start with limited assurance, over time the market may transition to “reasonable assurance,” which is similar to traditional audits of public companies’ financial statements.
Why CPAs & auditors are well positioned for ESG assurance
Financial statement auditing is a well-recognized practice performed by highly competent professionals adhering to rigorous standards. The rise of the importance of nonfinancial information — including that on ESG topics — on a company’s operations spurred the inclusion of sustainability reporting in company reports. The rigor and analysis required to perform financial audits make CPAs and auditors the ideal candidates to perform ESG assurance.
Specifically, CPAs and auditors are best fit to perform ESG assurance services for several primary reasons, including:
- They have both the depth and breadth of experience in understanding business processes and evaluating procedures for collecting, analyzing, and reporting information to identify gaps, assess risk, and develop recommended options in order to mitigate them;
- They have deep experience in determining whether a client is in compliance with multiple standards and frameworks; and
- Industry groups, such as the American Institute of Certified Public Accountants (AICPA), have taken steps to create standards and frameworks for how to conduct ESG assurance.
Further, US companies are out of step with their peers in other regions in using auditors for ESG assurance. “In relation to the limited number of organizations that seek assurance on ESG disclosures, the overwhelming majority of them have their ESG disclosures assured by non-CPAs,” according to a benchmarking study conducted by the AICPA, the United Kingdom’s Chartered Institute of Management Accountants (CIMA) and the International Federation of Accountants (IFAC).
In addition, ESG assurance is not consistently practiced within and across jurisdictions. For example, in the US, non-CPAs dominate the field and different assurance standards are being used on engagements. The US market is expected to transition to assurance from CPAs as ESG reporting matures, and currently the profession is rapidly upskilling to meet the demand. The SEC’s proposed rule includes independence and other ethical requirements for the attestation provider, with which CPA firms are already experienced.
Auditors, whether internal or external, are an essential part of reliable information. “We (CPAs) provide assurance over financial statement information, regulatory information, statistics, and on many other data sets when there’s a particular reporting requirement,” says April Little, Partner at Grant Thornton. “We also do internal controls attestation to validate the controls around how the data is gathered and making sure it is the right data. We apply this expertise to a different data set.” In this case, ESG.