Thought leadership: HLB International
A step in the right direction: how embracing sustainability reporting will lead to a more fruitful future
Bettina Cassegrain is the Technical Director and Global Assurance Leader for HLB International and is responsible for audit and assurance quality and knowledge sharing on this topic with HLB member firms worldwide.
The importance of sustainability has really come to the fore in recent years and for good reason. COP26 indicated that while businesses are making headway on their journey to net-zero, more needs to be done. It is crucial that businesses start paying attention to the ecological, social, and economic environments they operate in. Organisations of all sizes need to understand the importance of disclosing information on how they foster sustainability to not only meet increasing investor demands in this area, but also to ensure their long-term viability.
Technical Director and Global Assurance Leader
Sustainability reporting, far beyond what is required today, has become a hot topic in the audit and accounting profession as well. The current debate has undoubtedly been fuelled by public concern over the climate crisis and an increased amount of reporting of natural disasters such as global heat waves, floods and forest fires. In the past year, the IFRS Foundation established the International Sustainability Standards Board (ISSB) to create and develop sustainability-related financial reporting standards to meet the growing investor appetite for more substantial sustainability disclosures.
The ISSB’s objective is to complete all standard setting work before the end of this year in order to allow for rapid implementation of the new standards. If everything goes according to plan, we could see audit reports being issued as early as the first quarter of 2024.
Another initiative being run in parallel is the European Union’s Corporate Sustainability Reporting Directive (CSRD). This new legislation aims to ensure that companies disclose information on the way they manage and mitigate environmental and social challenges to highlight their responsible approach to conducting business.
Overall, these new reporting obligations will impact the accounting and auditing profession as they face a whole new set of challenges, regardless of the size of the firm. However, where there are challenges there are also myriad opportunities. We need to stand ready.
Keep ahead of the curve
It is very likely that there are firms or individual professionals who believe they are not concerned by the proposed change in standards, possibly because their clients are SMEs and therefore not immediately affected by the incoming obligations. However, this is a misconception as there are already plans to extend the same or very similar obligations to smaller entities from 2026 onwards.
On the audit side, the reasons for professionals to be interested in sustainability reporting seem obvious to me: if your firm has an existing audit engagement and a good client relationship, it is likely that your client will ask you to take care of the sustainability reporting as well. Auditors should view this situation as an opportunity to be more forward looking and demonstrate the value-add they can bring to the table.
Nevertheless, accountants and advisory specialists are also concerned and can look forward to providing new services. After all, auditors can only report if they have the right data in the right format to report in the first place.
With challenge comes opportunity
Sustainability reporting requirements present an enormous opportunity for the profession as a whole. Initial steps are two-fold: making sure your firm is ready to provide the new services, be it in the accounting/advisory or the audit space, and creating client awareness as not all clients, even the ones with early obligations, will be aware of all the detail.
On the firm side, it is important to train our staff or bring in specialists. This is actually a great opportunity for a profession which has for some time been struggling with recruitment and retention. Why not use ESG as a talent attraction tool. It is an exciting new area which might entice young people who were previously not interested in the profession. We have all heard about the importance of our ‘why’ and that it is essential for people to feel why what they are doing matters. There is hardly a better topic than ESG in this respect. We all want to do our bit to create a better tomorrow and preserve our planet. If the profession can demonstrate that we are fully embracing this objective, then we have a completely new and much more interesting angle when it comes to recruitment and talent retention.
I believe stakeholder and especially investor pressure will play its part in ensuring all businesses take a more pragmatic approach to sustainability disclosures. The second global study on the subject which has just been published by IFAC, the AICPA and CIMA points in this direction. It shows a clear increase in reporting by global companies with 58% of companies obtaining independent assurance on ESG in 2021 compared to 51% the previous year. Even more importantly, 61% of assurance engagements were performed by audit firms, thus clearly underlining why this is a topic we should be interested in as a profession.
ESG is all about thinking things through and making the right choices. This doesn’t mean that we have to over complicate things. Much of what an organisation may have put in place, even if it has not been given an appropriate label, might go in the right direction. Choosing local suppliers rather than ones which are located very far away and thus helping to preserve local employment and the local community is one example we can all work towards without too much difficulty. Being mindful of how we treat our staff and providing a platform for open dialogue is another first step in the right direction. Let’s not forget that ESG is about doing the right thing one step at a time, it’s not about being perfect on day one.
Worth the risk?
Auditors are ideally positioned to report on non-financial information. They know their clients well and have access to all processes, systems and information because they already audit the financial information. As mentioned previously, it therefore makes sense that a client would prefer to have their non-financial information certified by the same professional as their financial statements. It’s like any of us buying a product or a service: if we are happy with the experience we get from our current provider, why look elsewhere?
As for investors, they are used to relying on auditors for audited financial information and expect that information to be accurate. They will have the same expectation with regard to non-financial information.
The above indicates that an organisation is likely to have a natural preference for their current accountant when it comes to assistance with the preparation of non-financial information and their current auditor when it comes to the certification. By implication, this also means that if we do not position ourselves well and on a timely basis, we could very well lose some existing clients. On the other hand, those professionals who understand how crucial the current moment is and are ready to move into the sustainability space can normally only win.
HLB is acutely aware of the importance of sustainability reporting to the future of the audit and accountancy profession. Through its specialty committees and Centres of Excellence, HLB is finding ways to support its members in developing the right sustainability reporting capabilities and keeping member firms informed on the latest developments in this area. Get in touch with us today to find out more.