A new ‘coexistence’ of financial audit and ESG advisory teams could emerge due to the nature of sustainability assurance services
PwC has predicted that ESG assets will account for more than 50% of mutual fund assets by 2025 – representing compound annual growth of 28.8% from 2019 onwards.
But questions remain as to how this will affect the formation of professional services firms, with some industry participants arguing that silos and structures may begin to change shape.
“There’s an interesting question around how the financial audit and business advisory worlds coexist inside audit firms when it comes to delivering ESG services,” says Dr Jeremy Osborn, global head of ESG at AICPA.
Osborn draws on his experience working in EY UK’s sustainability services team, explaining that ESG assurance typically straddles both sides of the organisation. This may present a valuable opportunity for greater cohesion between the two, he says.
“I think those with the accountancy background whose primary role it might have been to provide financial audit or provide sustainability report assurance are also very well placed to provide advice to their clients around things such as adaptation to climate change.
“Getting the insights that comes from supporting the report assurance or the financial audit process provides a very good basis for them offering that broader advisory service to clients,” adds Osborn.
New IFAC, AICPA and CIMA research supports Osborn’s view. In a study of 1,400 global companies, 70% that engaged a professional accounting firm to perform their ESG assurance chose the firm that audits their financial statements.
This presents firms with an opportunity to distribute capabilities and break down information silos in order to more effectively serve clients, Osborn argues.
While some firms may find the mounting demand for ESG solutions to be an abrupt challenge, it will eventually present the opportunity to restructure accordingly, says Mary Tressel, ESG lead across Moore Global’s professional services network.
“It’s a bit of a challenge for firms to get their arms around in the beginning, but we’ll see that it’s an opportunity to break down silos, because you need to go across the entire organisation to gather the information required.”
Tressel tells of such initiatives taking place in the Moore Global network, explaining that the firm made it a priority to “really develop a structure” around the new service line.
She argues that many firms will be forced to do the same and “go back to basics”, making the suggestion that processes and team structures should be segmented per client.
“I think it’ll be on a client-by-client basis – there are opportunities for firms in both realms, and so I think the key for firms getting into this area is evaluating their client base and where they think the need is going to be strongest.”
A market ‘differentiator’
Similarly, Rakesh Shaunak, managing partner and group chairman at MHA Macintyre Hudson, argues that firms will be “forced” to rethink their most basic practices due to the weight of opportunity that the growing ESG demand poses.
This is reflected in the IFAC, AICPA and CIMA study. The number of global companies obtaining independent assurance on their ESG information increased from 51% to 58% in 2020, with almost a third of those surveyed (61%) stating that such engagements were being performed by audit firms.
“As our clients have begun to talk about these things more and more, we’ve become acutely conscious that it was something we needed to be involved in, and something that will act as a differentiator,” says Shaunak.
Shaunak went on to highlight talent as an “integral” tenet of this, explaining that the firm has leveraged its international network to create a global ESG team and offset any potential recruitment challenges.
However, he also suggests that this “works both ways”, arguing that an increased focus on sustainability matters acts as an effective recruitment tool for the firm.
“It comes back to us being seen as a differentiator. We’ve found that newer recruits are becoming more and more ESG conscious, so it’s definitely a big draw as far as recruitment is concerned.”
Tressel describes a similar experience in the Moore Global network, explaining that new recruits are increasingly ESG-aware regardless of their specialism.
“Whatever their professional interest is within the firm, they still have that focus, so this is definitely a recruiting tool.”
A survey conducted by PwC in 2021 supports this trend, which found that 86% of employees prefer to support or work for companies that care about the same issues as them.
But for AICPA’s Osborn, a crucial component of firms’ groundwork for responding to ESG demand is “amplification”.
With many firms likely to be in a position of privilege when it comes to forthcoming regulatory changes, a priority must be to help clients further their understanding of what needs reporting and how the information can be gathered.
“They’re in a very privileged position in terms of the relationship they have with their clients to help them understand what these changes are,” Osborn says.
“So part of their role is amplification through their client network and helping them understand what the changes are, and how that will impact on what’s reported, assured and audited.”
Regulatory picture remains unclear
However, the groundwork of audit firms in reacting to the ESG boom still depends heavily on how the regulatory picture develops, according to Osborn.
The “most important and urgent” aspect of this surrounds the work of the International Sustainability Standards Board (ISSB), he says.
Formed during COP26 in November 2021, the ISSB has consolidated the Climate Disclosure Standards Board and the Value Reporting Foundation to form a new global standards setter for sustainability reporting.
Its draft standards are expected to be published before the end of 2022. National regulators, such as the UK’s Financial Reporting Council (FRC), must then decide how soon they wish to adopt the new standards.
“That in turn will determine how the market shapes in response,” Osborn adds.
But while the universal adoption of the ISSB’s standards would be “ideal”, the reality is that audit firms must be prepared for all eventualities, says Tressel.
“For now it’s about being agile,” she says. “Firms have got to be prepared for whatever happens in their own jurisdictions. And then as soon as those regulations are finalised, they’ve got to get a team together that is studied up and prepared on it.”
Tressel also warns firms that many smaller businesses will be affected by the new requirements due to Scope 3 emissions disclosures.
Scope 3, which is included in the ISSB’s exposure drafts, covers all indirect emissions that occur in a company’s supply and value chain. This includes all purchased goods, services and distribution.
“It may be the listed companies that are exposed in terms of disclosure requirements, but it’s going to be pushed down because they’re being asked to report on their supply chain.”
Tressel says that she has observed this as a growing concern among her own client base, and urges firms to be prepared to offer the relevant advice to many smaller organisations as a result.
“We are seeing that in our own client base where the smaller and mid-sized companies are coming to us in a panic because their biggest customers are making these demands.”
Writes Sam Alberti in Accountancy Age(Edited)