With the emerging requirements globally for mandatory reporting on sustainability-related information and the related potential for practitioners to provide independent assurance of those reports or of the sustainability metrics and disclosures included in those reports, the International Ethics Standards Board for Accountants (IESBA) has added projects to their formal standards-setting agenda addressing the applicability of the “International Code of Ethics for Professional Accountants” when accountants are associated with preparing such reports or are engaged to provide assurance for such reports. (Exhibit 1 summarizes IESBA’s continuing technical agenda activities related to establishing ethics and independence standards, and guidance in support of transparent, relevant, and trustworthy sustainability reporting.)
In addition, the IESBA staff has published a Q&A document, “Ethics Considerations in Sustainability Reporting Including Guidance to Address Concerns About Greenwashing,” providing guidance to practitioners about the application of the “International Code of Ethics for Professional Accountants (including International Independence Standards)” to many of the ethics-related challenges arising from practitioners’ involvement in sustainability reporting and assurance. In the staff Q&A, particular consideration is given to situations in which the practitioner is associated with preparing and presenting sustainability-related information that might be misleading or false (commonly called “greenwashing”).
A brief overview of the IESBA and the IESBA Code appears below, followed by a discussion of the staff’s views as presented in the Q&A.
The IESBA’s Role in Sustainability Reporting
At its June 2022 regular board meeting, the IESBA committed to developing fit-for purpose, globally applicable ethics and independence standards in support of transparent, relevant, and trustworthy sustainability reporting.
Consistent with that commitment, the IESBA approved two board projects on Sustainability:
- ▪ A sustainability standards-setting project and
- ▪ An experts in sustainability project.
The sustainability project will focus on developing independence standards for use by all sustainability assurance practitioners, i.e., for accountants in practice and for non-accountants who also provide assurance on sustainability reports, many of whom are consultants with the technical knowledge and skills for evaluating the technical metrics and information provided in CSR.
The purpose of the experts in sustainability project will be to develop specific ethics and independence rules that address the use of experts by organizations in the context of audit and assurance engagements (including sustainability assurance).
At present, both of these projects are in their early stages and can be followed at: https://www.ethicsboard.org/consultations-projects/sustainability.
Overview of IESBA
IESBA (https://www.ethicsboard.org/) is an independent standard-setting board of the International Federation for Accountants (IFAC) that “develops, in the public interest, high-quality ethical standards and other pronouncements for professional accountants worldwide.” IFAC is a global organization for the accountancy profession comprising 180 member and associate organizations in 135 jurisdictions, representing more than 3 million professional accountants. Through its various standards-setting committees, IFAC supports the development, adoption, and implementation of high-quality international standards.
IESBA’s standards are codified in its “International Code of Ethics for Professional Accountants.” Generally, IESBA directs its guidance to professional accountants “in business,” which refers to accountants working in private enterprise, education, government, and nonprofits; as well as professional accountants “in public practice,” which refers to accountants providing services to clients, such as providing assurance for financial and nonfinancial information.
IESBA has one full-time independent board member—its chair, Gabriela Figueriedo Dias, a former securities market regulator from Portugal—and a globally diverse committee of as many as 17 volunteer board members representing accounting practice, the public sector, accounting and financial market regulators, other accounting practitioners, and those interested in accounting and financial reporting. The work of the IESBA is supported by a full-time professional supporting staff. IESBA members are appointed by the IFAC board. For a more detailed discussion of IESBA, see “New International Accounting Ethics Standards” by Susan Anders (CPA Journal, May/June 2022, https://www.cpajournal.com/2022/06/17/new-international-accounting-ethics-standards/).
IESBA’s standards-setting activities mirror those of the AICPA’s Professional Ethics Executive Committee (PEEC). In fact, one of IESBA’s members was nominated by PEEC; that member is a former PEEC member.
Periodically, IESBA meets with national ethics and independence standards setters from around the world that share common goals, including representatives from PEEC.
The IESBA Code and Greenwashing
Recently, the IESBA staff issued a Q&A document, “Ethics Considerations in Sustainability Reporting Including Guidance to Address Concerns About Greenwashing,” giving their views on the application of the IESBA Code when professional accountants are associated with sustainability-related reporting or assurance. In the Q&A, the staff states that the publication aims to aid “professional accountants, especially those in business, [when navigating] ethics situations or challenges that might lead to reporting misleading or false sustainability information.”
It is important to recognize that, as a staff-prepared document, the Q&A is “nonauthoritative”—that is, it is not an official pronouncement of the IESBA board. Therefore, it does not amend or override the Code; it is only the staff’s interpretation of the Code.
Other topics associated with providing accounting and assurance services for CSR are beyond the scope of this discussion. For example, this article does not address application of the independence standards related to providing assurance services when associated with sustainability reporting. Although the staff Q&A focuses on preparing and presenting sustainability information, when it comes to the Code’s independence requirements regarding the assurance of sustainability reports, this author argues that Code Part 4B, “Independence for Assurance Engagements other than Audit and Review Engagements,” applies. Paragraph 900.5 of Part 4B states that “[w]hen performing assurance engagements, the Code requires firms to comply with the fundamental principles and be independent” (Exhibit 2 provides a detailed list of the questions addressed in the Q&A).
Questions Addressed in the IESBA Staff Q&A
- Does the Code define greenwashing?
- The Code includes a robust set of provisions applicable to the preparation and presentation of information. Do practitioners have to comply with the Code’s provisions when preparing and presenting not only financial, but also non-financial information, including sustainability information, whether presented in stand-alone sustainability reports, annual or integrated reports, or on a website?
- Are there specific provisions in the Code that safeguard against greenwashing?
- The multiplicity of reporting frameworks may result in inconsistent approaches to reporting on sustainability information. Many of those reporting frameworks are voluntary, with no independent oversight of preparers, and often limited or no external assurance regarding the sustainability information asserted to be prepared and presented in accordance with such frameworks. This increases the risks and opportunities for greenwashing. Does the Code require compliance with a specific reporting framework when accountants prepare and present sustainability information?
- Sustainability-related terms are constantly emerging, resulting in different definitions across jurisdictions. There is a lack of common understanding or transparency about what is meant by “sustainable investment” and “sustainability risks.” The descriptors for sustainability performance metrics (e.g., “green” or “ethical”) are not standardized or defined. These inconsistencies present challenges in providing transparent and reliable sustainability information. What guidance does the Code provide?
- The lack of reliable and comparable ESG data is a key challenge to tackling confusion in the ESG marketplace. In the absence of a common standard and enforcement mechanism, it can be challenging to measure the impact of certain ESG factors. It is even harder to track and disclose metrics, especially in the case of social factors that tend to be more qualitative in nature. Does the Code provide any guidance for accountants regarding the presentation of and reporting on such matters?
- Making misleading or inaccurate claims about the sustainability performance of an investment without providing evidence for the claims is another form of greenwashing. This could lead investors to allocate capital to investments based on false or unsubstantiated information about the investments or the company’s sustainability performance. Do accountants have any responsibility to verify the sustainability information or performance?
- ESG metrics can be broadly categorized as point-intime measurements. Different timing of measurement and disclosure of ESG data can lead to inconsistency in presentation and make it difficult to compare advancement in ESG goals. Does the Code provide guidance in relation to the timing of the measurement or disclosure of sustainability information if the relevant reporting framework does not determine it?
- There is a great deal of pressure to meet ESG goals in the current environment. There are also many incentives and opportunities to “cherry-pick” or “greenwash” ESG-related information. Does the Code provide guidance on how to deal with such pressure?
- There is a lack of common standards for reporting on sustainability information, and reporting on such information is voluntary in many jurisdictions. Consequently, some companies choose to disclose certain ESG-related matters (e.g., carbon emissions) while omitting others (e.g., human-rights-related issues). Some companies also selectively disclose some risks but not the others, or unduly emphasize the importance of risks on one aspect of sustainability (such as environmental considerations) relative to risks on another (such as social impact) regarding a particular project (i.e., a trade-off). Such practices are potentially misleading because they do not give investors and other stakeholders a holistic picture of the sustainability risks to the company. Would such cherry-picking constitute noncompliance with the Code?
- Sustainability information is mainly characterized and determined by the specific circumstances of the industry and sector in which an organization operates. Because reporting frameworks are not necessarily industry specific, if no particular metrics and definitions are available, the disclosure of sustainability information across different industries and sectors could make it difficult to compare ESG goals and constitute greenwashing. Does the Code provide any guidance regarding how to prepare and present sustainability information considering the particular characteristics of an industry?
- Suppose an accountant prepared a sustainability report and subsequently learns that information in the report is misleading. While investigating the matter, the accountant also obtains information that suggests there has been non-compliance with a particular law or regulation. What is their responsibility under the Code?
- Oversight by TCWG, including audit committees, plays a vital role in enhancing the quality of corporate reporting, including the strategy, risks, and opportunities related to sustainability. Does the Code provide any guidance regarding the involvement of TCWG to mitigate the risks of greenwashing?
The staff Q&A can be found at: https://www.ethicsboard.org/publications/ethics-considerations-sustainability-reporting
The IESBA Code and Greenwashing
The staff decided to issue the Q&A because, currently, the IESBA Code does not specifically discuss sustainability reporting nor define “greenwashing” as associated with those reports.
The definition of greenwashing used in the Q&A is “practices that involve misleading intended users of the information, or intentionally giving them a false impression about how well an organization or an investment is aligned with its sustainability goals.” It was adapted from a 2020 International Organization of Securities Commissions (IOSCO) report on sustainable finance, “Sustainable Finance and the Role of the Securities Regulator” (https://bit.ly/43QjIlS).
Furthermore, the staff points out that greenwashing can involve sustainability disclosures that inappropriately omit relevant information, misrepresent or falsify corporate sustainability activities, or overstate the impact or influence of sustainability factors in corporate decision-making in situations in which those factors had or will have limited, if any, impact on the investment decisions or business strategies the entity implements.
The Q&A lists factors that “could contribute to greenwashing” that accountants should consider when they are associated with preparing or presenting CSR-related information.
The Q&A lists factors that “could contribute to greenwashing” that accountants should consider when they are associated with preparing or presenting CSR-related information, including the following:
- ▪ The integrity of the reporting framework used in preparing the related report or disclosures, if any, and the company’s level of compliance with it when preparing their sustainability reports.
- ▪ The availability and quality of the reporting company’s sustainability data and related system of internal controls over the preparation of the corporate sustainability reports, including governance and oversight arrangements that have not kept pace with internal and external developments.
- ▪ The connectivity and integration, or lack thereof, between corporate financial and nonfinancial sustainability information and the related system of internal controls over that data.
- ▪ The financial or reputation-related incentives and opportunities that might be derived from promoting more sustainability-aligned products or promoting the company as being aligned with reported sustainability goals, targets, or trends.
- ▪ Any lack of regulation that restricts or limits corporate greenwashing activities, or any regulation that is evolving but limited.
The staff explains that, although the IESBA Code does not address greenwashing specifically, it states that “when a professional accountant prepares or presents financial and non-financial information, including sustainability information, they are required to comply with the Code” (section 220, “Preparation and Presentation of Information”).
In explaining the application of the code, the staff notes that it is “critical that the mindset and conduct of those involved be anchored” in the Code’s fundamental principles and in its conceptual framework (Part 1, “Complying with the Code, Fundamental Principles and Conceptual Framework,” paras. R110.2 and R120.3). These fundamental principles are as follows:
- ▪ Objectivity
- ▪ Professional competence
- ▪ Due care
- ▪ Integrity
- ▪ Professional behavior.
With respect to these fundamental principles, the staff argues that acting with integrity is specifically important to ensuring that an accountant avoids being associated with preparing or presenting misleading or inaccurate financial or nonfinancial information, including preparing or presenting misleading sustainability-related information.
According to the Q&A, when acting with integrity, an accountant associated with preparing or presenting a sustainability report should do so “in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately” and that the accountant will not “omit [information from the report or presentation] with the intention of rendering the information misleading or of influencing contractual or regulatory outcomes inappropriately.” This implies that accountants must endeavor to prepare or present sustainability information that, to the best of their knowledge and ability, is complete and unbiased.
Just as important as integrity, when dealing with sustainability metrics or unique sustainability measurements or assessments, professional judgment must be used to represent the facts accurately and completely in all material aspects. Therefore, accountants must attain professional competence as well as apply due care and sufficient expertise in applying their professional judgements. This requires that an accountant “[attain and maintain] professional knowledge and skills at the level required to ensure that the client or employing organization receives competent professional service, based on the current technical and professional standards” and “make the client or the employing organization or other users of the services or activities aware of the limitations inherent in the services and activities” being applied.
Dealing with the Diversity of Reporting Frameworks
In some jurisdictions, such as the United States, formal sustainability reporting standards are still evolving. With the absence of formal reporting standards, reporting entities have, on a voluntary basis, issued detailed sustainability reports based on a diverse set of sustainability reporting standards that have been developed and issued by nonauthoritative professional standard-setting organizations such as GRI, the Sustainability Standards Board (SASB) and the Task Force for Climate-Related Financial Disclosures (TCFD), among a multitude of other formal and informal standard-setting organizations. Currently, no single organization is recognized by the SEC as the authoritative standards-setter for sustainability-related reporting in the United States. In this vacuum, various organizations have established formal due process procedures and an infrastructure in support of establishing high-quality sustainability reporting standards. Still, except for some current SEC disclosures for public companies, most corporate sustainability reporting is voluntary.
In those circumstances in which an entity’s sustainability reports are prepared using non-authoritative guiding frameworks and principles, the IESBA staff believes the principles-based guidance in the IESBA Code can be applied to aid it in the selection of applicable guiding frameworks and standards. Although not specific to sustainability reporting, the IESBA Code requires that accountants apply the appropriate “relevant reporting framework” when preparing a sustainability report, and when no specific reporting framework is available, it requires that they exercise professional judgment to identify and consider the purpose for which the reporting information will be used, the context within which the reported information will be provided, and the audience to whom the sustainability information will be addressed.
Finally, the IESBA Code requires that, when selecting the appropriate reporting framework, accountants must exercise discretion with the intention of not misleading others or influencing contractual or regulatory outcomes inappropriately and accountants must, in preparing or presenting sustainability information, include the relevant background, assumptions, and other supporting information to enable those who might rely on the reported information to form their own judgments.
The Responsibility to Verify Sustainability Information
Separate from the issue of preparing sustainability reports, the Q&A discusses accountants’ responsibility to ensure the reliability of information prepared and presented in sustainability reports.
Furthermore, consistent with the IESBA Code, the staff asserts that “making misleading or inaccurate claims about [an entity’s] sustainability performance … without providing evidence for the claims is another form of greenwashing” because, when relying upon such information, capital providers might mis-allocate their investment capital “based on false or unsubstantiated information about the investments or the company’s sustainability performance.”
If accountants know, or have reason to believe, that information used to prepare or present a sustainability report is false or misleading, they must take the necessary steps, specified under the IESBA Code, to be disassociated from that information.
Thus, rather than accepting information at face value, an accountant is expected to “have an inquiring mind,” which entails the following:
- ▪ Considering the source, relevance and sufficiency of the information used in preparing or presenting a report; and
- ▪ Being open and alert to a need for further investigation of the information used in preparing or presenting the report.
Furthermore, when considering the reliability of the information used in preparing or presenting sustainability information, accountants should consider the following:
- ▪ Whether new information has emerged, or whether there have been changes in facts and circumstances inferred by the information provided.
- ▪ The presence of bias or self-interest in the information provided or its source.
- ▪ Whether potentially relevant information, known to the accountant, is missing from the facts and circumstances, or whether there exists “an inconsistency between the known facts and circumstances and the [practitioner’s] expectations.”
- ▪ Whether the reported information provides a reasonable basis on which to reach a conclusion, or whether the information obtained could lead to other reasonable conclusions.
If accountants know, or have reason to believe, that information used to prepare or present a sustainability report is false or misleading, they must take the necessary steps, specified under the IESBA Code, to be disassociated from that information. Such a response might include the following:
- ▪ Consulting the organization’s policies and procedures regarding how to address such matters internally, or
- ▪ Discussing their concerns with their supervisor, appropriate management personnel, or senior management, or to those charged with governance (TCWG), as appropriate, and requesting that such parties take appropriate action to address and resolve these concerns.
The IESBA staff further acknowledges that in situations in which an accountant follows the suggestions above but continues to have concerns that reported information is misleading, the Code requires further actions, such as consulting with the relevant professional body, corporate internal or external auditor, or corporate legal counsel, to determine whether any requirements exist to communicate with noncorporate third parties, including users and regulatory and oversight authorities (such as the SEC).
After exhausting all feasible options above, if accountants determine that appropriate actions have not been taken in response to the identified misleading sustainability information, the IESBA Code requires that they “refuse to be or to remain associated with the information,” which might require resigning from the employing organization.
Finally, although the IESBA Code does not require accountants to address their concerns about greenwashing to TCWG, such as the appropriate committee of the board of directors, the staff explains that the Code “sets out circumstances when communication with TCWG might help in evaluating threats to compliance with the fundamental principles or in resolving specific issues,” such as in those situations in which an increased risk of green-washing is present, including actual or suspected non-compliance with laws or regulations (NOCLAR).
The staff points out that, if a professional accountant becomes aware of actual or suspected NOCLAR, the Code provides that they take action to address the NOCLAR, including communicating with TCWG about such matters, whether actual or suspected. The staff advises that “such communication facilitates the senior [practitioner’s] assessment of the appropriateness of the response of TCWG to the NOCLAR and enables the [practitioners] to fulfill their further responsibilities.”
The First Step
Consistent with the evolving guidance for CPAs preparing or providing assurance regarding corporate sustainability reporting, IESBA has entered the fray with two agenda projects (as discussed in Exhibit 1) and staff guidance regarding their views on the applicability of the IESBA Code while they identify and deliberate on which revisions might address emerging issues in corporate sustainability reporting for accountants. Thus, the IESBA staff’s Q&A guidance should not be seen as the final word on the applicability of the Code; rather, as the first step in providing practical guidance on the applicability of the Code to concerns about greenwashing in sustainability reports. Certainly, more guidance will be forthcoming, as the IESBA deliberates on the applicability of the Code when accountants are associated with sustainability reporting and on the use of experts in sustainability reporting.