Convergence of Global Sustainability Standards Reinforces Importance of ESG Initiatives

Executives should be asking questions after the flurry of Q1 developments around sustainability reporting. The activity culminated with The Committee of Sponsoring Organizations of the Treadway Commission (COSO) releasing Achieving Effective Internal Control over Sustainability Reporting (ICSR): Building Trust and Confidence through the COSO Internal Control — Integrated Framework on March 30. COSO's framework, originally developed in 1992 and revised in 2013, is widely-accepted as the benchmark for publicly traded companies in their reporting on the effectiveness of internal control over financial reporting (ICFR). Organizations now have additional guidance for applying the framework to internal control over sustainability reporting (ICSR).

During the quarter, we also saw:

• The International Sustainability Standards Board (ISSB)[1], announce the release of its first two standards: S1 (General Requirements) & S2 (Climate-related Disclosures), expected to be effective in 2024.
• European Union (EU) companies and non-EU companies with a EU presence take notice of
  the Corporate Sustainability Reporting Directive (CSRD)’s new reporting requirements. The CSRD reporting requirements take effect for large EU companies during fiscal year 2024.

These Q1 developments demonstrate the momentum in global sustainability reporting.  The issuance of the COSO guidance along with the convergence of global sustainability standards should be a signal to the corporate community that sustainability reporting is here to stay. 

In February 2023, the Association of International Certified Professional Accountants (International Federation of Accountants, AICPA & CIMA) published The State Of Play: Sustainability Disclosure & Assurance. The study comprised a review of the 2021 disclosures of 1,350 of the largest companies in 21 jurisdictions. According to the study, 95% of companies reported some ESG information and 64% obtained some level of assurance on that data in 2021 compared to 2019 when 91% of the companies reported some ESG information, and 51% obtained some assurance.  This demonstrates a high frequency of global ESG reporting among large organizations with an increasing trend towards assurance.

This is an interesting contrast to the UHY 2023 Middle Market Trends Report in which only 4.5% of respondents labeled sustainability/ESG as their top focus (ranked last).  Based on these results, we are concerned the middle market is underestimating the significance of ESG/Sustainability reporting.

While we anticipate the SEC’s guidance on climate-related disclosures and attestation, some organizations may be taking a “wait and see” approach. We would advise against this.  ESG impacts every organization, and executives should be considering their business strategies, risk management practices, and internal controls related to ESG.  With increasing demand from investors, customers, and other stakeholders for ESG-related data, it is important for organizations to identify the information their stakeholders will require.

The COSO guidance offers several key themes for organizations as they begin or continue their journeys toward establishing and maintaining an effective system of internal control over financial and sustainable business information. One is “Start early: It can take time to design and refine a system of controls that fully supports reporting objectives, so it’s important to begin the conversation sooner rather than later.”

[1] The ISSB, established by the IFRS Foundation in 2021, is tasked with developing global sustainability reporting standards that can be used by companies around the world; the equivalent of the IASB in financial reporting standards.