By CPA Elizabeth Kaheru
Globally, we are witnessing an increasing demand for sustainability reporting. Sustainability reporting broadly involves disclosing and communicating an entity’s environmental, social, economic, and governance (ESG) impacts. The concept became prominent because it considers environmental, social and governance sustainability information. Stakeholders and investors continue challenging businesses to report how their operations affect the environment and society. Consequently, annual reports of such organisations include ESG information; however, disclosing such information is optional in many countries.
Sustainability information is commonly communicated in an entity’s annual report, which contains audited financial statements and other information relevant to understanding its nature, objectives, performance, and results during the reporting period.
Ethical Issues Associated with Sustainability Reporting
The ethical issues associated with sustainability reporting lie mainly in preparing sustainability reports.
Lack of uniformity in sustainability reporting practices across jurisdictions. This could be attributed to the existence of different sustainability-related reporting frameworks. This makes the comparability of sustainability reports complex as entities use different frameworks that align with their reporting interests. Because sustainability reporting is performed voluntarily, the common practice is for entities to determine how much sustainability information to disclose using any of the available sustainability-related reporting frameworks, including:
· Global Reporting Initiative (GRI) standards which have been accepted globally and are commonly used;
· Recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD);
· Sustainability Standards issued by the Sustainability Accounting Standards Board (SASB), among others.
Greenwashing. In sustainability reporting, greenwashing refers to making false or exaggerated claims about an entity’s sustainability performance or practices to portray the entity as environmentally responsible. Greenwashing also refers to market practices through which entities publish sustainability profiles that do not reflect their sustainability risks and impacts. Through greenwashing, entities may portray themselves as sustainable despite their products or actions not matching their claims. While this practice occurs during product development and marketing, it is also present today in how entities design their ESG strategies and reports. Through greenwashing, entities create a false sense of corporate responsibility.
Ethical Considerations in Sustainability Reporting and Assurance
Due to the challenges highlighted above, the International Ethics Standards Board for Accountants (IESBA) has proposed some amendments to the International Code of Ethics for Professional Accountants (the Code). The proposals are meant to be applied by everybody involved in the sustainability reporting process, regardless of whether they are professional accountants. Some of the key proposals which will eventually become the International Ethics Standards for Sustainability Assurance include the following:
a) Sustainability assurance practitioners must comply with the fundamental principles of ethics – integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Similar to the approach for audit engagements, those providing sustainability assurance services must be independent of the sustainability assurance clients. This will require the application of the conceptual framework in the Code to identify, evaluate, and address threats to independence concerning a sustainability assurance engagement.
b) A new requirement is to communicate actual or suspected non-compliance with laws and regulations (NOCLAR) to the auditor of the sustainability assurance client. In addition to communicating with actual or suspected NOCLARs with management and those charged with governance, the proposed standards will also require this communication to be made to the auditors of the sustainability assurance clients.
c) Introduction of a new term, ‘another practitioner’ (also referred to as the ‘other practitioner’) in the Code. The other practitioner is a sole practitioner, partnership, or corporation of practitioners that performs assurance work relevant to a sustainability assurance engagement. The other practitioner is not a member of the assurance engagement team, so the sustainability assurance practitioner cannot direct, supervise, and review their work. In situations where the other practitioner is engaged in the sustainability assurance engagement, the engaging firm will be required to:
· Make the other practitioner aware of the relevant ethical requirements, including the independence provisions and
· Request the other practitioner to confirm that they understand and will comply, or if the work has already been carried out, has complied with such provisions.
d) The proposed International Ethics Standards for Sustainability Assurance acknowledge that providing non-assurance services to sustainability assurance clients might threaten compliance with the fundamental principles and independence. As with non-assurance services to audit clients, the proposed standards require sustainability assurance practitioners to apply the conceptual framework to evaluate threats to independence created by the acceptance of engagements to provide non-assurance services to sustainability assurance clients.
e) Substantial revisions to Section 220 of the Code should include guidance, especially concerning misleading sustainability reporting, the value chain, and forward-looking information. The proposed revisions include prohibitions on the preparation or presentation of sustainability information in a manner that misleads others or the omission of anything to render the sustainability information misleading. The proposals also contain the requirement to maintain independence concerning value chain considerations of sustainability reporting clients. The value chain relates to key sustainability assurance clients’ stakeholders, such as customers and suppliers.
Based on the fundamental aspect that sustainability information is forward-looking, the IESBA believes that the recent technology-related revisions to the Code provide helpful guidance when using forward-looking information.
While sustainability reporting is performed voluntarily, it will be required to reflect the profession’s recognition of public interest responsibility. Therefore, all sustainability reporting practitioners, whether professional accountants or not, should adhere to the fundamental principles and maintain independence from the sustainability reporting clients during sustainability reporting assurance engagements.
The writer is Senior Technical Officer -Institute of Certified Public Accountants of Uganda
