The SEC and ESG: Preparing for What’s Ahead

In March of this year, the U.S. Securities and Exchange Commission (SEC) released proposed regulations to enhance and standardize climate-related information reported by publicly traded companies. Assuming the regulations are implemented in their proposed form, certain of the new disclosures will require third-party assurance.

The CAQ recently discussed the SEC’s proposed legislation, the role public company auditors can play and other global ESG developments with audit leaders.

On public company auditors’ skillset

According to audit leaders, auditors are well positioned (and have been given they are already doing this work) to enhance the reliability of climate-related information.

“It isn’t really new for us,” said Marc Siegel, Americas Corporate and ESG Reporting Thought Leader, Ernst & Young LLP. “In fact, while in the US many companies are in the early stages of obtaining assurance over climate information, in Europe, the Big Four have been performing the majority of [ESG assurance] for some time.”

Auditors are known to adapt quickly to the changing world around them and are used to applying skills like objectivity, skepticism, and standards-based analysis across countless different industries.  In a public interest role, US public company auditors play a role in the flow of reliable information for decision-making.

“Our teams are organized intentionally,” said Kristen Sullivan, Global Audit & Assurance Sustainability and Climate Services Leader, Deloitte & Touche LLP. “A precondition of performing our services is a command of the subject matter and we bring a breadth of capability and experiences no different than we do to the evolving set of considerations factored into a financial statement audit.”

Added Maura Hodge, ESG Audit Leader, KPMG LLP, “As companies’ financial auditors, we bring valuable knowledge to the business and a preexisting working relationship with companies. When I personally started doing this work in 2010, it felt like a natural application of the skills and experiences I had developed as a financial statement auditor.”

And while the reporting of ESG information presents a new challenge, public company auditors are steeped in bringing independence, accountability, standards-based analysis and objectivity to the review of company-reported information – and these skills are transferable to oversight over ESG reporting.

“From an independence perspective, the public company audit profession has a long history of understanding and complying with those often-complex requirements from various regulatory regimes and have invested substantially in those compliance tools and systems,” said Catherine Ide, Managing Director, PricewaterhouseCoopers LLP (“PwC”). “From an experience and attestation perspective, we are experienced in reporting on compliance with various established standards and frameworks. And finally, from a professional requirements perspective, we have specific licensure, credentialing, oversight, and quality management requirements, among others, which are monitored and reviewed.”

On the future role of auditors in climate and other ESG assurance

Driven by investors, the proposed requirements could bring about a shift from a voluntary system of reporting to a more mandate-based system. Putting this information in documents being filed with the SEC could bring some scale to this reporting and the related assurance, resulting in more comparability from company to company.

“There is a disconnect between companies and investors over sustainability and long-term value,” said Siegel. “According to the EY Global Corporate Reporting and Institutional Investor Survey, 78% of investors say they believe companies should invest in improvements relating to ESG matters, even if it dents their short-term profits, but only 55% of business leaders hold the same view.”

“As we’re seeing this increased focus on ESG reporting, investors expect quality data and they’re entitled to the same confidence in ESG information as they currently expect from financial disclosures,” said Ide. “In PwC’s 2021 global investor survey, we saw that 79% of global investors said they trusted reported ESG information more when it has been assured.”

As it relates to the proposal, there are a few important considerations for public company auditors.

“The SEC proposal as it has been written gives rise to a two-pronged challenge for auditors and companies,” said Hodge. “The first is expanding financial statement disclosure about the financial impact of climate risk. The second is ultimately about providing reasonable assurance over Scope 1 and 2 GHG emissions. In the near term, auditors and companies will need to understand the gaps they need to close in order to meet these financial and non-financial reporting requirements.”

On how firms are preparing for potentially mandated climate and other ESG disclosures

Public company audit firms already have the skillset and expertise to assure company-reported climate information, but if this rule is mandated, there may be more of a push by firms to hire auditors with expertise in this area and to increase their training for partners and staff in areas such as climate risk and supply chains. Many firms are also already in the process of this.

“Public accounting firms like EY have already been looking at how to integrate this with the rest of the assurance practice,” said Siegel. “At EY, we have the non-financial reporting team already embedded within the Assurance division and more and more we’re actually having financial accounting audit partners signing off on ESG type of arrangements.”

Added Sullivan, “We at Deloitte and the other audit firms are very much committed to equipping, upskilling our practice to continue to evolve with market conditions and the circumstances our clients are having to evolve with.

On audit quality and ESG

The firm leaders also unanimously agreed that audit quality and ESG are interconnected.

“I’m regularly hearing the term investor-grade data when speaking about ESG information and really the underlying concept is that investors can rely on the comparability and credibility of the information that’s being presented,” said Hodge, noting that all of the top companies in the US provide some ESG reporting, according to KPMG’s recent sustainability survey. “Under proposed SEC and international regulations, we’re expecting assurance and ESG data to become the norm and it’s critical that we don’t do this work in a silo. The financial impact of climate risk will be part of the audit and we must apply the same standards of rigor over all that information.”

Ide shared her thoughts on what skills auditors would need to bring the same vigor and quality to the assurance of ESG information. “Independence and objectivity are the starting point for investor confidence in third-party assurance and these are table stakes for the public company auditing profession.”

The ESG Reporting Landscape

To understand the role of public company auditors in ESG assurance, it’s also important to understand the current ESG reporting landscape for public companies. The CAQ discussed current considerations for public companies with Ami Beers, Senior Director on the Assurance and Advisory Innovation Team at the Association of Certified Public Accountants (AICPA).

“I think what companies are struggling the most with are the many standards and frameworks that are out there today. There are literally hundreds of voluntary frameworks that are available in this space,” said Beers.

The CAQ recently conducted an analysis of the S&P 500 that identified the primary standards and frameworks used by the largest public companies in the US, which found that SASB continues to be the most commonly used framework, followed by GRI and the TCFD.

Along with a lack of an aligned global reporting framework or standard, Beers cited a lack of ESG expertise, access to data, technology and good governance as challenges currently facing public companies.

“It’s an investment in resources, time and people that are required for public companies to do this right,” she added.

For more resources on ESG reporting and attestation, visit the CAQ’s ESG hub.