With investors calling COVID-19 the 21st century’s first “sustainability” crisis, heads are turning towards climate change and socially responsible actions.
In particular, there has been a surge this past year in sustainable investing approaches, as investors demand more attention be paid to environmental, social and governance (ESG) endeavours.
“The pandemic has not slowed the momentum around climate change and sustainability. In fact, it has increased the pace,” says Charles Antoine St-Jean, CPA Canada’s president and CEO. “Urgency is translating into action on sustainability reporting. This is a pivotal time.”
The ESG investing momentum is evident in a recent RBC survey which found that 75 per cent of institutional investors incorporated ESG principles into their investment process (up from 70 per cent in 2019), while 84 per cent believe ESG-integrated portfolios perform as well or better than those that don’t integrate ESG.
Meanwhile, according to Morningstar, a U.S.-based financial services and investment research firm, sustainable funds and exchange-traded funds (ETFs) in Canada soared by 67 per cent in 2020.
CPAs must keep their eyes on a moving target, say experts, realizing the role accounting plays in ESG and how sustainability reporting must react accordingly.
Here are four insights for professional accountants to keep in mind as ESG efforts gain momentum.
CPAs can and will play a crucial role as ESG initiatives become mainstream and are integrated into organizational strategy, says Davinder Valeri, director, strategy, risk and performance, in the research, guidance and support department at CPA Canada. Roles will range from business governance to reporting and assurance, risk assessment and analysis, she adds.
“A lot of what is needed in ESG, or sustainability at large, is about transparency around decision-making,” she says. “As stakeholder expectations continue to evolve, CPAs are positioned to help companies navigate the complexity of these issues.”
According to PwC, almost 60 per cent of mutual fund assets will be ESG by 2025. As investor expectations continue to shift, Valeri stresses the need for CPAs to embrace the movement, stay abreast of new developments, the roles accountants are playing and how their own skillsets can be used (or developed) to contribute.
“This is a huge opportunity for CPAs in both the short- and long-term as ESG is not going away anytime soon,” says Valeri. “Peter Bakker [CEO of the World Business Council on Sustainable Development] said that ‘accountants can save the world’. Really, we can.”
CEOs from Canada’s eight leading pension plan investment managers, representing approximately $1.6 trillion in assets under management, recently called on companies and investors to provide consistent and complete ESG information to strengthen investment decision-making and better assess and manage ESG risk exposures.
This statement spotlights the urgency of improving sustainability reporting to ensure transparency, while building (and sustaining) trust among investors and the public at large. Accurately assessing an organization’s ESG efforts goes far beyond traditional reporting and requires a broader type of analysis that incorporates a multi-stakeholder and long-term perspective.
“We need to establish what measurement really means when we talk about our [global] footprint, for the community, governments, as well as for investors and the financial and capital markets as whole,” says Martin Charbonneau, vice-president of corporate accounting for CDPQ (Caisse de dépôt et placement du Québec). “How do we get the data we need to educate, communicate and integrate ESG risks and opportunities into our processes to ensure the successful and timely deployment of ESG strategies? The information is getting more accurate and relevant, but sustainability reporting needs to continue to evolve and mature.”
This evolution, adds Valeri, is heavily dependent on the establishment of global standards, set collaboratively by standards bodies, regulators and governments around the world, that organizations of all sizes and across industries can adhere to.
“A set of comparable and consistent standards will allow businesses to build public trust by creating greater transparency around their sustainability initiatives,” she says.
A global solution for improving the consistency and comparability of ESG reporting may be in the works to avoid the current piecemeal approach. A new global set of ESG reporting standards will build on the work of international bodies such as the Task Force on Climate-related Financial Disclosure (TCFD), the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), which have had their standards acknowledged and even adopted by corporations globally, explains Valeri.
“A global solution will bring discipline and rigor to the ESG reporting process,” she says. “The accounting profession is poised to assist Canada and the world achieve this.”
Spearheading a move to create global sustainability standards is the International Financial Reporting Standard (IFRS) Foundation. Last fall, it issued a consultation paper to test the demand for global standards and the support for the foundation to set up a new Sustainability Standards Board (SSB).
In its response to the IFRS Foundation, CPA Canada emphasizes ways to improve the quality of sustainability reporting globally. Recommendations include producing high-quality sustainable reporting standards in a timely manner; tailoring reporting requirements to alleviate the burden on smaller organizations with limited resources; and working with existing bodies, including the SASB and GRI, already engaged in this area.
“Business, political and regulatory leaders are fully supporting this proposal and calling for a single set of consistent and internationally recognized sustainability reporting standards,” says Valeri.
A final decision on the new SSB could come as soon as this fall, according to the IFRS Foundation, moving sustainability reporting to an even higher level.
Ultimately, the “do-good” efforts of yesterday are just that, a thing of the past, says Valeri. A necessary evolution in accountability and credibility is taking place.
“No longer can companies simply record ‘good deeds’ in their CSR. Now they need to integrate sustainability with financial data and apply integrated thinking to show a picture of risks, strategy, performance and long-term value,” she says.
“Companies that have invested in ESG reporting with an integrated lens are reaping the benefits, and CPAs are at the forefront of strategic decision-making, performance measurement and data integrity to help them do so.”
Charbonneau agrees, adding that to be influential, professional accountants must also find a meaningful place in this rapidly emerging area.
Complementing CPAs’ role in industry as ESG reporting gains ground, CPA Canada’s St-Jean notes: “Canada’s accounting profession will seek a role in global sustainability standards, leveraging its world-class experience and expertise in standard setting.”
Check out CPA Canada’s wealth of resources providing further insight into environment and social disclosure and considerations to assist companies in assessing the materiality of climate-change matters. Also, read in detail CPA Canada’s letter in response to the IFRS Foundation’s Consultation Paper on Sustainability Reporting.