Opportunity knocks for firms as ESG reporting, assurance levels rise

February 27, 2023

The percentage of large companies around the world disclosing and obtaining assurance on data related to environmental, social, and governance (ESG) is on the rise, but the percentage of assurance provided by accounting firms is heading in the opposite direction.

Ninety-five percent of companies reported some ESG information, and 64% obtained some level of assurance on that data in 2021, according to The State of Play: Sustainability Disclosure & Assurance. In 2019, 91% of companies reported some ESG information, and 51% obtained some assurance.

The International Federation of Accountants (IFAC) and AICPA & CIMA, together as the Association of International Certified Professional Accountants, co-authored the latest version of the study, which reviewed the 2021 disclosures of 1,350 of the largest companies in 21 jurisdictions.

In 2021, 57% of ESG assurance engagements were conducted by audit firms, down from 63% in 2019.

A joint statement in the study from IFAC and AICPA & CIMA leadership stressed that "the accountancy profession must demonstrate to stakeholders why our profession is best placed to deliver assurance."

Is the US poised to reverse the trend?

The United States stands out among seven jurisdictions where nonaccountancy service providers delivered the majority of ESG assurance engagements. Audit or affiliated firms provided 15.3% of assurance over ESG data in the United States in 2021, slightly down from 16.2% in 2020.

However, with the SEC expected to soon release its first rule requiring climate-related disclosures and attestation, and with some U.S. companies soon to be affected by the EU's Corporate Sustainability Reporting Directive, firms are preparing for increasing ESG assurance opportunities.

In a recent AICPA & CIMA survey of 27 of the top 100 U.S. accounting firms, 84% of firms not currently providing ESG assurance services said they're very likely or likely to do so in the next one to three years. In the same survey two years ago, just 43% said that was very likely or likely. No firms in the most recent survey said it was unlikely they would soon start providing assurance services.

However, nearly three-fourths of responding firms indicated that when securing or planning to secure ESG-related assurance engagements, they find it challenging to gather "the necessary internal resources and experts to perform the work" — ranking as the concern most commonly cited.

For the sake of firms seeking solutions, AICPA & CIMA recently launched a first-of-its-kind Fundamentals of ESG Certificate course; recently updated an attestation guide for ESG engagements; and recently launched an education partnership with the University of Oxford in addition to developing other tools designed to help support firms' preparedness.

Other noteworthy State of Play findings

1. Firms currently providing ESG assurance were consistent with the standards they used in 2021, with 95% using ISAE 3000 (Revised) — signaling the likelihood that firms collectively will embrace the standard's eventual replacement — ISSA 5000. By contrast, just 38% of engagements performed by other service providers used ISAE 3000 (Revised) in 2021.
2. For companies reporting ESG data, the use of multiple reporting frameworks increased from 68% in 2019 to 86% in 2021. Standardization may be on the way, however, with the ISSB's first two building-block global reporting standards set for implementation by some companies beginning in 2024.
3. The number of companies breaking out ESG data in a sustainability report has ticked down, from 57% in 2019 to 50% in 2021. The authors consider that an encouraging trend, noting steady progress "toward reporting in annual reports and integrated reports, which provide more connectivity between ESG and financial information and support integrated decision-making within companies."
4. Among the 95% of companies reporting some ESG information in 2021, 96% reported data in all four categories reviewed in the study (greenhouse gas emissions, other environmental data, social, and governance) — up from 89% in 2020. Fifty-three percent of those companies obtained assurance in all four areas in 2021, up from 43% in 2020.
5. Ninety-seven percent of companies in 2021 reported historic greenhouse gas emissions; 67% disclosed emission reduction targets.
6. The study (parts of which are accessible only via AICPA or CIMA membership) also includes a snapshot view for each of the 21 represented jurisdictions, summarizing ESG disclosure and assurance data.

[Journal of Accountancy]