Firms that review corporate climate data are at odds over who is qualified to perform this work, a key and potentially lucrative task under a Securities and Exchange Commission proposal that would require new disclosures on the subject.
The US Securities and Exchange Commission said in March it would like companies to seek independent certification of certain new disclosures, including estimates of greenhouse gas emissions from their operations and from the energy they use. The hedging requirement would apply to companies with at least $250 million in publicly traded stock.
Under US securities laws, only chartered accountants may audit the financial statements of public companies. According to the SEC’s proposal, the attestation report could not only be created by external auditors, but also by other service providers such as an engineering, consulting or certification company. The big four accounting firms — Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers — are pushing for stricter criteria for who can fulfill that duty, according to letters sent to the SEC as part of a public consultation that ended last month. Meanwhile, some non-accounting firms say technical expertise is important, and other observers say the market is big enough for either type of firm.
If the SEC proposal passes, insurers of environmental, social and governance details would likely see greater demand for their services. US companies are currently voluntarily commissioning an engineering or consulting company to verify their data instead of a classic auditing company. Many companies disclose some climate data themselves, but the SEC wants to make it easier for investors to compare that information.
About 6% of S&P 500 companies engaged an accounting firm to review at least some of their ESG information in the past year, compared to 47% who engaged an accounting firm, according to the latest available data from the Center for Audit Quality-industry group.
The most active in securing ESG information are consulting firms including Apex Companies LLC, WSP Global inc,
Lloyd’s Register Group Ltd. and ERM International Group Ltd., along with certification companies Bureau Veritas SA
and SGS SA,
based on research by Audit Analytics, which reviewed the largest US companies by market capitalization.
That’s partly because these vendors often charge less, said Derryck Coleman, director of research analytics at Audit Analytics.
The Big Four recommended requiring companies to demonstrate they have the expertise needed to provide this type of security. PwC said the SEC should consider whether US state licensing laws would bar professionals other than CPAs from providing attestation services. PwC also advised the regulator to consider requiring certification providers to register with the Public Company Accounting Oversight Board, the US audit regulator, to better protect investors. The Sarbanes-Oxley Act of 2002 requires accounting firms to register with the PCAOB. If attestation providers are not registered with the PCAOB, they should be compelled to comply with conduct, ethics and engagement performance requirements, PwC said.
KPMG said the SEC should clarify whether all practitioners are required to consider certain additional information, as CPAs do. Auditors must uncover inconsistencies between so-called other information and audited financial statements. The “role of the auditor is to serve the capital markets with professional skepticism and quality control systems, as well as expertise in evaluating internal data processing systems,” said Scott Flynn, KPMG’s vice chairman of audit.
PwC and the SEC declined to comment, while EY and Deloitte did not respond. Deloitte is a sponsor of the CFO Journal.
The Big Four will generate higher revenue by offering these services to more businesses. The companies do not disaggregate the revenue they generate from ESG-related work, and there are no external estimates.
Engineering, certification and consulting companies defend their expertise. French certification company Bureau Veritas is qualified to do the job because of the technical background of its staff, which means it can confirm the validity of the data and weigh companies’ plans to reduce carbon emissions, said Marc Boissonnet, executive vice president of corporate and external affairs.
“You need a lot more than audit tools,” Mr. Boissonnet said, referring to the delivery of ESG security. “You need people who are technically skilled and know the industry they’re evaluating.”
Other firms said the attestation market is likely large enough for both audit and non-audit firms. “Given the high demand for attestations, it is important that we offer companies as many options as possible to meet both voluntary and regulatory disclosure requirements,” said Beth Wyke, ERM’s global head of corporate assurance, based in London.
Rockville, Maryland-based Apex said the notion that only a financial accountant could do the job ignores the need for expertise in environmental sciences and engineering systems. “The market doesn’t have enough experience if you only use accountants, and the market doesn’t have enough experience if you only use scientists,” said Nicole Bouquet, executive director of ESG.
Few companies disclose how much they spend on climate security. The oil and gas company Diamondback Energy inc
and communications infrastructure provider Crown Castle International corp
Paid $31,500 and $40,000, respectively, to Grant Thornton and PwC for limited security services in 2021, government filings show. Energy infrastructure company Kinder Morgan inc
A filing said it paid PwC $375,000 for limited security services last year, up 15% year over year.
Investors likely won’t care what type of firm reviews companies’ climate data as long as the SEC requires them to meet the same level of professional and attestation standards that accounting firms are required to meet, said Sandy Peters, senior head of financial reporting advocacy at the CFA Institute, which represents investment professionals.
The SEC proposal has met opposition from companies who say it would be too costly to comply, and Republican lawmakers and law professors who question whether the regulator has the legal authority to set such a rule. The regulator plans to review feedback on the proposal and decide whether to make changes.
write to Mark Maurer at Mark.Maurer@wsj.com
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