Momentum around ESG reporting has been building in recent years. Now, regulations, investors and other stakeholders want companies to prove their ESG and climate information is accurate and reliable through audits and assurance.
Certified Public Accountants (CPAs) are the trusted providers of most companies for financial auditing and have been supporting the assurance of non-financial ESG and climate information for decades. This experience puts them at the top of most companies’ list when considering a firm to perform the third-party audit of their ESG and climate reporting. In fact, a Center for Audit Quality (CAQ) analysis found that 90% of US companies that trusted their non-financial auditing to a publicly traded auditor used the same firm for their financial auditing.
To find out why your company should be using an accounting firm to meet the growing need for Climate and ESG auditing, this post will introduce why there is a growing need, the difficulties related to ESG and climate auditing, why CPAs are best positioned to help and how to pick the best auditor for your company.
The Growing Need for Climate and ESG Auditing
Rising climate and ESG risks, new regulations, and stakeholder pressure have ensured that many companies are measuring and reporting their ESG and climate data. Those same forces are shifting their focus from data reporting to data verification through third-party auditing.
With so much room for misrepresenting or misstating ESG data, assurance has become an important part of ESG reporting. These are the main factors contributing to the growing need for ESG data auditing.
- Regulation: Many of the world’s most far-reaching climate regulations require assurances from pre-approved third-party auditors. The recently passed California climate disclosure rule, SB 253, will require companies to start limited assurance in 2026 and reasonable assurance in 2030 for Scope 1 and 2 emissions. For the EU’s sustainability reporting regulation, the Corporate Sustainability Reporting Directive (CSRD), which will affect 60,000 EU and non-EU companies, companies will have to provide limited assurance.
- Investors: Increasingly, investors ask for consistent, reliable, and accurate ESG and climate data to make better investment decisions. Companies that audit their ESG data are more likely to attract investments.
- Supply Chain: Most companies will not be affected directly by climate or ESG auditing regulations. However, it is likely their largest customers will be impacted, and they will request ESG information to meet regulation requirements. They may require the data to be audited to ensure accuracy.
- Consumers: The public is increasingly critical of companies' misstatements on their emissions or other ESG metrics. These controversies can risk a company's brand reputation. ESG and climate audits allow companies to identify issues before reporting their ESG data.
The majority of these auditing needs are coming from a climate perspective. However, other ESG metrics also increasingly need assurance. As ESG risks accumulate and regulations evolve, metrics other than climate requiring third-party audits are only likely to increase further.
Complexities of ESG and Climate Data Auditing
Despite these growing pressures for auditing, 75% of companies are unprepared for regulation-driven ESG audits. This may be in part because ESG and climate auditing pose a whole new set of challenges distinct from challenges of traditional financial auditing. The five main difficulties when conducting ESG and climate data auditing include:
- Diversity of data sources: Financial data is often collated from standardized internal company sources with one metric: money. ESG and climate data can emerge from various sources. The range of sources can include mileage from vehicles, deforestation in supply chains, diversity in the workplace, etc.
- Disparate standards: There's no globally recognized standard for ESG data collection, reporting, and assurances like there is for finances. Leading to varied methodologies and metrics across organizations making it difficult to do comparable and consistent auditing.
- Future-looking information: Financial statements usually just look at the previous fiscal years’ balance sheets. ESG and climate impacts can have long-term consequences under multiple scenarios, making assessing both current actions and future implications essential.
- Data Verification: Authenticating claims, such as reduced deforestation, GHG emissions, or water use, requires verification through multiple methods, which could include satellite imagery, on-site inspections, energy bills, and supplier audits.
- Type of assurance: most companies will need limited assurance to begin with as that is the easier type of assurance, only requiring the auditor to express a conclusion that nothing has come to their attention to indicate that the data is materially misstated because this is the main assurance level in regulations and the least costly. However, over the longer term, companies can expect to provide reasonable assurance, which is a higher level of assurance under which the auditor expresses a positive opinion that the data is fairly presented in all material respects.
The long-term consideration of future ESG risks and the multitude of ESG metrics covering a broad spectrum from carbon emissions to labor rights make it difficult to verify and audit ESG data. However, given the heightened scrutiny from stakeholders, any missteps in ESG reporting can result in significant reputational and financial repercussions, underscoring the importance of getting your ESG data verified by a third party, one that understands these complexities.
Things to Consider When Engaging an ESG Auditing Provider
Most studies point to companies using professional accountants that audit their finances to audit their non-financial information. One International Federation of Accountants (IFAC) study revealed that 70% of global ESG assurance is performed by accountants. However, it also reveals that in some jurisdictions, less than half of ESG assurance engagements are performed by accountants. Meaning companies are still considering other ESG auditing providers. Here are five steps to take when you are selecting an ESG assurance provider:
Step 1: Assess Your Needs and Objectives
- ESG Compliance and Goals: Understand what ESG regulations your company has to comply with and the level of assurance it requires (limited or reasonable). Also, determine the ESG goals you want to achieve and the metrics you'll need to be audited.
- Scope of Work: Determine the extent of the audit, whether it's focused only on climate or extends to other areas like water, deforestation, or social factors. This may be established by regulation or reporting standards.
- Timeline: Establish a realistic timeline for the auditing process. This may be established by regulation or reporting standards.
Step 2: Research and Shortlist Potential Partners
- Previous Relationship: Firstly, consider if the firms that have conducted your other audits have ESG auditing capabilities, as they will understand the business and be able to hit the ground running.
- Industry Reputation: Look for firms known for their expertise in ESG and climate data auditing.
- Online Reviews: Take note of customer reviews to gauge the firm's credibility.
Step 3: Evaluate Qualifications and Expertise
- Credentials: Make sure the firm has experts specializing in ESG auditing and that they use the most up to date ESG assurance standards.
- Prior Work: Ask for case studies, white papers, or previous audit reports to understand their approach.
- Regulatory Compliance: Ensure they're well-versed in current ESG regulations and guidelines relevant to your industry and geography.
Step 4: Conduct Interviews and Request Proposals
- Interview: Meet potential partners to gauge the fit between their capabilities and your needs.
- Technical Capabilities: Ask about the software tools and methodologies they employ for ESG auditing.
- Request for Proposals (RFPs): Solicit detailed proposals, including cost estimates, deliverables, and timelines.
Step 5: Make the Decision
- Compare Proposals: Assess each proposal based on your priorities, including cost, expertise, and the proposed approach.
- Check References: Contact other companies that have used the auditing firm's services for unbiased feedback.
- Finalize Contract: Once you’ve made your choice, go over the contract details carefully and finalize the partnership.
Why an Accounting Partner Is the Best Fit for Navigating ESG Data Auditing
Considering these five steps, here is why CPA firms should be your go-to choice. Firstly, auditing has always been one of the cornerstone services of accounting firms. Although ESG auditing is vastly more complex than financial auditing, CPAs have conducted non-financial audits for decades. With their experience and knowledge, they are the best for companies conducting ESG assurances. Here is why:
- Understanding Business Processes: CPAs deeply understand your industry, market dynamics, and why specific ESG metrics are material. With a deep understanding of business processes, they can identify ESG data for collection and suggest reporting improvements.
- Standard Adherence: CPAs are experienced in applying recognized auditing and attestation standards like the IAASB’s ISAE 3000 standard. Such adherence ensures that your ESG reporting meets internationally recognized benchmarks.
- Specialist Access: CPAs have the resources to tap into specialists with expertise in various ESG areas, including climate-specific topics like GHG emissions. This network of expertise ensures companies have peace of mind that their CPAs can navigate all the complexities of sustainability reporting and assurance.
- Trusted by Stakeholders: Investors and capital market participants trust CPAs due to their long-term experience with auditing financial reports and, therefore, value ESG information audited by CPAs. Such auditing not only reinforces the reliability of your ESG data but can also enhance your standing in sustainability indices, impacting investment decisions.
Why CPAs Will Dominate the
Future of ESG
ESG data auditing and assurance is still expanding, with one IFAC study revealing that, although most companies are auditing some of their EAG data, just less than half of companies (47%) are still not getting all of their ESG data audited. However, with ESG reporting regulations starting to come into play in 2024 and the heightened interest in ESG investments, that number will likely rise sharply.
CPAs, with their history of conducting rigorous financial audits, are ideal candidates to perform ESG assurance. Accounting firms also see this as an area of growth and are investing heavily to develop the necessary skills to meet the rising demand for ESG assurance services.
Contact Us
If you have been reporting your ESG and climate data and now need assurances, reach out to our Sustainability and ESG Services Team to get started today!
