The Center for Audit Quality (CAQ) has posted on its website S&P 500 ESG Reporting and Assurance Analysis, the annual update of its study of S&P 500 company environmental, social, and governance (ESG) disclosures. The CAQ found that 98 percent of S&P 500 companies publicly disclosed detailed ESG information in 2022, essentially unchanged from 99 percent in 2021. Seventy percent of S&P 500 companies that reported 2022 ESG information also obtained third-party assurance over at least some of that information, compared to 65 percent of ESG reporters that obtained assurance in 2021. About one-fifth (21 percent) of the companies that obtained assurance in 2022 retained a public company auditor – usually the same firm that audited their financial statements -- to provide ESG assurance, up from 18 percent in 2021.
To compile the information in its ESG reporting study, the CAQ reviewed S&P 500 company websites, CDP Climate Change Questionnaires, and third-party assurance or verification reports for reporting periods ending in 2022. (The analysis does not include information disclosed in SEC filings.) The CAQ found that most S&P 500 companies have an ESG page on their investor relations website where a standalone ESG report is available as a pdf. However, some companies issue ESG information in multiple reports such as SASB, GRI, or TCFD indexes or reports. Other companies provide an ESG interface web portal to disclose ESG information.
Below is a summary of some of the highlights of the 2024 CAQ updated study.
ESG Reporting Frameworks and Standards
The CAQ tracked references to four ESG disclosure frameworks or standards: the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate Change (TCFD), and the Integrated Reporting Framework (IR). (The SASB standards are now under the oversight of the International Sustainability Standards Board (ISSB), which began to issue standards in late 2022.)
A substantial majority of S&P 500 companies referenced at least one of these reporting frameworks or standards in their 2022 ESG disclosure. Ten companies referred to all four, and 304 companies referred to three of the four. Twelve companies reported ESG information but did not reference any reporting framework. The most frequently referenced ESG disclosure framework or standard in 2022 was SASB (459 companies), followed by TCFD (411 companies), GRI (358 companies), and IR (13 companies).
Assurance or Verification
In 2022, 340 S&P 500 companies disclosed receiving some form of assurance or verification over certain of their ESG metrics, a 6 percent increase from the 320 companies that obtained assurance in 2021. Seventy percent of the companies that reported ESG information in 2022 obtained assurance over some part of that information.
Of the companies that obtained assurance in 2022, 74 utilized public company auditors, and 277 obtained assurance from other types of providers. The percentage of companies that engaged a public company auditor to perform their assurance engagements rose from 18 percent in 2021 to 21 percent in 2022. (Some companies used both a public company auditor and other providers.) Ninety-five percent of the companies that obtained assurance from a public company auditor in 2022 used the firm that performed their financial statement audit, up from 90 percent in 2021.
Assurance by Public Company Auditors
For those S&P 500 companies that used a public company auditor to provide ESG assurance, the information covered, standards used, and level of assurance varied.
Thirty-nine companies obtained assurance over greenhouse gas (GHG) emissions and between one and three additional ESG metrics. (e.g., water, energy, or waste metrics), compared to 31 companies in 2021. Fourteen companies obtained assurance over GHG emissions only, while 21 obtained assurance over GHG emissions and more than three other metrics.
U.S. public company auditors used the American Institute of Certified Public Accountants (AICPA) attestation standards to perform their assurance engagements, while non-U.S. auditors used either the International Auditing and Assurance Standards Board (IAASB) standards or the national assurance standard applicable in their country. One U.S. public company auditor used both the AICPA attestation standards and the IAASB assurance standards to perform an assurance engagement. In three cases, the assurance standard used could not be determined from the company’s documentation.
Seventy-nine of the 2022 assurance reports issued by public company auditors provided only limited assurance on the ESG disclosures they reviewed. Eleven of the public company auditor assurance reports provided reasonable assurance – the same level of assurance as is required in financial statement audits filed with the SEC. (These numbers exceed the number of companies that obtained assurance from public company auditors because some companies had multiple assurance engagements performed.)
Assurance or Verification by Other Providers
For those S&P 500 companies that used ESG assurance providers that were not public company auditors, there was similar variation in the information covered, standards used, and level of assurance.
Companies that sought assurance over their GHG emissions tended to utilize non-auditor assurance providers. In 2022, the CAQ found 108 instances in which such providers issued reports on GHG emissions only. In 107 other cases, companies obtained assurance over GHG emissions and between one and three additional ESG metrics from a non-auditor. Sixty-two obtained assurance over GHG emissions and more than three other metrics from a non-auditor.
Non-auditor ESG assurance providers used one of three sets of standards in performing their work: International Standardization Organization (ISO) standards, IAASB standards, or AccountAbility’s AA1000 assurance standard. The ISOs were the most popular. The CAQ found 242 instances in which non-auditors used the ISOs, compared to 192 for the IAASB’s standards and 22 for AA 1000.
Providers that were not public company auditors used three terms to describe the level of assurance they provided, “reasonable assurance” (51 instances), “limited assurance” (342 instances), and “moderate assurance” (20 instances). In three cases, the level of assurance provided could not be determined from the company’s documentation. The 51 reports in which non-auditors provided reasonable assurance on ESG disclosures during 2022 were almost double the 26 non-auditor reasonable assurance reports in 2021. (As in the case of auditor assurance reports, the report numbers for non-auditor assurance exceed the number of companies that obtained assurance from non-auditors because some companies had multiple assurance engagements performed.)
GHG Emissions Information
GHG emissions are the ESG metric for which companies most frequently obtain assurance or verification. In 2022, 337 of the 340 S&P 500 companies that obtained any type of ESG assurance obtained assurance over their GHG emissions -- 19 more companies than obtained assurance or verification over their GHG emissions in 2021. Of those 337 companies, 272 obtained assurance over Scope 1, 2, and 3 emissions, while 63 obtained assurance over only Scope 1 and 2 emissions. Two companies obtained assurance over only Scope 1 emissions. (Scope 1 GHG emissions are direct emissions from sources owned or controlled by an organization. Scope 2 GHG emissions are emissions associated with purchased electricity, steam, heat, or cooling. Scope 3 GHG emissions include all other emissions that occur in the upstream and downstream activities of an organization, such as those from the activities of suppliers or customers’ use of the organization’s products).
Other ESG Topics Subject to Assurance or Verification
In addition to GHG emissions, S&P 500 companies obtained assurance over a wide range of ESG metrics in 2022. Excluding “other,” the top five assurance topics were energy (164 companies), water (141 companies), waste (91 companies), employee health and safety (56 companies), and human capital (50 companies).
Net-Zero or Carbon-Neutral Commitments
In 2022, 293 S&P 500 companies disclosed a net-zero and/or carbon-neutral commitment – a nine percent increase over the 268 companies that disclosed such a commitment in 2021. The most common commitment date was 2050, the same as in 2021.
Audit Committee Takeaways
The CAQ’s findings are broadly consistent with those of other studies of ESG reporting. See Large Companies Worldwide Continue to Expand Their ESG Disclosure and Assurance, February 2024 Update. In brief, ESG reporting is almost universal among the largest companies, and third-party assurance over ESG disclosure is becoming the norm. While non-auditors dominate the ESG assurance market, public company auditors are slowly increasing their share.
The ESG disclosure revolution has many implications for audit committees. One of the themes of the Update has been that ESG disclosures are often not subject to the same controls and procedures as traditional financial disclosures. This creates risks that the sustainability report may be inconsistent with other company disclosures or that the accuracy of the information presented may not be verifiable. These risks should be of concern to audit committees because of their responsibility for disclosure oversight and for oversight of related controls and procedures.
The CAQ’s report highlights another audit committee issue. Most companies that obtain assurance over GHG emissions or other ESG disclosures opt for limited, rather than reasonable, assurance. This is the case regardless of whether a public company auditor or some other type of professional provides the assurance. A limited assurance engagement results only in a statement that the assurance provider performed certain procedures and that nothing came to the provider’s attention that would indicate the disclosure is inaccurate. While the cost of obtaining limited assurance is typically lower than the cost of reasonable assurance, the benefits are also lower. Investors may not understand what limited assurance engagements entail, and there is a significant risk that they will overestimate the value of limited assurance. See Sustainability Assurance is the New Expectations Gap, May-June 2024 Update. Audit committees should consider the benefits of obtaining reasonable assurance over the company’s ESG disclosures. Committees that opt for limited assurance should ensure that the disclosure clearly explains to users the meaning of that assurance level.
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