Specialized Audit Skills are Needed for Climate Transition

By Andre Bredell.

With governments around the world looking to restructure their economies in response to a looming climate crisis, it is no longer enough for businesses to just donate to environmental causes.

Organizations are increasingly required to adopt sustainability at the heart of their business practices and strategies, which calls for a broader set of financial accounting skills focused on environmental, social and governance (ESG) reporting.

Sustainable investing isn’t a new concept, but we are beginning to now see the emergence of more substantial policies that offer businesses incentives to take their impact on the environment much more seriously. With the introduction of regulatory frameworks centered around sustainability, organizations of all sizes will need to partner with consultants experienced in a range of sectors and jurisdictions. Not only will they want to avoid penalties for excess emissions or unsustainable practices, they will also benefit from any financial incentives that promote business models and activities that reduce their impact on the environment.

Growth in sustainable funds

Sustainable business is growing rapidly. In its “Sustainable Reality” report published in February 2023, Morgan Stanley’s analysis of 96,000 funds globally using Morningstar data saw sustainable funds continue to expand their market share.

Sustainable funds went from a 4% share to 7% share of total assets under management (AUM), where they reached R2,8 trillion out of a total of R40 trillion in 2022.

Sustainable funds often have specific investment mandates or criteria related to sustainability and responsible investing. The role of accountants and auditors is crucial to accuracy and transparency in this type of financial reporting to help attract investors and maintain their trust.

What is sustainable finance?

Working with the financial markets, and in line with the United Nations’ Sustainable Development Goals (UN SDGs), governments are developing a variety of standards against which companies can measure their social and environmental impact.

South Africa, for instance, has committed to reach net-zero carbon emissions by 2050, introducing its first carbon tax in July 2021.

While some companies are already upgrading their infrastructure to reduce emissions in their operations, others might also want to earn carbon tax credits for investing in sustainable entities or managed funds. This, under certain jurisdictions, allows them to offset any own excess emissions tax obligations, should they struggle to overhaul their existing infrastructure in a given time period.

Common investment vehicles that might improve an organization’s ESG score include green bonds (sustainable debt), sustainable investment strategies, climate finance programs, social impact investments, sustainable supply chain finance and others.

Corporate sustainability reporting and disclosure of sustainability performance of these tools is still an enormous challenge, as there is no single global reporting standard, and the level of complexity only increases exponentially for multinationals that operate under different laws.

Sustainable reporting skills

As with all complex regulatory compliance processes, especially in a relatively new space, organizations need ongoing guidance to protect business continuity, while looking for effective ways to make a difference in society.

Skilled auditors will be central to driving robust sustainability reporting practices, the integration of ESG factors into financial reporting, maintaining ethical standards, and assurance and verification.

Few institutions have the required flexibility and organizational model to deploy a diverse range and required depth of specialized skills in the fast-growing area of sustainable financing and reporting. In a transition process of such importance and complexity, businesses need a partner to not only understand the various emerging compliance frameworks but offer experienced insights to guide the operational changes needed to action a sustainably-led business strategy.

Firms should consider working with a talent provider to more readily navigate the emerging sustainable finance landscape across the world. Talent provider organizations allow accounting firms to gain the ability to maintain lower overhead costs, while scaling their reporting capacity up or down, based on shifting requirements in regulatory environment. As the world seeks to avert a future climate disaster, while maintaining growth and employment, economies can remain financially viable by unlocking a diverse pool of specialized finance and auditing skills and expertise, reduce compliance risks, cut hiring costs, and save precious time, while nimbly navigating a modern world moving into a new, more sustainable era.

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Andre Bredell is the Executive of Quality and Standards at SAPRO, a global workforce solutions firm specializing in advisory, assurance and tax. Andre advises accounting industry clients on external audit, accounting, Generally Accepted Accounting Principles, income tax and internal controls.