Firms specializing in the verification of environmental, social, and governance (ESG) claims made by companies are on the verge of embracing a groundbreaking ethics code, according to the head of a prominent global standards body. The escalating influx of trillions of dollars into investment funds flaunting green credentials has given rise to concerns about the accuracy of these claims, leading to a collective effort within the industry to ensure heightened transparency and accountability.
Faced with the widespread issue of greenwashing—a practice wherein companies exaggerate or misrepresent their commitment to sustainability—companies are now under increasing pressure to disclose more comprehensive and accurate information about their efforts in addressing critical issues such as climate change and diversifying their boards. As reported by Reuters.
Starting from this year, companies operating within the European Union and globally are now mandated to incorporate new and obligatory disclosures on ESG and climate-related factors in their annual reports for the fiscal year 2024 and subsequent periods. To counteract the persistent challenge of greenwashing, these disclosures are slated to undergo rigorous scrutiny by external auditors as a protective measure.
Gabriela Figueiredo Dias, the chair of the International Ethics Standards Board for Accountants (IESBA), recently announced that the board is actively proposing modifications and additions to its ethics standards, specifically tailored to the meticulous auditing of sustainability information provided by companies.
As an independent global body dedicated to establishing ethics standards for businesses and other entities, the IESBA stands at the forefront of shaping best practices for the verification of a company's sustainability claims.
The proposed standards include comprehensive guidelines covering various aspects, such as accounting for the environmental impact of corporate actions on emissions, the reliance on external experts, and the identification and resolution of conflicts of interest.
Dias underscored the pivotal role of ethical considerations in the realm of sustainable finance, emphasizing that instances of misinformation and greenwashing typically have their roots in behavioral issues rather than technical reporting reasons.
The proposed standards, currently open for public consultation until May, are strategically designed to complement the forthcoming technical assurance standards from the International Auditing and Assurance Standards Board.
Highlighting the importance of ethical behavior as the foundational pillar of the entire infrastructure, Dias emphasized that challenges associated with greenwashing often result from ethical or independence issues. Such issues may encompass conflicts of interest, financial interests, pressure from client companies or their management, inducements, or even a lack of professional competence.
The International Organization of Securities Commissions (IOSCO), a prominent global securities watchdog, has formally endorsed the IESBA's proactive efforts to update its standards. This aligns seamlessly with the introduction of mandatory rules for climate-related disclosures, effectively replacing private sector guidance and paving the way for more robust enforcement mechanisms against greenwashing.
Jean-Paul Servais, the chair of the IOSCO board, expressed his support for IESBA's initiative, underlining the critical role of external assurance based on globally accepted ethical standards in enhancing trust and credibility in disclosed information.
Furthermore, IESBA pointed out that the proposed standards could find applicability beyond professional accountants, extending to various professionals such as consultants, engineers, or lawyers who collectively contribute to over half of sustainability reports.
European Union regulations, in a bid to foster competition in the auditing landscape, allow non-accounting firms to audit sustainability disclosures. However, it's noteworthy that such audits are subjected to a lower standard than financial statements, introducing a dynamic shift in the competitive landscape for audit services currently dominated by the Big Four—KPMG, EY, Deloitte, and PwC.
29.01.2024
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