Several financial auditing firms have been signaling their entry into the ESG space. I blogged a few months ago about PwC’s $12 billion investment – and a recent Financial Times article says that all of the Big Four firms are jumping on the bandwagon. A CAQ publication from earlier this month also lays the groundwork for CPA firms getting into ESG assurances.
ESG disclosures benefit from verification but some discussions conflate auditing and accounting – which are not the same. And that is important, because most ESG matters are not financially material or covered by existing accounting standards. The term “data validation” is more appropriate than “audit” for ESG these days.
ESG generally refers to activities and non-financial indicators that are sometimes converted – perhaps artificially at times – to financial values. Accounting of course has its basis in financial values and their categorization covered by existing accounting standards. ESG values more likely to be in the realm of managerial accounting.
Having spent decades doing ESG data validation, I am not sold on the idea that “regular” accountants possess the right skills or knowledge for such engagements – just like I am not qualified as an accountant or to perform financial audits. Financial auditing requires of financial accounting knowledge, and ESG data validation requires understanding the technical basis for underlying data that frequently comes from:
- specialized equipment like fuel burning devices and pollution control equipment,
- monitoring devices requiring on-going maintenance, cleaning and calibration,
- knowledge of calculation methodologies for things like air emissions and process chemical use,
- laboratory analyses, and
- gut checks for potential red flags like this one.
These are but a few examples of relevant specialized knowledge necessary for ESG data validation. Granted, I know a small number of folks at Big 4 firms who have solid technical non-financial backgrounds but they are few and far between. Accountants can play a role in a multi-disciplinary ESG review team, but they are not singularly qualified for ESG data validation engagements.
A previous gold rush anticipated by accounting firms associated with Section 1502 of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 (concerning conflict minerals) never happened. That market is dominated by non-financial advisors and auditors from technical backgrounds more closely related to the subject matter – an indicator that buyers value technical knowledge over accounting knowledge in the ESG space.