Accountants and auditors are muscling in on the preparation of climate data amid concern that companies are still far from ready for disclosure rules being drawn up by regulators around the world.
The US Securities and Exchange Commission is finalising a rule to require audited emissions data be included in corporate financial reports, while accounting standards setters in Europe are close to publishing new climate reporting guidelines. The developments raise the stakes for companies that until now have been reporting environmental, social and governance data on a largely voluntary basis.
In response, companies are pulling staff from their finance departments into work on emissions data and other ESG metrics that are currently pulled together by specialists in sustainability reporting. Some are appointing “ESG controllers” with accounting backgrounds to impose the kinds of internal systems used to produce financial statements.
“The governance and control environment needs to quickly mature to get into alignment with traditional corporate reporting,” said Kristen Sullivan, US head of sustainability and ESG services at the accounting firm Deloitte.
“The direction of travel is clear. The finance organisation is key to putting discipline, rigour and professionalisation around ESG reporting.”
The Big Four accounting firms, meanwhile, are marketing their own services to help companies prepare, and are training up their own staff in anticipation of being asked to audit the new disclosures to investors.
If EY goes ahead with a separation of its consulting and audit arms later this year, its climate change and sustainability services practice will stay with the audit side and is critical to the division’s growth targets, according to people familiar with the plans.
“Investors put climate reporting on the table,” said Sandy Peters, senior head of global advocacy at the CFA Institute, the professional body for the investment industry. “The accountants have arrived because of the money.”
Partners from the Big Four were a heavy presence on panels discussing climate reporting at the annual conference of the American Institute of Certified Public Accountants last month, where company executives and external auditors agreed there was significant work to be done to improve emissions data.
Finance teams that are getting involved are realising, “Oh wow, the company systems are not set up to handle this,” Sara DeSmith, ESG partner at PwC, told attendees.
“A lot of this is still very manual and [data are] coming from operational parts of the business that are not used to having the rigour of a monthly financial close or don’t appreciate the need for having things done the same way every single month,” she said. “It’s been painful sometimes.”
Michael Tovey, who last year moved from being corporate controller at Bank of America to the new post of ESG controller at the bank, said certified public accountants “can add a huge amount of value” when brought into the process. “No company can afford to have a material misstatement in any of its reporting, be it financial reporting or ESG reporting.”
CPAs have been appointed to new ESG or sustainability controller roles at the oil services company Halliburton, the chemical group DuPont and Google’s parent company, Alphabet, among other blue-chips.
Businesses and lobby groups have pushed back aggressively against the SEC’s proposed climate rule, which demands disclosure not just of a company’s own emissions but also in many cases the disclosure of so-called Scope 3 emissions, those produced indirectly by suppliers and customers. Some data will need to be audited to the same standard as other financial disclosures, although companies will have protection against being sued over mistakes in the Scope 3 data.
The SEC is racing to have the rule finalised within months, in the hope it will get through the expected legal challenges in time to become effective before the 2024 presidential election.
Matthew Franker, partner at the law firm Covington and a former SEC attorney, said smaller clients may want to wait to see what happens, but larger companies are already preparing by involving their internal audit teams and external auditors such as the Big Four.
“Having [your] internal audit function kick the tyres will help put more rigour around what is being said,” he said. “The next step is getting third- party assurance. Most large companies are looking to do that, especially if they have aggressive greenhouse gas target reductions.”
Maura Hodge, ESG audit leader at KPMG US, said the task is bigger at bigger organisations. “For the largest companies it can be especially difficult, because they are more decentralised, they have lots of systems, they have people all over the world and operate under different regulations in different jurisdictions.”
Some executives and investors worry that accountants come with unrealistic expectations when it comes to emissions data produced inside a company’s operating businesses and calculated using assumptions about suppliers and customers. Their natural caution could slow down disclosures.
“We can’t let the perfect get in the way of progress,” Sheryl Burke, senior vice-president of corporate social responsibility at the pharmacy group CVS Health, told last month’s AICPA conference.
“At my company there is a really good partnership with the finance teams, but they still want perfect. They want to be able to say to our chief financial officer, ‘this is exactly correct, this is exactly how much greenhouse gas there is, exactly what our plastic use is’. But we don’t know these things. This is not a perfect science and these are not perfect measurements.”