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This publication offers insight into key regulatory ESG reporting requirements and standards likely to impact U.S. entities.  
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ESG Reporting: A Primer on Key Regulatory Reporting Requirements for U.S. Based Entities

Auditors

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Company Management

Senior Director, Professional Practice

Desiré Carroll, CPA, CA(SA) is a Senior Director, Professional Practice at the Center for Audit Quality. Her role involves advancing technical and policy-oriented projects to identify, develop, and seek consensus on issues affecting the public company auditing profession. This includes engaging with senior leaders across the financial reporting ecosystem, drafting comment letter responses to regulators, and developing thought leadership publications.

Before joining the CAQ, Desiré served as Associate Director – Sustainability Assurance at the American Institute of Certified Public Accountants (AICPA). Prior to that, she spent over 11 years at Deloitte primarily in their New York M&amp;A Transaction Services group and initially in their Audit practice. Desiré is a CPA and a South African Chartered Accountant.

Desiré Carroll, CPA, CA(SA)

Throughout my career, I’ve been focused on better understanding our financial reporting landscape, which continues to evolve at a rapid pace. One area that I have found myself particularly immersed in has been environmental, social and governance (ESG) reporting. It...

Throughout my career, I’ve been focused on better understanding our financial reporting landscape, which continues to evolve at a rapid pace. One area that I have found myself particularly immersed in has been environmental, social and governance (ESG) reporting. It first hit my radar over a decade ago. Over time, large investors increasingly demanded that public companies be more transparent about the impact of climate-related risks on their business (the ExxonMobile shareholder vote in 2017 stands out as a watershed moment). Since then, discourse around ESG has only increased and global ESG reporting rules and regulations have established this area of corporate reporting as a fixture.

When I joined the CAQ in 2021, I became part of a several year effort to better understand how public companies are reporting and assuring ESG-related information. This effort, which analyzes S&amp;P 500 companies and their ESG reporting practices, answers questions such as which reporting standards and frameworks companies are using, if they’re seeking assurance on this information, which organizations are performing the assurance services, and what standards those organizations use to perform their assurance engagements.

With the majority of companies in the S&amp;P 500 reporting some form of ESG information, this is an area of corporate reporting that I believe is here to stay, though it is likely to continue to evolve. Here are my top observations from our <a href="https://www.thecaq.org/sp-500-and-esg-reporting">2024 S&amp;P 500 ESG Reporting and Assurance Analysis</a>.
<h3><strong>Multiple standards and frameworks continue to be used to report ESG information </strong></h3>
According to our latest report, which covers 2020 - 2022 reporting, S&amp;P 500 companies continued to reference a variety of ESG reporting standards and frameworks, which they used to varying degrees. In 2022, we noted increases in the use of the SASB, TCFD, and GRI standards/frameworks with a slight decline in references to the Integrated Reporting Framework. In 2022, SASB, GRI and TCFD remained the most frequently mentioned reporting standards or frameworks. With the formation of the ISSB, we also found that 17 companies mentioned the ISSB in their ESG reporting - a number we expect to increase in 2023 and beyond.

While voluntary ESG reporting has continued to evolve, so too have regulatory reporting requirements. In the U.S., under the SEC’s <a href="https://www.sec.gov/files/rules/final/2024/33-11275.pdf">final climate rule,</a> public companies will be expected to provide climate-related disclosures in their annual reports and registration statements beginning with annual reports for the year ending December 31, 2025. In <a href="https://www.thecaq.org/aia-sec-climate-rule-part-2-what-we-were-looking-for-in-the-final-rule-versus-what-we-found">this blog</a>, I share an overview of the rule’s final requirements.  Further, the 2023 California climate disclosure laws (<a href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB253">SB 253</a>, <a href="https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202320240SB261">SB 261</a>, and <a href="https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1305">AB1305</a>) and the EU’s <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464">Corporate Sustainability Reporting Directive</a> will impact certain US companies’ ESG reporting going forward.

[custom_quote text="While voluntary ESG reporting has continued to evolve, so too have regulatory reporting requirements."]
<h3><strong>Assurance over this information continues to increase, including assurance from auditors </strong></h3>
In 2022, there was an increase in companies obtaining assurance or verification over ESG-related reporting. The CAQ observed that 340 S&amp;P 500 companies disclosed receiving some form of assurance or verification over certain ESG metrics in 2022, representing a 6% increase from the 320 companies that did so in 2021. Overall, 70% of reporting companies obtained assurance over some ESG information. The percentage of companies that obtained assurance and engaged public company auditors to perform their assurance engagements continued to increase, shifting from 18% in 2021 to 21% in 2022.

These insights reaffirmed what we know to be true: public company auditors <a href="https://www.thecaq.org/wp-content/uploads/2021/03/caq_rota-esg-a-deeper-dive-on-assurance_2021-03.pdf">play a critical role</a> in serving the public interest and supporting the flow of reliable information for decision-making. Auditors comply with rigorous requirements for independence, firm systems of quality control, and subject matter competency. Auditor assurance over ESG metrics can enhance stakeholder trust and confidence in management’s assertions, data, and disclosures.

[custom_quote text="The percentage of companies that obtained assurance and engaged public company auditors to perform their assurance engagements continued to increase."]
<h3><strong>The scope of information subject to assurance continues to increase </strong></h3>
The specific disclosures that S&amp;P 500 companies sought assurance over varied. Some companies obtained assurance over select metrics related to GHG emissions and others sought assurance over a wider range of ESG metrics like water, energy, and waste metrics. Overall, the scope of information subject to assurance continued to increase with most companies assuring their greenhouse gas (GHG) emissions and at least 1 – 3 other ESG metrics. This differs from what we had seen in prior years, where most companies had elected to assure only their GHG emissions.
<h3><strong>Certain assurance/verification providers’ descriptions of compliance with assurance standards indicate limited compliance</strong></h3>
Looking at both the public company auditors and other assurance/verification providers who used the IAASB’s assurance standards to perform their assurance engagements, we explored how each described their application and adherence to certain ISAE 3000 (Revised), <em>Assurance Engagements Other than Audits or Reviews of Historical Financial Information, </em>requirements.

We looked for the assurance/verification provider’s adherence to the following reporting requirements:
<p style="padding-left: 25px;">The requirement to include (in the assurance provider’s assurance report):</p>

<ul>
 	<li>A statement that the engagement was performed in accordance with the assurance standard.</li>
 	<li>A statement that the quality standards ISQC 1 or ISQM 1 (or other requirements that are at least as demanding) were applied and</li>
 	<li>A statement that the assurance provider complies with the independence and other ethical requirements of the IESBA Code (or other requirements that are at least as demanding as the IESBA Code).</li>
</ul>
[custom_quote text="Overall, other assurance/verification providers’ descriptions of compliance indicated limited compliance with these requirements."]

Overall, other assurance/verification providers’ descriptions of compliance indicated limited compliance with these requirements: roughly 20% did not indicate that their engagement was performed in accordance with the assurance standard, 43% did not mention use of any quality standards and 14% did not mention use of any independence or ethical requirements. Further, of the 64% of other assurance/verification providers that indicated use of an equivalent ethics code, the majority indicated that they had used their own code of conduct. In contrast, all public company auditors that applied the IAASB assurance standards, indicated compliance with each of the above IAASB requirements. Compliance with the IAASB assurance standards results in more consistent application of the standards and more comparable outcomes for report users like investors and other stakeholders.

In the report, we observed several other trends, such as increased reporting and assurance of all 15 different Scope 3 emissions categories and increased disclosures of net-zero or carbon neutral commitments.

With ESG remaining a topic of focus for our profession and as we monitor the impact of the <a href="https://www.thecaq.org/aia-sec-climate-rule-part-2-what-we-were-looking-for-in-the-final-rule-versus-what-we-found">U.S. Securities and Exchange Commission’s final climate-related disclosures rule</a>, the CAQ remains committed to <a href="https://www.thecaq.org/esg">developing resources</a> to support public company auditors navigating this landscape. Explore the full S&amp;P 500 ESG analysis <a href="https://www.thecaq.org/sp-500-and-esg-reporting">here</a>.

S&P 500 Analysis: ESG Reporting Continues to Evolve

Investors

Blog Post

ESG considerations have become a core part of investment analysis and a top priority for corporations and communities. There has been an acceleration in the number of companies reporting on ESG risks and opportunities; a dramatic shift in the range...

ESG considerations have become a core part of investment analysis and a top priority for corporations and communities. There has been an acceleration in the number of companies reporting on ESG risks and opportunities; a dramatic shift in the range of stakeholders (investors, employees, customers, and others) demanding ESG prioritization; an evolution of laws and regulations on ESG matters; and massive fund flow into ESG investment strategies as the finance sector increasingly recognizes the importance of ESG factors to long-term performance and corporate value.

As organizations increasingly report ESG, or sustainability-related information, investors are placing greater emphasis on the reliability of this information. With this growing interest in high-quality sustainability-related information, companies worldwide, especially publicly listed ones, are seeking third-party assurance on sustainability-related information. Third-party assurance enhances investor confidence in sustainability disclosures by providing insight into the reliability of the information. CPAs are well qualified to provide this assurance, meeting stakeholder expectations and regulatory requirements.

Download this publication to further explore:
<ul>
 	<li>The sustainability reporting and assurance landscape</li>
 	<li>Assurance-related considerations for institutional investors and investors in the private sector</li>
 	<li>The benefits of third-party assurance of ESG information performed by CPAs</li>
</ul>
<a class="button" href="https://www.thecaq.org/wp-content/uploads/2024/07/caq_investor-decision-making-why-cpas_2024-07.pdf">READ NOW</a>

Investor decision-making: Why CPAs are the Preferred Practitioners for Sustainability Assurance Services

The CAQ looked at ESG reports, company websites, completed CDP Climate Change Questionnaires, and third-party assurance or verification reports for 2022 period end data from S&amp;P 500 companies to understand what they disclosed about ESG reporting standards and frameworks, GHG...

S&P 500 ESG Reporting and Assurance Analysis

More than ever, sustainability and climate-related risks are top of mind for companies, investors, and everyday Americans. For many investors, the importance of this issue is directly related to a company's public persona. In a new survey from the CAQ...

More than ever, sustainability and climate-related risks are top of mind for companies, investors, and everyday Americans. For many investors, the importance of this issue is directly related to a company's public persona. In a new <a href="https://www.thecaq.org/institutional-investor-survey-q2-2024">survey</a> from the CAQ and KRC Research, 60% of institutional investors reported that reliable climate-related disclosures enhance the reputation and trustworthiness of a company. As investors and other stakeholders look to rely on sustainability-related information disclosed by companies, public company auditors are uniquely qualified and prepared to enhance the reliability of such company-prepared information. In fact, according to one study, accountancy firms already perform 58% of global assurance engagements.<sup>1</sup>

As Senior Director of Professional Practice at the Center for Audit Quality (CAQ), I proudly lead advanced technical and policy-oriented projects to identify, develop, and seek consensus on issues affecting the public company auditing profession, on the topics of ESG reporting and assurance.

While we’re still in the first half of 2024, the Securities and Exchange Commission’s new climate-related disclosure rules have thrown climate reporting into the spotlight. In honor of Earth Day, join me in taking a closer look at the environmental reporting landscape.

<strong>Understanding the New SEC Climate Disclosure Rules</strong>

In March, the U.S. Securities and Exchange Commission (SEC) <a href="https://www.sec.gov/news/press-release/2024-31">voted to adopt</a> its long-awaited climate-related disclosure rules. Here at the CAQ, <a href="https://www.thecaq.org/statement-of-support-for-the-secs-final-rule-on-climate-related-disclosures">we support this decision</a> as it will bring more clarity, consistency, and comparability to company-reported climate information and require assurance over certain aspects of the disclosure.

[custom_quote text="Whether greenhouse gas emissions or the impact of climate issues in company financial statements, audit firms – with their deep understanding of company financial records, operations, business strategies, and internal controls – stand ready to bring their independence and objectivity in providing assurance on this information." attribution='Julie Bell Lindsay, Chief Executive Officer of the CAQ']

The SEC's rule is on the minds of investors across the country. According to our recent survey with KRC Research, 83% of institutional investors in the U.S. support the SEC's efforts to require climate-related disclosures because of the role such information plays in evaluating investment opportunities. We collaborated with the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) to develop a <a href="https://www.thecaq.org/wp-content/uploads/2024/03/AICPA-CAQ-SEC-Climate-Rule-Summary.pdf">high-level summary</a> of the rules . A few key changes from the proposal that we observed included:
<ul>
 	<li>Less prescriptive Regulation S-K requirements which provide for certain disclosures based on materiality.</li>
 	<li>Regarding Greenhouse gas (GHG) emissions, elimination of Scope 3 GHG emissions disclosure requirements and the exemption of small reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers from the disclosure and attestation requirements.</li>
 	<li>Regulation S-X requirements that are narrower in scope. The final rule removed the requirement to evaluate financial statement impacts on a line-item-by-line-item basis for positive and negative impacts of severe weather events, other natural conditions, and transition activities.</li>
 	<li>A lengthening of the adoption timeline.</li>
</ul>
While Scope 3 emissions disclosures were excluded from the final rule, our recent survey with KRC Research suggests that the relevance and importance of Scope 3 will be an ongoing debate. Ninety-one out of 100 institutional investors said that public companies should be required to report their Scope 3 emissions.

I encourage you to check out <a href="https://www.thecaq.org/aia-sec-climate-rule-part-2-what-we-were-looking-for-in-the-final-rule-versus-what-we-found">my in-depth analysis</a> of what we were looking for in the final rules versus what we found as the profession continues to understand its impact. Additionally, Anita Chan, Partner at KPMG US, who played an active role in the development of the proposed rule, also sat down with me to break down the rule. You can watch a replay of that event <a href="https://www.thecaq.org/breaking-down-the-new-sec-climate-related-disclosure-rules">here</a>.

<strong>The Value of Environmental, Social, and Governance (ESG) Information</strong>

Here at the CAQ, we know that ESG information is no longer an emerging trend, but a necessary disclosure expected by investors. Comparable and reliable ESG reporting can increase investors’ confidence in the reported information, allowing our capital markets to run smoothly.

The value of ESG reporting is tied to the value of assurance provided by a public company auditor. When it comes to the value of assurance, investors are clear where they stand. In our new survey with KRC, 94% of investors want a third-party to review and assess the climate-related disclosures that companies make. Assurance of climate-related and other company-prepared ESG information is critical, as auditors can enhance the reliability of this information and offer increased investor protection.

[custom_quote text="The auditing profession has acknowledged the value of ESG information to investors and other market stakeholders and has been working to help the market obtain reliable information on which to base decisions."]

When considering assurance needs for climate-related disclosures, investors have additional thoughts. Asked about what assurance provider characteristics enhance their confidence in assurance, institutional investors said that a public company audit firm's extensive experience diving into business processes and risks (68%) and regulatory oversight that requires them to maintain systems of quality control (60%) are two attributes that give them confidence in the veracity of climate-related disclosures when assured by an auditor. The auditing profession has acknowledged the value of ESG information to investors and other market stakeholders and has been working to help the market obtain reliable information on which to base decisions.

As auditors navigate this evolving landscape, especially after the SEC’s climate disclosure rule, it’s more important than ever that we  understand <a href="https://thecaqprod.wpengine.com/wp-content/uploads/2023/03/caq_rota-climate-related-financial-information_2023-03.pdf">the role of the auditor in climate-related information</a>.

<strong>The Rise of ESG </strong>

Even before the SEC’s final climate disclosure rule, the CAQ found that growing numbers of public companies were reporting ESG information.

In our <a href="https://www.thecaq.org/sp-500-and-esg-reporting">2023 S&amp;P 500 ESG Reporting and Assurance Analysis</a> of the 2021 reporting period, we found that the number of companies reporting ESG information increased from 93% to 99% of S&amp;P 500 companies.

Additionally, most companies have a dedicated ESG page on their corporate investor relations website where the company often discloses ESG information in a standalone PDF report. We also discovered that the number of companies seeking assurance over certain ESG metrics increased by 13% from 2020, and the scope of information subject to assurance also increased.

<img class="wp-image-14808 alignright" src="https://www.thecaq.org/wp-content/uploads/2023/08/2024_04_AiA_Earth-Day.png" alt="" width="199" height="313" />Furthermore, we found that of the S&amp;P 500 companies that obtained assurance over their ESG information, 18% engaged public company auditors to perform their assurance engagements, including leading companies like Alphabet, Nike and Coca-Cola.

The conversation around climate-related reporting is ongoing. This Earth Day, as the ESG landscape continues to evolve and our profession responds and adapts, <u><a href="https://www.thecaq.org/esg">I strongly encourage you to explore the CAQ’s ESG resources to strengthen your understanding and skillset</a>.</u>

The CAQ will continue to release resources to support implementation of the rule and other ESG-related corporate reporting matters over the coming months. <a href="https://go.thecaq.org/l/834983/2020-04-22/fskb">Subscribe</a> to stay updated on our latest resources.

&nbsp;

<hr />

<strong>Endnotes</strong>
<h6>1. <a href="https://www.ifac.org/news-events/2024-02/sustainability-reporting-and-assurance-practices-largest-global-companies-continue-mature-ifac-aicpa">Sustainability Reporting and Assurance Practices of Largest Global Companies Continue to Mature, IFAC, AICPA &amp; CIMA Study Shows | IFAC</a></h6>

Charting the Path to Sustainability: Elevating ESG Reporting this Earth Day

The Center for Audit Quality is pleased to release this research to further understand capital market stakeholder information needs. Capital markets operate on trust and transparency, and understanding investor information needs as they allocate capital is necessary to build and...

The Center for Audit Quality is pleased to release this research to further understand capital market stakeholder information needs. Capital markets operate on trust and transparency, and understanding investor information needs as they allocate capital is necessary to build and maintain both.

To reach a broad range of institutional investors, the CAQ has partnered with KRC Research, a global public opinion research consultancy, to conduct independent quantitative and qualitative field work involving a diverse group of investor community stakeholders.

This second survey in our 2024 series focuses on two matters related to climate-related disclosures. First, we wanted to understand the role of, and confidence in, climate-related disclosures when it comes to investment decision-making. Second, we wanted to gain early insights into investor reactions to the U.S. Securities and Exchange Commission’s final rule on climate-related disclosures.

The Q2 survey research was conducted online from April 2 – 8, 2024 among 100 U.S. institutional investors.

All qualified respondents were screened to ensure they are professional investors employed at companies with a minimum of $500M in assets under management, have appropriate job titles, and serve at the Director level or higher with at least 5 years of experience.

<a class="button" href="https://www.thecaq.org/wp-content/uploads/2024/04/caq_institutional-investor-survey-q2-2024_2024-04.pdf">Read the survey</a>

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