Host
Jag Dhaliwal
Guests
- Kate Beeston, Technical Manager, Corporate Reporting, ICAEW
- Alex Russell, Head of Audit and Assurance Strategy, ICAEW
Transcript
Jag Dhaliwal: Hello and welcome to ICAEW Student Insights. My name is Jag Dhaliwal, and today we’re discussing sustainability reporting and assurance. Sustainability has risen up the corporate agenda in recent years. But what does it mean for the work of accountants? We’re going to talk about how sustainability reporting and assurance are developing, and the skills you need to get ahead of the curve. I’m joined today by two experts: Kate Beeston, Technical Manager, Corporate Reporting, and Alex Russell, Head of Audit and Assurance Strategy. Thank you for coming in today.
Accounting and financial information has been around for many years, but how new is non-financial information – in particular, sustainability and climate?
Kate Beeston: So non-financial information has been around 20, 30 years or so, but it is a growing area, so annual reports are definitely seeing the front half getting bigger and bigger, and the focus now is much more on sustainability reporting. So, you can see there’s lots more requirements coming in, and we’re going to see a lot more of that in the future.
Alex Russell: And companies have been getting to grips with, especially, climate change, transition plans, for a few years now. But the challenge really is, as you said, financial reporting has been around for a long time. Companies have mature systems for capturing the information. reporting. Non-financial information is a completely different kettle of fish. Processes are very immature. There’s a whole lot of information you can capture and some of that – around greenhouse gases, wider climate disclosures – takes a while to capture, takes a while for companies to get to grips with, let alone internal controls. So that’s all very new to the profession.
JD: So today we’re going to focus on sustainability in particular. So for those who are new to the subject, what is the landscape like for sustainability in terms of reporting and assurance?
KB: So in terms of reporting, if we’re looking at the UK, there are some requirements already in force for UK companies, particularly to do with the environment and climate-related reporting. So of course, you’ve got your strategic report requirements where some companies do already have to report about environmental matters. We also already have streamlined energy and carbon reporting, so companies in scope have to report on their emissions.
And then more recently, we’ve seen the focus really on climate-related disclosures. So in the UK, a couple of years ago, we saw the introduction of the UK climate-related financial disclosure regulations, and they require in-scope companies to report quite detailed disclosures around the risks and opportunities relating to climate. And these regulations are very much based on the TCFD disclosures. And there’s four, I guess, big areas that they have to report on. It’s governance, it’s strategy, it’s risk management and it’s metrics and targets.
I think, I guess another area to mention is there’s listing rules as well. So it’s quite a complicated landscape at the moment, but listing rule requirements, they enforce the disclosure of – well it’s really on a comply or explain basis, so you have to comply or explain with the TCFD.
So the landscape at the moment is a little bit fragmented, but it’s really at the moment focused on climate disclosures.
JD: So it sounds like a very complicated landscape at the moment. Alex, do you have anything further to add to that?
AR: Yes, it is complicated. And as Kate said, we’ve really only scratched the surface of the E of ESG, and within that environment, largely climate reporting. But the S and G are following fast. So the S covers things like employee practices. So obviously, students and consumers will be really interested in the S. And you know, if you’re buying clothes, for example, what are the practices down the value chain?
But in terms of the assurance environment in the UK, especially, it’s a bit behind the reporting environment, so there’s no mandatory assurance in the UK yet. We’re waiting to see what the government will decide in that respect. That’s not to say the companies aren’t getting assurance on their sustainability metrics, sustainability information, sustainability reports – but it’s very sporadic at the moment. Most of the FTSE 100 are getting some form of voluntary assurance – so that’s the 100 largest companies in the UK, essentially, and that’s growing. But there’s no regulatory environment to create a framework for that at the moment.
JD: And if we do, then, get slightly more technical, what are the requirements of IFRS S1 and S2?
KB: Yeah, so IFRS S1 and S2, these are the ISSB standards, the International Sustainability Standards Board. So they are the sister board, really, of the IASB. They come under the IFRS Foundation, and they have recently published their first two sustainability standards. So we’ve got S1 which is focused on the general requirements, and we’ve got S2 which is focused on climate-related disclosures. And actually S2 is very much based on the TCFD framework, so it’s familiar to a lot of people – not exactly the same, but it follows those four pillars that I mentioned with the governance and the strategy, risk management and metrics and targets. So the ISSB’s aim is to really create a global baseline, the idea being that we have these standards, they increase comparability and quality and it means, then, that investors can actually use that information to make decisions.
So they are, really, a very important milestone, the publishing of those two standards. And it’s interesting to see what’s happening at the moment around the world because, of course, at ISSB they can’t mandate these standards in different countries – that is up to individual jurisdictions. So at the moment, it’s about 30 jurisdictions which have either endorsed them or are taking steps to endorse those standards.
JD: Does that have a name in terms of the global element?
KB: Yeah. I mean, I guess the ISSB is one of the big, big players in terms of a reporting standards board. And I would say that there’s another big player, which is the EU, ultimately. And so the EU has introduced a new directive called the CSRD, and under that, they are requiring companies within their scope to report on a whole host of sustainability matters. They are using EFRAG to create these standards, and they so far have issued 12 standards.
So they’re a bit further ahead than the ISSB, and their standards are not the same as the ISSB standards – although, you know, in terms of the climate ones, there’s a lot of overlap. But they’re not the same, and they do have some different concepts and definitions. Materiality is the big one that you hear people talking about a lot because the EU standards – they’re called ESRSs – they require companies to use double materiality, and that’s quite a big change, I guess, from what we’ve been used to. Double materiality is where you have to look at two aspects, of course. One is the impact of all the sustainability matters on the company’s position and performance. But you’ve also got it really the other way around, where it’s the company’s impact on the environment, the community, nature.
And so, yes, accountants have got to get grips with that and actually understand how that works in practice. So that’s quite a big change and a big difference from the ISSB standards. So they’re the two big players in the reporting world.
AR: Yeah, and from an assurance perspective, I think Kate mentioned comparability, and that’s a really important concept. Comparability, trust in the information that’s being reported, and reliability – that’s where assurance comes in to create that level of trust in the information that’s being reported. At the moment, in the UK, there’s a standard called ISAE 3000 which is being used, but that doesn’t have any sustainability specifics. So there’s a new global standard, another acronym being thrown at you, the ISSA 5000 – International Standard on Sustainability Assurance 5000 – and that, much like S1 and S2, is designed to create a global baseline. The body in the States that’s issued it, the global body, the IAASB, is trying to get that implemented in as many countries as possible, and the early signs are really good that it’s being implemented around the world. We’re still waiting on the UK position, but I think we’re moving in the right direction to implement that.
But the idea in that new standard is, unlike its predecessor, it explains different types of sustainability information and sustainability matters – that goes from greenhouse gas emissions and climate change to wider issues like biodiversity – lots of things coming down the line. So the idea is that that standard could be used for all these different sustainability matters.
And then there’s a few other really important aspects about it. So number one, it’s designed to be framework-neutral. So all the reporting frameworks that Kate has been describing, S1 and S2, the EU CSRD, other frameworks like the Global Reporting Initiative – the new ISSA 5000 is designed to be used on all of those. So no matter which framework you’re using, you should be able to apply this new assurance standard.
And secondly – you might hear this a lot – it’s designed to be practitioner-agnostic. So that means you don’t have to be a professional accountant, you don’t have to be an auditor, to apply it. It’s an open tool to apply, as long as you meet certain criteria. So if you meet certain ethical requirements, if you maintain a system of quality management, then you can apply that standard. But it’s designed to create a global baseline. So that’s key to promoting consistency and comparability. So it’s really important.
JD: You both showcased a lot of great technical knowledge there. For our students who are listening, and perhaps watching, what would be the key headlines that they should take away. Kate, I know you mentioned double materiality. Is there anything else that you think is really key for our students?
KB: I think it’s just really useful to keep an eye on these developments and understand the key differences between them. Because we’re talking about the UK, well, we are very much expecting the UK to endorse the ISSB standards, we’re expecting a decision at the beginning of next year [2025]. And then we’ll expect UK sustainability reporting standards. So I think it’s really important to keep up to date with these developments, because it is a very fast-evolving landscape.
And with CSRD, although it’s, you know, it’s EU regulation, the regulation does and can impact companies outside the EU. So I think it’s understanding the key players in this, the key standards and some of those definitions and concepts such as double materiality.
JD: And Alex, do you have anything to add to that?
AR: I think where do we start, really, with skills that our members and students need to learn here? I mean, lots of the traditional skills you’re learning through the ACA and, you know, if you’re in audit you’re learning, are really applicable here, and even more so because Kate mentioned double materiality; so you might be used to financial materiality, but this sort of other concept she described with impact materiality – so the impact the company is having on the outside world – is really a new area.
I think, because of the issues around materiality, you’re going to have to get to grips with what’s known as qualitative materiality a lot more as well. So not just the numbers, but is something qualitatively material? And that requires you to engage brain, engage your professional judgement, your scepticism. You’ll be looking at a whole range of different disclosures that could be on any different topic, any sustainability matter.
And this is worth pointing out, this will come onto your desk, whether you’re in audit, whether you’re delivering some kind of other assurance, whether you’re actually a consultant specialising in sustainability, whether you’re in-house in a company in their finance team – you’re going to come across these issues and need to build up your understanding.
The next one, really, is you’re going to have to collaborate a lot more, because as a profession we’re going to be working with a lot more specialists and experts than we ever have done before. You might, if you’re working in audit, you might be used to working with pension specialists, investment managers, people like that. But with this, it could be anyone. It could be, you know, really interesting specialists that are specialists in developing climate models, things like that. So collaboration, I think, being aware that organisations have value chains as well. So I mentioned at the start, an interest in employees and where companies are sourcing their materials, etc. So value chains and supply chains are really important, and knowing that we’re going to have to dig a lot deeper in the future to kind of understand how a business is running.
And I think Kate alluded to it, but I think continuous learning and having that kind of open mindset, because we’re only just scratching the surface of all these sustainability topics. Kate mentioned the TCFD, and that’s climate-related financial disclosures, but coming down the line is TNFD, another acronym – Task Force for Nature-Related Financial Disclosures. And that’s really going to blow all this wide open, because you’ve got considerations of how your company is affecting nature, and trying to get companies to change their mindset from having a negative effect on the planet to a positive effect. And that brings in all kinds of things like biodiversity, land use, water and waste. So there’s a lot of room to learn, and just keep picking up these different areas and sort of learning as you go, really.
JD: Yeah, there’s so much to unpack from what you’ve just said there. As an auditor, I can definitely agree it has come across my desk – ESG specialists – and then also just from the work that you do in the back half, and having to tie that through to the front half. And then in terms of those skills that you’ve mentioned as well – so collaboration, professional scepticism – those skills, what do you think? Are they kind of skills for just now, or are they also skills for the future, the next five to 10 years? Or is there any other skill that you maybe haven’t mentioned that will become relevant?
AR: Well, professional judgement, including scepticism, is one of the most important skills that we have as professional accountants. The Financial Reporting Council has been very on top of this, issuing lots of guidance on it. ICAEW has done a lot in this space, and I think that’s a key skill to hone, especially, as I said before, we could be working with lots of different experts and specialists. We’re going to be working with information that we’re not very familiar with. So we need that judgement and scepticism to know, to both consider materiality, but also, you know, just spot things that don’t look right, and that also ties into how we can help prevent greenwashing and other types of washing that you might come across.
KB: I think, just to come in on that in terms of skills, I think with sustainability reporting, accountants are in a really good place for this, because we’re used to a set of reporting standards. We’re used to interpreting them, understanding them, and that’s exactly what we’re going to have to do with sustainability. But of course, it’s getting to grips with that subject matter. That’s the new bit. But we are well practised in actually understanding and interpreting standards.
And I think another part of this is going to be data analytics, really, because there’s going to be so much data that emerges from sustainability reporting, and how we handle that and deal with that and understand it – that is definitely going to require digital skills and analytical skills.
AR: I’d also add that if you have clients who are audit clients or otherwise, or you work with companies in another way, bringing them along on the journey is key as well, because the processes are quite immature for us professional accountants, chartered accountants, but companies aren’t all the way there yet either. So this is fairly new to companies as well – coming up with these disclosures for TCFD and the EU’s CSRD – with a certain respect, we have to make sure we can bring them along on the journey. And that’s obviously a core chartered accountant skill, really, you know – how we can explain these complex concepts to our clients and members in an understandable way.
JD: So in terms of these new reporting standards, and also just the massive changes that are coming, how do we really think it will change the work of accountants? Is it what you’ve said, Kate, already, in terms of just the data skills and, I guess, we already do have to break things down that are quite complex to our clients? Are there any other ways that it will really kind of change our work?
KB: Well, I think it’s a huge learning curve that we’re all going to have to go through. Because, as we’ve already mentioned, sustainability reporting is coming, it’s definitely coming, and whether you end up specialising in it or not, it is going to come across your desk. But I think there’s, I guess, a mindset change as well that has to happen here, and we have to make sure that we don’t look at sustainability reporting in isolation from the financial statements. So I think that’s another area that we’re going to have to learn how to do and change our mindset on, because connectivity is really important here, and we should be able to see with reporting an holistic picture of the company, and understand how these sustainability reporting data actually link to the financials.
So there’s a big learning curve, I would say, and it’s all the things we’ve already mentioned. But yeah, the subject matter and understanding how it all fits together, I would say, is another challenge.
AR: I think that’s really key – the link from the front half to the back half. You’re going to have things that naturally you can follow through, like greenhouse gas emissions, but there’s so much in there – companies are having to actually change their business models, their strategies, to make sure that they are meeting consumers’ and investors’ needs, so really thinking about how sustainability fits with their strategy.
And so, from our members’ point of view, really considering how a disclosure they’ve read or a metric they’ve seen – does that have an impact on the financial statements? Does that, you know, does something not tally with their business strategy or their going concern? Have we read something around emissions or, you know, severe weather could impact a company’s supply chain? Have we sort of considered that?
So it’s a very holistic thought process, thinking about everything that’s happening to the company, really, which is, again, quite new.
JD: Yeah, absolutely, because all of that then would have to factor into the forecasts and everything that I guess our auditors are looking at, and the accountants who are preparing those. So in terms of accountants, then, this element of the front half and the back half linkage – it may become that, I would say, perhaps a bit of a more senior level. But do you think it is really important for our junior accountants to really be looking at this from as soon as they can?
AR: I think so. It depends greatly whether you’re doing a statutory audit or a specific assurance engagement, because they are two distinct things. You know, in the audit, you’re checking consistency with the front half to the back half. And you need to have that mindset I’ve just described. If you’re delivering a sustainability assurance engagement, that could be on anything. It could be a handful of metrics. It could be a sustainability report, you might be homing in on certain metrics, looking at the qualitative materiality of them, deciding if they fit in together.
And as I mentioned before, how the company captures that information in the first place – and Kate mentioned data – there is so much data to get to grips with through analytics and other means, so it’s very important. But I think yes, the sooner you can get to grips with it, the better. And even our first and second-year trainees who are studying for the ACA will come across these issues day to day, for sure.
KB: Yeah, I completely agree with Alex. I think this is absolutely one for the junior accountants, as well as the senior staff. And you know, in audit, you’re looking at your impairment, and you’re looking at forecasts, then yes, you’ve absolutely got to consider whether sustainability matters are impacting that and therefore impacting your financial results. So they go together. They can’t be completely just looked at in isolation, which means we all have to get to grips with this throughout the entire profession.
JD: There’s really no getting away from it. So what can our students do? How can they learn more about this? Are there any resources Kate?
KB: Yeah, well at ICAEW, I’m a staff member in the Corporate Reporting Faculty and students can sign up to this. It’s completely free, and it provides you, when you’ve got access, to a lot of resources. It really will help you keep up to date with what’s going on in this sustainability reporting world. And if you sign up, then you get our bulletins straight to your inbox and that will really help just keeping an eye on what’s going on because things are changing at a fast pace, and we have lots of introductory guidance, which really just sets the scene, particularly if you’re at the beginning of this, and trying to get to grips with all the different reporting standards and who they apply to, and the scoping. It’s a complex area, and it’s fast changing, as I said, so we do have lots of resources in the faculty,
AR: Yeah, well, ICAEW has got a sustainability certificate, which is well worth a look at, and I think there’s some updates coming down the line early next year to that as well. In our Audit and Assurance Faculty, we’ve got a sustainability assurance hub so you can read about many of the issues I’ve talked about today. We’ve also got some specific climate assurance guidance for companies, which is really interesting as well. Membership of the Audit and Assurance Faculty is free as of last year to our members and our students, so it’s well worth joining if you’re interested in and want to learn more about the topic. You’ll get one newsletter a month, otherwise we won’t bother you too much! But you can access all of those and listen to webinars on sustainability assurance and upskill yourself. So it’s well worth a try.
JD: The first thing I’m doing after this podcast is checking out those faculties and communities. So before we finish up today, I just want to really thank you both for coming in and giving your expertise as well as your time. So Alex, Kate, thank you.
AR: Thank you very much for having me.
KB: No problem – thank you for inviting us.
JD: Make sure you visit ICAEW Student Insights for ongoing support during your studies. On the Student Insights hub, you’ll find resources for completing the ACA qualification and the ICAEW CFAB, as well as inspiring stories of students and recently qualified members. That’s all available at icaew.com/studentinsights
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