Corporate controllers can play an important role in environmental, social and governance reporting as the U.S. and other countries prepare to impose new reporting requirements for climate risk disclosures, according to a recent report from Deloitte.
The report focuses on controllership’s role in simplifying ESG reporting complexities and catalyzing wider transformational change. Its release comes as the Securities and Exchange Commission is expected to unveil a final rule for climate-related disclosures this fall. Last January, the European Union’s Corporate Sustainability Reporting Directive took effect, and in June the International Sustainability Standards Board released its climate disclosure and sustainability standards (see story). Companies in the U.S. with significant operations in the E.U. may soon be required to provide vast amounts of ESG information as mandated by the CSRD, the report points out.
The Deloitte report sees several ways controllers can help reduce the complexity of ESG reporting. They can help monitor different jurisdictional requirements in places like the U.S. and the E.U., and navigate decentralized reporting responsibilities. The controllership function is in a position to design and implement efficient responses to the various risks involved in ESG reporting.
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“The risk paradigm for ESG reporting has changed as we move forward from voluntary ESG reporting to regulated reporting, and controllership has in front of them a choice to figure out what is the best blend of resources to tackle the new challenge,” said Lauren Pesa, a partner in Deloitte & Touche’s audit and assurance practice, who wrote the report.
Some companies are already starting to leverage guidance released in March by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, on how to apply its widely used internal control framework for sustainability reporting (see story).
“As it stands right now, we’re still in a little bit of a voluntary landscape, but as the standards and frameworks mature, converge and coalesce, and as investor demand has increased for transparency of information rooted in standards and frameworks, we’re seeing an evolution toward that on a voluntary basis,” said Pesa. “And then in the background, the regulators are responding to investor demand, including the Securities and Exchange Commission, and certainly what we see out of the European Union with the Corporate Sustainability Reporting Directive, as companies prepare to get ready to comply with those reporting requirements.”
Controllers will need to find a way to accommodate the various standards and frameworks, even after the ISSB inherited them from the consolidation of the Sustainability Accounting Standards Board, the International Integrated Reporting Council and the Climate Disclosure Standards Board.
“One of the challenges controllership faces is that you’ve got a number of different regulations that are being issued, and they intersect with each other,” said Pesa. “Sometimes they overlap, sometimes they don’t, so in order to have an effective implementation process, it’s really a leading practice for companies to think about the universe of requirements globally, so that they can tackle those challenges holistically and efficiently. Controllerships’ experiences in regulated reporting, whether that’s at an SEC public company level, or in global reporting that they may have historically done, are uniquely positioned to have a perspective in terms of how to move this mandate forward efficiently and effectively, while also considering the various capabilities and bandwidth of their existing financial reporting teams.”
It’s not clear yet whether the SEC will require companies to disclose information on just their own climate-related risks, or whether it will mandate Scope 2 and Scope 3 reporting on suppliers and customers’ activities as well in the final rule.
“The most important first step is doing some scoping, looking at where you operate jurisdictionally,” suggested Pesa.
Then she recommends looking at where the various standards and frameworks overlap with directives like the CSRD.
Data collection is also important as controllers need to identify data sources and strategy to incorporate into their reporting in alignment with existing control frameworks. Controllers may need to make sure the sustainability information they’re receiving from outside sources is accurate.
“There’s no one right answer for how controllership does or does not respond to the mandate in front of them,” said Pesa. “It’s going to be very company specific. But what we do know is that controllership has a longstanding acumen with respect to data governance and architecture because of how they’ve influenced financial reporting, and has strong credibility with respect to process, internal controls and data maintenance. Therefore, we think that level of expertise could be very accretive to enabling quality in ESG reporting as well.”
Even though there’s a backlash going on in some states like Texas and Florida to ESG funds and reporting, controllers need to recognize that many investors still want that information.
“Many of these regulatory reporting requirements are here, both in the U.S. and globally, and now is the time to prepare, and certainly monitor the controversies to the extent that they impact potential reporting implications,” said Pesa. “It is wise for all controllership functions to keep a finger on the pulse of this ever-changing landscape.”
Controllers will need to combine several types of skills to do ESG reporting.
“Fundamentally, I think what needs to happen is a blending of the sustainability functions to the extent that they already exist and a company’s capabilities and history in dealing with voluntary reporting for sustainability information, with the skills and acumen of controllership, not to replace one another, but to bring both parties to bilingual capabilities,” said Pesa. “Learn some of the leading practices that controllership follows, as well as have controllership understand some of the uniqueness and complexities associated with some of the standards and frameworks that have been in existence for quite some time. Partnership is really of critical importance to enable the future management and operation model for ESG reporting specifically.”
More accountants and accounting firms are getting involved in the ESG reporting area and learning more about the way it works will help controllers and their companies.
“ESG reporting fundamentally is accounting,” said Pesa. “It’s just accounting for information that doesn’t have a currency symbol next to it. The acumen that technical accountants bring to this mandate is really important, since they have the history of dealing with standards, frameworks, interpretations and evolving practice issues. That lens, as we move into more regulated reporting, can be really helpful for mobilizing for this mandate efficiently and effectively.”
