On the 50th anniversary of Earth Day, accountants are working on the environment
Fifty years since the first Earth Day was held on April 22, 1970, in response to unprecedented pollution and environmental degradation, accountants are working on ways to help the environment.
In February, 14 accounting organizations, including the Association of International Certified Professional Accountants, the Association of Chartered Certified Accountants, the International Federation of Accountants and CPA Canada issued a joint call to action in response to climate change (see our story).
"Barry Melancon, as CEO of the Association of International Certified Professional Accountants, signed this call to action, along with 13 other chief executives of other accounting bodies around the world,” said Desire Carroll, AICPA senior manager of public accounting, who is the staff liaison to the AICPA Assurance Services Executive Committee’s Sustainability Assurance and Advisory Task Force. “In it, they set out the actions that accountants are called upon to take in response to climate, as well as commitments from the accounting bodies themselves in support of their members. That call to action did highlight that climate change represents an economic, social and business risk, and really calls on accountants to play a role in that area of risk. As core members of most businesses, accountants are ideally well positioned to help organizations assess and manage these new risks.”
As the COVID-19 pandemic has spread across the globe in the past few months, that call to action by accounting leaders has taken on greater urgency. “There’s a sense that with the pandemic and its impact on the market, it highlights that environmental and social problems can pose significant financial risks, and highlights the need for these kinds of risks to be managed appropriately,” said Carroll. “What we’re seeing in the near term is a shift in which [environmental, social and governance] issues are focused upon as we try to get through this crisis, and maybe focus on employee health and benefits and the sustainability of the supply chain. There’s a general sense that, as we move out of the pandemic, this would likely accelerate the issue, given the significant risks they can pose to the financial realm.”
The closing down of businesses and industrial production in many parts of the world and reductions in automotive traffic since the advent of the pandemic have been credited with decreasing pollution levels to some extent. That provides perhaps a tiny bit of a “silver lining” in the midst of an otherwise catastrophic situation, and could perhaps encourage companies to act more responsibly toward the environment once the pandemic is eventually under control.
“Now that everyone is being forced to work remotely, we’re seeing these improvements in the environment,” said Carroll. “Maybe they will be able to continue, at least to a greater degree to help improve the climate and the environment.”
The AICPA has been working with groups like the Sustainability Accounting Standards Board, the Global Reporting Initiative and the International Integrated Reporting Council to develop educational resources for its members.
“Part of the commitments of the accounting bodies themselves is to support their members with providing training and the support they would need to apply this environmental drive,” said Carroll. “There is greater need in terms of being asked more often to provide assurance services over sustainability information. In 2017 we released a guide, called 'Attestation Engagements on Sustainability Information.' If our members are out there being asked to perform a sustainability assurance engagement, it helps them apply our specific attestation standards. It walks through everything from the engagement considerations to planning the engagement to performing the engagement and then reporting it at the conclusion of the engagement.”
After releasing the guide, the AICPA has been developing training materials for performing sustainability assurance engagements, including online self-study courses, webinars and a website with sustainability reporting resources. Future initiatives are also in the works. “Over the summer we’re planning to do a joint sustainability reporting and assurance event with SASB,” said Carroll. “We’re also going to be putting out in the next few months some assurance FAQs with the Global Reporting Initiative. We’re constantly trying to monitor the needs of our members and what they might need to deliver the services that they’re being asked to deliver and provide them the appropriate resources for those purposes.”
A 2017 survey of portfolio managers and financial analysts by the CFA Institute indicated a greater desire for assurance on ESG information by 69 percent of the respondents. “There’s obviously a broader role to helping with the reporting beyond assurance,” said Carroll. “The systems are not quite as robust as financial reporting systems. There are a number of areas that CPAs can help with.“
SASB for its part has teamed up with a technology company called Mercatus, which has developed technology for helping companies and portfolio managers comply with SASB standards.
“SASB is doing a great job and got huge endorsements from the CEOs of Blackrock and others,” said Mercatus CEO Haresh Patel. “We certainly felt that with all the standards developing, they seem to be gaining the most momentum. Our job is to figure out how to make it easy to report.”
“Most of the technology for reporting was built as an accounting system and therefore it was a ledger-based architecture, where you’re trying to use a rearview mirror to look at what you’re going to do forward looking,” he added. “Our platform happened to be built as a financial model architecture. Therefore we were looking at projects, assets and portfolio companies one at a time. ESG reporting requires a total inversion of how you gather this data.”
Private equity firms have complained that collecting ESG data from their underlying portfolio companies and assets has been a manual, time-intensive process, noted Jeff Cohen, head of private investments initiatives at SASB. Much of the data has resided in Microsoft Excel spreadsheets and has been difficult to transfer into the kinds of systems they use for investing. The information needs to be actionable, especially at a time when the world is facing a deadly pandemic.
“I think the pandemic has been first and foremost a humanitarian issue that we’re all dealing with and cognizant of,” said Cohen. “But I believe that one of the things that it’s done is shone a light on a lot of human capital factors as well as governance factors, things like business continuity planning, paid sick leave and systemic risk management, that are very much being stress-tested at this point in time. One of the results of the pandemic we’re seeing play out is in the price of oil as well as the significant drop in emissions. Ultimately how firms are thinking about Earth Day and being more cognizant of certain environmental as well as social and human factors is not only important for people on the planet, but increasingly important for the financial resilience and operating condition of the companies themselves. That’s where I believe SASB can play a really significant role in standardizing this information and creating consistent and comparable data sets to allow for more informed actions by both investors as well as by companies, and any tools that can help make that process smoother are a really valuable addition to the market.”