Sustainability: ‘We absolutely must wrap our minds around this’
CPAs are now seeing increased demand from clients and other stakeholders for sustainable reporting and assurance (Getty Images / skynesher)
Sustainability reporting has been gaining momentum across a growing number of industries. And, as stakeholders and investors look for more information on a company’s ESG policies and footprint, the demand for third-party assurance of that information is also increasing.
“More and more clients are going to be asking for sustainability assurance engagements,” says CPA Amy Yacyshyn, principal in sustainability reporting and assurance at CPA Canada. “It’s key for practitioners to understand the current landscape and to keep up to date on upcoming regulatory initiatives.”
Here are some of the latest developments in sustainability reporting and assurance and how the profession may be impacted.
GLOBAL DEVELOPMENTS
While environmental, social and governance (ESG) reporting has been around for some time, this was generally done on a voluntary basis.
“These disclosures were a nice-to-have,” says Edward Olson, CPA, partner in enterprise risk services and leader of ESG at MNP.
But now, he says, momentum is clearly growing toward standardization. “We're finally hitting that transitionary point where the must-have is coming into play,” he says.
One of the most recent examples of the strides that ESG reporting has been making is the creation of the International Sustainability Standards Board (ISSB), with the inauguration ceremony for the board’s Montreal centre taking place in June. The ISSB also released two exposure drafts, IFRS S1 – General Requirements for Disclosure of Sustainability-related Financial Information and S2 – Climate-related Disclosures; the public comment period ended on July 29, 2022.
In addition, last fall, the Canadian Securities Administrators (CSA) published a consultation on proposed climate-related disclosure requirements. The comment period ended in January 2022.
“For a lot of public companies, that was a wakeup call to the seriousness with which this reporting is being taken,” says Yacyshyn.
The recent establishment of the Independent Review Committee on Standard Setting in Canada (IRCSS) aims to review the governance and structure for establishing Canadian accounting, auditing, and assurance standards, as well what might be needed for the future—including sustainability standards. The IRCSS is working to finalize its recommendations on several key matters based on feedback gathered through its 2022 consultation process. One of the early recommendations emerging from the review was the establishment of a Canadian Sustainability Standards Board, which aims to be operational by April 2023.
Both Yacyshyn and Olson note that Europe is ahead of North America in terms of ESG standard-setting and assurance. “Europe has a lot more stringent requirements that go across the economy,” says Olson. “Companies will have to be aware of the requirements in order to ensure compliance. If they don’t, it will directly impact their revenue and profitability.”
Olson adds that Canadian and U.S. companies that do business in Europe will be affected by these sustainability regulations and need to be aware of the implications.
Like the CSA, the U.S. Securities and Exchange Commission (SEC) has also recently consulted on its own set of climate disclosure rules. The comprehensive 500-page report proposes requirements for issuers to disclose their scope 1, 2 and 3 emissions.
Olson cautions that it is not just public companies that need to pay attention to these evolving global ESG regulatory developments. “The implications of these requirements will start with the capital markets but cascade down to those who do business with companies in the capital markets,” he says. “You are in somebody's supply chain or enterprise value chain. If that public company is your customer, they will be asking [that disclosure] of you.”
“This is cautionary for companies who are privately held,” he adds. “Be aware of the changes and know they will impact you.”
HOW CPAs WILL BE AFFECTED
These developments will affect the services CPAs provide to their clients. As Olson puts it, “With companies of all kinds being asked to provide sustainability information, we need to ask ourselves, ‘How are our clients going to be impacted?’”
Olson adds that it’s imperative for CPAs to step up their game. “The call to action is not to wait. We are a profession with a mindset that allows us to look at this and really get our heads wrapped around it.”
The same skills that are applied to traditional assurance, he says, must also be applied to sustainability reporting and assurance. “Just as we approach financial statements with rigor to ensure their completeness and accuracy, we will need the skills to provide assurance over sustainability disclosures to ensure that same completeness and accuracy.”
WHAT CPAs SHOULD HAVE ON THEIR RADAR
Looking forward, a possible hurdle CPAs will have to overcome is acquiring and adapting sustainability reporting skills and knowledge to their already well-developed accounting toolbelt. “Once again, the same rigor needs to be applied to sustainability as to traditional accounting and assurance,” says Olson. “We must embed these skills into the CPA curriculum.”
Olson also says today’s CPA needs to evaluate who is consuming sustainability-related information, what they are consuming and how they are going to use that information.
“The very foundation of business resilience--cash flow--may be negatively impacted should a key customer decide to cancel a contract or business relationship. This decision could result from the inability of a supplier to report on critical information such as greenhouse gas (GHG) emissions. Alternatively, third party assurance can be obtained on the GHG information provided to enhance the customer’s reliance on that information.”
To provide proper assurance, it will also be necessary to build collaboration between external advisers (CPAs) and internal parties (internal audit departments). “Working together, we can leverage the skills of both parties to cover the assurance needs of individual companies,” says Olson. “And that collaboration should also extend to the various parties working together, as they advise on the ESG framework to apply and the appropriate level of assurance to be obtained.
One surefire way for CPAs to remain on top of sustainability assurance is to follow ISSB and International Auditing and Assurance Standards Board (IAASB) developments, and to visit Financial Reporting and Assurance Standards Canada for the latest on standard setting, Yacyshyn says. She also recommends referring to new standards and papers coming out of the CSA, SEC and other organizations. However, she points out that ESG covers a broad range of topics. “Don’t just stop after learning about climate [change]. Understand governance practices and how organizations are embedding social issues into their decision-making and reporting as well.”
KEEP UP TO DATE ON ESG
Stay up-to-date on developments in ESG reporting and assurance with our audit quality blogs and other sustainability reporting and assurance resources.