The Credibility of ESG Information Is Mission Critical for Professional Accountants
Francisco Sant'Anna, Independent Auditor and Chairman of the Board of Directors, IBRACON | February 7, 2022
Available Languages: English | Portuguese
Much of the world was immersed in following the UN Climate Change Conference in Glasgow (COP26) – arguably one of the most important global events in 2021. COP 26’s conclusion saw a package of actions adopted that aim to enhance the transparency of signatories’ progress toward reducing carbon emissions, including tracking and reporting on their National Determined Contributions. At COP 26, we also saw both the public perceptions of mistrust of private institutions as to their real efforts and actions to reduce carbon emissions as well as new public commitments from large corporations regarding their role in addressing climate change and global effects. These commitments will inveitabiliy lead to new components in the preparation of companies’ statements and disclosure reports and the responsibility of their governance bodies given the public’s pressing concerns for transparency. Further, the expectation of investors is shifting to demand more comparable information regarding a company’s social and environmental impact in their reporting.
Comparable ESG (Environment, Social and Corporate Governance) information and reporting is a key component to successfully addressing climate change and should have the same rigor and technical quality as mandatory financial reports. It will require a broader effort to standardize the way companies account for their environmental and social impact; in turn, ushering in an era of mandatory comparable reporting, auditing, and assurance. The announcment of the International Sustainability Standards Board (ISSB) is a major step in advancing disclosures relating to social and environmental impacts, which are currently voluntary, vague, and without comparability.
ESG reporting will not only have impacts on corporations, but also on independent auditors. Their function of assuring the quality of ESG information of the audited companies to investors, stakeholders, and regulators takes on a new and very significant meaning as part of the climate change fight and is one way companies will be held accountable to their commitments.
It is, therefore, important that independent auditing firms, accountancy professionals, and their professional accountancy organizations actively and resolutely engage in this new and crucial challenge facing our profession. In this regard, it is worth reiterating the call made by IFAC to all its member organizations to support the initiative to transform new global standards into local reporting requirements with consistent and comparable ESG information.
The accountancy profession worldwide has the proper knowledge and competencies to fulfill this mission and should immediately take a leading role in the discussion, understanding and establishment of guidelines for the quality, standardization and reliability of companies' ESG disclosures, as well as in the independent audit of this information in their respective jursidictions. It is essential that we are protagonists in the following:
- monitoring, participating, and supporting the IFRS Foundation in the International Sustainability Standards Board (ISSB) standard-setting process;
- supporting the actions of the International Federation of Accountants (IFAC) related to the standards issued by the ISSB;
- supporting to Professional Accountancy Organizations (PAOs) around the world, which must act timely regarding the translation of the standards established by the ISSB, as well as in training and dissemination initiatives;
- promoting the strong ethical commitment of the profession that is critical within the scope of the ESG theme (e.g. pointing out greenwashing), and demonstrating how the profession continues working in the public interest.
Professional accountants can also significantly and specifically contribute to the process of engaging companies in their challenges related to climate change, through the following steps:
- Promote an internal reflection at their companies on this important topic, since this type of reporting will be increasingly demanded by investors, regulators, rating agencies, insurance companies and consumers;
- Engage leaders, as this process will necessitate important changes within the organization around business models, production processes, and technology;
- Before starting any new process, companies must carry out, with the assistance and advice of their professional accountants, a thorough stocktaking and analysis regarding their ESG goals, gaps, and costs;
- With all necessary information in hand, the planning and development of projects can begin - including costs and opportunities, risks, and targets for approval;
- Finally, the professional accountant's contribution to communicating these developments will be vital. Internal communication within companies will be necessary for the involvement and buy-in of their employees, and external communication to the market to show support for the new global standards.
Considering that companies' engagement is essential for the success of the goal—reiterated at COP 26—of limiting warming to 1.5 degrees Celsius in relation to pre-industrial levels, the mission of professional accountants is very clear. Our work related to environmental and sustainability actions means a great responsibility towards the entire global society.