Accounting firms are getting more involved in sustainability reporting and assurance around the world, with recent global standards and record-setting temperatures spurring calls for action.
PricewaterhouseCoopers hosted a Climate Week event in New York on Monday featuring a discussion between Emmanuel Faber, chairman of the International Sustainability Standards Board, and Wes Bricker, vice chair and U.S. Trust Solutions co-leader at PwC, moderated by Heather Horn, PwC’s national office thought leader. The discussion took place as the United Nations General Assembly gathered in New York to discuss climate change and other pressing issues.
The ISSB issued two standards in June, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures (see story). Immediately thereafter, the Financial Stability Board, an international body that monitors the global financial system, welcomed the publication of the two standards and said that the publication of S2 was the culmination of its Task-force on Climate-related Financial Disclosures, and therefore the TCFD would cease operations as the standard becomes effective, Faber noted.
“They transferred the framework of the TCFD to us, which I think was no surprise for anyone in this room, because we embedded TCFD not only in S2 for climate, but in S1 for the full language of sustainability that we are developing,” said Faber.
That means the ISSB not only has responsibility for the standards it inherited with the consolidation of the Sustainability Accounting Standards Board, the International Integrated Reporting Council, and the Climate Disclosure Standards Board to form the ISSB under the oversight of the International Financial Reporting Standards Foundation, but it now has inherited the legacy of the TCFD.
“It came with a formal public ask by the Financial Stability Board for us to monitor on their behalf the implementation of climate disclosure around the world,” said Faber.
Less than a month after the standards were released, they were endorsed by the International Organization of Securities Commissions, or IOSCO (see story).
He noted that the ISSB released an adoption guide, which covers where the ISSB’s priorities are going to be when guiding and discussing with jurisdictions about how to be considered an adopting jurisdiction.
“We’re now fully focused on a couple of important aspects that need to be dealt with by the end of this year when our standards are going to be effective in January 2024,” said Faber. “One is the digital taxonomy.”
That will be helpful in digitizing European Sustainability Reporting Standards to reduce divergence in reporting. The ISSB will also be looking at international applicability of the SASB standards, which it has promised to deliver by the end of this year. Some of the U.S.-based topics in the SASB standards could refer to local jurisdictions and regulations and the applicability may be expanded globally. The ISSB also plans to unveil a program at the UN’s upcoming COP28 climate change conference in Dubai to focus on how to start with its standards for regulators, companies, investors and market participants around the world.
Bricker noted that the taxonomy would be leveraging Extensible Business Reporting Language, or XBRL, taxonomy, which will help the standards remain interoperable. “Our goal is to produce a great experience for those who are using the information,” he said. PwC has worked with SASB over the years to translate its sustainability standards into XBRL, and the ISSB and the IFRS Foundation will be leveraging that taxonomy as they work to update and maintain it, in conjunction with local regulators.
He noted that the work accountants do would help combat accusations of greenwashing by providing assurance services.
Faber said the ISSB is engaging with jurisdictions, both from an institutional basis and receiving calls from them, while trying to manage the momentum appropriately. The ISSB has a working group that meets every month. Members include the U.S. Securities and Exchange Commission, as well as the Ministry of Finance in China, the European Commission, the U.K. and others. The ISSB also has a Sustainability Standards Advisory Forum that includes about 15 other jurisdictions along with additional advisory groups. They are considering whether various countries should be considered “adopting jurisdictions” or in other categories.
The ISSB may also need to deal with states like California, where state legislators passed a bill last week requiring companies to disclose their greenhouse gas emissions and climate-related financial risks ahead of finalization of the SEC’s proposed rule on climate-related disclosures (see story). It requires that reports must be prepared in accordance with the TCFD reporting framework, but reports prepared under the ISSB’s standards will also be acceptable.
In an interview with Accounting Today, Bricker was asked about what impact the California bill would have. “That’s important to companies all across the U.S. and around the world who do business in California,” he said. “It’s hard to find companies that don’t have a connection to California. What the bill is essentially saying is we’re moving from a pre-mandatory phase to a mandatory phase, and that’s where companies really need to take note because the voluntary reporting that they’ve been doing is coming into a season of mandates. Being well prepared requires investments in time and technology and expertise to really get it right. But the California proposal in the U.S. is a state-level action. We’ll need to see how the SEC moves forward on their own proposal at a federal level to really understand the intersection between state and federal as it relates to something like climate reporting.”
He believes companies shouldn’t wait until the SEC rule is finalized to start working on their sustainability reporting.
“I think it’s important for companies to create a plan, to really take stock of where they are in their reporting today, and what the requirements are, and how the proposed requirements are likely to come in,” said Bricker. “What we see a lot of our clients focused on are the rules in Europe, the CSRD [Corporate Sustainability Reporting Directive. “We see them focused on the International Sustainability Standards Board, the SEC and now California. Those are the the big three — and now with California I think it’s fair to say the big four — frameworks that management teams need to understand. As they do that, beyond just having a plan, then the question is what’s the scope of that plan? Good reporting integrates with the pulse of communication and financial reporting of a company. The information in a sustainability report is strongest whenever it’s integrated with the financial planning, the contracting, the operational design of a company’s products and services. It’s an integrated concept where I see most leading companies really now focused, not just a compliance exercise. How do we integrate it for a much stronger communication?”
The ISSB is looking at ways for jurisdictions to adopt the ISSB standards, or at least standards substantially based on S1 and S2. There will be transitional relief in jurisdictions when adopting. The ISSB is focusing on capital marketers, public entities and large companies, but not on smaller venture-backed companies, according to Faber. The Growth and Emerging Markets Committee of IOSCO, which has about 120 members, is looking at ways for various jurisdictions to transition to the ISSB standards as well.
“Today, we do have active conversations with a number of very varied types of jurisdictions,” said Faber. “That goes from Japan, Korea, Singapore, Hong Kong, Malaysia, China, U.K., the E.U., Africa, Egypt, Ghana, Nigeria, South Africa, Kenya, Latin America, Brazil, Colombia, Chile, probably dozens of jurisdictions. There are more to come.”
The ISSB is also developing a checklist for jurisdictions so they don’t jump into the standards without sufficient preparation just to be considered early adopters. “We don’t want everyone to come immediately,” said Faber. “We just want to make sure that people don’t start without being without the ecosystem being ready.
The ISSB has been working with Nigeria on implementing the standards, which will be a crucial test. “We cannot afford for Nigeria to fail because that’s the end of the story in a whole part of the world, and we absolutely need that part of the world as well,” said Faber.
The private sector and market participants are fundamental to creating the momentum from a jurisdictional standpoint, he added. The IFRS Sustainability Alliance includes members that will early adopt and signal their intention to support them. “That will bring signals that lower the political cost for regulators to move into regulation,” said Faber.
Faber was asked about the ISSB’s consultation on its future agenda, which could include subjects like biodiversity, ecosystems and ecosystem services; human capital; human rights; and integration in reporting (see story). He declined to say which ones will be on the future agenda, as the consultation period only finished recently and the ISSB is still involved in capacity building for implementation of its standards in January. He noted that the ISSB received 400 letters and 3,000 people reached out, and it will take several months to unpack all the comments. The ISSB plans to start deliberating on its future agenda in the early part of next year, and that will inform its work in the second half of 2024.
Bricker said during the interview that he would like to see human capital as an item on the future agenda.
“There’s still work to do on climate,” he pointed out. “Topics beyond climate do include human capital because of the importance of supporting people in the training that they need in order to sustain societies, but also to create the value for companies that operate and grow and compete and produce goods and services. We need human capital strategies that are well informed with good information to differentiate between those strategies that are performing well, and others that may not be fully complete. Information helps the markets identify, differentiate and provide feedback, and that makes all of us better.”
Accounting and auditing firms like PwC will be able to provide assurance services for sustainability reporting. Those could be in line with the proposed standards from the International Auditing and Assurance Standards Board (see story). However, only 57% of assurance engagement for ESG reporting was done by accounting firms in 2021 (see story).
“The trend toward CPA provided assurance on sustainability reports is growing,” said Bricker. “The trend line is moving in the right direction. Why is that? It’s because there’s a flight to quality and there’s a flight to confidence. When CPAs provide assurance on information, they do so with the benefit of an ethical framework, a framework for independence, and a framework for methodology and reporting. As we look at assurance providers, we see the benefit of a licensed provider that applies a comprehensive set of ethical and execution and reporting standards. That’s not to crowd out other assurance providers in the market. But it recognizes that assurance requires the trust and confidence of the market. That’s been earned over time, through licensed, regulated, robust and comprehensive standards to guide the preparation and distribution of assurance in the market.”
