What More ESG Regulation Means for CPAs

No longer a novelty, environmental, social and governance (ESG) is increasingly being included voluntarily in organizations’ reporting requirements, according to a virtual panel discussion earlier this fall.

Investor Influence

Chris J. Schiffer, CPA, CFP, MBA, AIF, senior vice president of the Wealth Enhancement Group and leader of the NJCPA Business & Industry Professionals Interest Group, who moderated the session noted that there has been more interest in learning about an organization’s ESG initiatives from investors. In the future, there could be a way to tax ESG initiatives, he explained, particularly as tax professionals find a way to measure these activities.

Shari Littan, CPA, J.D., manager of corporate reporting technical activities at the Institute of Management Accountants and a panelist on the program, explained that ESG is a topic that is “gaining a lot of prominence and bringing us a new paradigm in the accounting world.”  

Trevor Dunaway, audit senior manager and a diversity, equity and inclusion leader at KPMG as well as a panelist on the webinar, added that, “looking at everything we are hearing and seeing, we know that reporting should really support a business’ value creation, and because of that there is an investor focus.” The anticipated regulation related to ESG, he said, will come because of that investor focus. “A company’s reporting strategy really needs to be able to meet the needs of all of its key stakeholders, but also be agile enough and compliant with regulation.”

Eye on Regulators

From conversations coming out of the International Financial Reporting Standards (IFRS) Foundation and others in the U.S., Dunaway said there is a momentum towards establishing a baseline global standard of ESG reporting. “The SEC (Securities and Exchange Commission) has been pretty active in this the last year,” he added, pointing to a September release by the SEC of a sample letter to companies for climate change disclosures.  According to Dunaway, the letter provides some insight into where the SEC might be going with potential ESG regulation. “It’s clear that the SEC is comparing what a company has reported today in their 10K and in their financial filings against that 2010 climate change rule. In addition, they are also comparing what a company has disclosed in their 10K against what they are reporting whether it’s an ESG report or whether it’s in a climate change report or greenhouse gas emissions report.”

“One element that also came out of reviewing that comment letter is the potential for additional quantitative and qualitative disclosures around climate change,” he added, noting that the SEC has a great focus on climate change disclosures. The SEC also recently closed their comment period for receiving insights and feedback from the marketplace about potential climate regulation.

Lazaro Tiant, investment director for sustainability at Schroders and a webinar panelist, said that what is important for an organization is “an ability to prove you are doing what you say you are doing from a sustainability standpoint.” From 2010 to 2020, he said more sustainability and ESG reporting was to be expected given the exponential growth in global regulation and policies, which is not just from financial and government regulators but also from industry. The CFA Institute recently published global ESG disclosure standards for investment products.  

“This is not just about ESG investing or ESG metrics,” he said. “There are so many environmental and social components of our day-to-day that are being regulated or put in policies from a voluntary perspective or a mandatory perspective.” He added, “there’s a headwind for some organizations to be able to respond to this, but, for CPAs, I think it’s a tailwind to be able to play a role in assisting in these frameworks and how it’s taken into account internally in their organizations but then how the market holistically starts factoring in this kind of information within business practices altogether.”

Learn more in the ESG Knowledge Hub.