The centrality of ethics to sustainability

Ken Siong

Ken Siong CPA, Programme and Senior Director, International Ethics Standards Board for Accountants, on the essential role ethics and independence play in the reporting and assurance of sustainability

Environmental, social and governance (ESG) funds and climate investing are two of the fastest-growing segments of the investment industry. Globally, hundreds of new funds are added each quarter, totalling some US$2.5 trillion, according to Morningstar. Investors are paying nearly a record premium for shares of companies with the best ESG scores over the ones with the worst ratings, according to Bank of America analysts. Surveys from the Index Industry Association and others show investors are making ESG more of a priority while snapping up green bonds and investing in climate start-ups.

These developments, among many others, sum up a plain fact – the ship has sailed on sustainability. While governments grapple with the scope, direction and intensity of policymaking on sustainability, capital has been flowing freely and abundantly where investors see the greatest opportunities – ESG or, more broadly, sustainability. This major shift in capital allocation has been accompanied by a voracious appetite among investors, rating agencies, data providers and other market participants for sustainability data. The result has been a wake-up call for the global regulatory community, which has raised significant concerns not only about the consistency and comparability of sustainability-related information but also about greenwashing.

Recognizing these public interest concerns and the pace of developments in sustainability, in June the International Ethics Standards Board for Accountants (IESBA) decided to take timely action to develop fit-for-purpose, globally applicable ethics and independence standards as a critical part of the infrastructure to support transparent, relevant and trustworthy sustainability reporting. This recognizes the essential role ethics and independence play in the production, reporting and assurance of sustainability information, and the major role of professional accountants in this regard. Importantly, this strategic commitment positions the International Code of Ethics for Professional Accountants (including International Independence Standards) (the IESBA Code) as the third pillar to trustworthy sustainability reporting and assurance, alongside the standards being developed by the International Sustainability Standards Board and the International Auditing and Assurance Standards Board (IAASB).

The need for coordinated, interoperable global standards addressing sustainability reporting and assurance has been recognized by the Financial Stability Board (FSB). In its July 2022 roadmap for addressing financial risks from climate change, the FSB affirmed that the IAASB’s and IESBA’s development of robust sustainability assurance, ethics and independence standards will be important for reliable climate-related disclosures. In mid-September, the International Organization of Securities Commissions (IOSCO) announced its backing for the IAASB’s and IESBA’s plans to work towards high-quality, global assurance, ethics and independence standards that are profession-agnostic and can support assurance of sustainability-related information.

“It is in the public interest for all assurance providers, whether or not from the accounting profession, to be subject to the same high bar of ethical behaviour and independence.”

The IESBA is working quickly but systematically to respond to these high expectations. It has established a Sustainability Working Group that has been diligently working to formulate pathways to developing (1) ethics standards addressing the mindset and behaviours of professional accountants involved in sustainability reporting, and (2) independence standards geared towards sustainability assurance engagements. These new standards will, by design and necessity, be principles-based, recognizing the wide diversity of sustainability subject matter information, and will leverage the existing robust principles and conceptual framework in the IESBA Code.

The IESBA is intensely considering how to best respond to the call for profession-agnostic standards with respect to sustainability assurance as it is in the public interest for all assurance providers, whether or not from the accounting profession, to be subject to the same high bar of ethical behaviour and independence. This is not a hypothetical question as the market for sustainability assurance in some major jurisdictions, such as the European Union under its Corporate Sustainability Reporting Directive, has now been open to all assurance providers. In others, such as the United States, regulation is being developed that will allow assurance on climate-related disclosures to be provided by an audit or non-audit firm. While it is for regulators to mandate who must comply with the IESBA’s standards and to enforce them, the IESBA has a unique opportunity to make available to any assurance providers high-quality ethics and independence standards, provided that these providers also fulfill the competence, quality management and other prerequisites to performing high-quality sustainability assurance engagements. Establishing a level playing field in this regard is a crucial matter of the public interest. Without it, there is a clear danger markets will pivot to the lowest cost providers, potentially harming investors and other stakeholders, and ultimately undermining public trust in sustainability assurance.

The IESBA has set a December 2022 target to approve a project plan addressing sustainability reporting and assurance. Regardless of the pathways it takes, its commitment to robust due process will be a hallmark of its work in the public interest. In the meantime, the IESBA is proactively engaging with key stakeholders to hear their views and insights.

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