Insight

Preparedness in a moving ESG reporting landscape

ESG panelists at the 2023 AICPA & CIMA Conference provided investor, preparer and assurance provider perspectives.


On Monday, former SEC Commissioner Elad Roisman stated that for the SEC’s climate rule, it’s a question of when it’s coming – not if it’s coming. But in the absence of a final rule and with other regulators, standard-setters and even customers moving forward with ESG reporting requirements, companies are faced with having to prepare for reporting in a very unsettled environment. That was the theme of the ESG panel on Day 3 of the Conference, moderated by Wendy Stevens, Mazars USA partner.

“Today’s financial reporting has been more than a century in the making. In contrast, ESG has gone from a voluntary endeavor to mandated reporting in what seems like five minutes. But I’m confident that we, the accounting profession, can draw on our historical experience and skills to inject the same kind of rigor into ESG reporting as we do for financial reporting.”

— Maura Hodge, KPMG ESG Audit Leader


The ESG state of play

Maura Hodge, KPMG ESG Audit Leader, set the stage with an overview of the current regulatory reporting landscape. All panelists acknowledged that the frameworks dominating the discussion right now are the California laws and international requirements. Added to that, Hodge highlighted customers because of the role they play by requesting information from suppliers to meet their own reporting needs.

California’s Climate Accountability Package

  • The Climate Corporate Data Accountability Act requires disclosure of GHG emissions data – scopes 1, 2 and 3 – by all US business entities (public or private) with total annual revenues in excess of $1 billion that do business in California. Reporting of scope 1 and 2 emissions begins in 2026, with scope 3 one year later. Assurance over scope 1 and 2 will also be required, with scope 3 potentially being added later.
  • The Climate-Related Financial Risk Act requires all US companies – public or private, with total annual revenues in excess of $500 million that do business in California – to disclose their climate-related financial risks and measures taken to reduce or adapt to such risks. Disclosures will need to be made no later than January 1, 2026, and every two years thereafter, and be prepared in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) or similar reporting standards.
  • Amendments to California’s Health and Safety Code are effective on January 1, 2024. They require specified disclosures by business entities marketing or selling voluntary carbon offsets in California, and by entities purchasing or using voluntary carbon offsets that make claims regarding the achievement of net zero emissions or other, similar claims.
  • Read more about these requirement in our Hot Topic, California introduces climate disclosures and assurance, and web article, California imposes ESG reporting related to carbon offsets.

European Sustainability Reporting Standards (ESRSs)

  • In November 2022, the European Parliament and Council of the EU adopted the Corporate Sustainability Reporting Directive (CSRD), which amends and significantly expands the existing EU requirements for sustainability reporting. Member States are now in the process of transposing it into national law, and may make revisions that enhance the CSRD requirements as drawn up.
  • The related sustainability reporting under ESRSs is effective for the first wave of companies starting from January 1, 2024.
  • Notwithstanding that the CSRD is an EU Directive, there are considerable ESG reporting implications for US and other non-EU based companies that have securities listed on an EU-regulated market or substantial activity in the EU. Read more about the scope of the CSRD in our Hot Topic, Impact of EU ESG reporting on US companies.
  • The first set of ESRSs includes two general standards and ten topical standards. Companies will need to include information from their value chain and assess which topics to report using the double materiality concept, which requires information that is material from either a financial or an impact perspective. Read more about the requirements in our talkbook, Get ready for ESRSs.

International Sustainability Standards Board (ISSB)

  • The ISSBTM Standards comprise a general standard (IFRS S1) and a climate standard (IFRS S2). The standards are effective for fiscal years beginning on or after January 1, 2024, but individual jurisdictions will need to decide whether and how to incorporate the standards into local requirements; or companies can also decide to adopt voluntarily.
  • The ISSB Standards require comprehensive sustainability reporting of risks and opportunities to primary stakeholders such as investors. Read more about the standards in our First Impressions, and see how they compare to ESRSs in our talkbook, Comparing ESG reporting proposals.
  • The International Organization of Securities Commissions endorsed the standards in July 2023, and the list of countries considering adopting or incorporating the standards into local requirements is growing. In addition, and notably for US companies, CDP (formerly, Carbon Disclosure Project) announced it will incorporate the climate standard into its disclosure system starting in 2024.

Decision-useful sustainability information

Sandra Peters, Senior Head of Global Advocacy, CFA Institute, highlighted the following characteristics that make sustainability information decision-useful: forward-looking, consistently reported over time, connected to the financial statement impact, and subject to well-designed controls.

Peters highlighted investors’ specific interest in financially value-relevant information – and in the cash flow implications of a company’s risks, opportunities, commitments and actions. For example, if management commits to becoming net-zero, what is that going to cost and what’s the impact on enterprise value? Or if a company will be impacted by water scarcity, what will that do to its cost structure and ability to meet product demand?

Related to climate, the connectivity between climate risks and financial reporting is evident in the SEC’s thinking.

The challenge of interoperability

Mary Agoglia Hoeltzel, SVP Tax and Global CAO, Cigna, lamented the lack of convergence between the different standards, which is making preparedness difficult for companies. There are some commonalities – e.g. gravitation toward greenhouse gas emissions metrics and TCFD-like disclosures; however, different standards have different starting points to assess what information to disclose – e.g. financial materiality under the ISSB Standards versus double materiality under ESRSs. Peters highlighted the need to look very carefully at the exact wording of the standards when preparing for implementation.

“Maximizing interoperability between the standards is key not only to achieving comparability, but also to reducing the burden on preparers. Our KPMG comparison between IFRS® Accounting Standards and US GAAP is 600 pages. I think we have a collective responsibility to help ensure we don’t end up in the same place for ESG reporting.”

— Julie Santoro, KPMG Partner, ESG


The role of the governance and controls – and assurance

Agoglia Hoeltzel spoke about Cigna’s journey to formalized reporting, beginning in 2014 with a CSR report driven by the company’s HR function. It was eventually investor pressure that made management realize the company needed a more formal governance structure. Fast forward to today and the company has a cross-functional taskforce responsible for ESG strategy, performance and reporting.

Having started with around 600 reported metrics, Cigna went through an iterative process to scale down to a core set of metrics that reflects its ESG strategy in anticipation of regulation and assurance requirements.

Regarding controls over sustainability information, Jennifer Burns, Chief Auditor, AICPA & CIMA, spoke about the desire of stakeholders for quality ESG information that has the same level of rigor for measurement and reporting as there is for the financial statements.

Burns referenced the recent guidance developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) that illustrates how COSO’s Internal Control – Integrated Framework can be used for sustainability and ESG reporting. Read more about the guidance in our report, Insights from the 2023 COSO ICIF report.

Peters noted that investors desire assurance and the CFA leans toward external auditors – because of their ethical code, knowledge and understanding of internal controls, and appreciation of how sustainability information connects to the financial statements.

Postscript: Climate rule update

The SEC's Fall 2023 regulatory agenda was posted just as the Conference closed. It shows a date of April 2024 for the final climate rule.