As a seasoned CPA with over 25 years of experience, I find it imperative to shed light on the significant developments in the financial landscape, particularly those stemming from governmental directives. On May 20, 2021, President Biden signed an Executive Order addressing Climate-Related Financial Risk, introducing a series of initiatives aimed at comprehensively managing risks associated with climate change. In this article, I will dissect the key points encapsulated in this executive order and delve into its potential ramifications on attest engagements. Let's embark on this exploration.
Government-Wide Climate Risk Strategy
At the core of the Executive Order is the directive for the formulation of a government-wide climate risk strategy. This strategy is tasked with assessing, mitigating, and disclosing climate-related financial risks pertaining to federal government programs, assets, and liabilities. An integral aspect of this strategy involves identifying the financing requirements essential for achieving net-zero greenhouse gas emissions for the U.S. economy by 2050. Furthermore, the order underscores the exploration of opportunities for both public and private investments to meet these identified needs.
This strategic approach aligns with the global imperative to address climate change and underscores the government's commitment to embedding climate considerations into financial decision-making processes. For CPAs, this signifies a potential paradigm shift in the landscape of attest engagements, as organizations grapple with the implications of this strategy on their financial reporting and risk management practices.
The Executive Order also emphasizes the consideration of enhanced climate-related disclosures by regulated entities. This mirrors ongoing efforts by the U.S. Securities and Exchange Commission (SEC) to develop proposals for mandatory climate change disclosure requirements for public companies. The SEC has been actively engaged in assessing the necessity of standardized climate risk disclosures, recognizing the importance of such information for investors in making informed decisions.
As a CPA, this focus on climate-related disclosures holds profound implications for attest engagements. The evolution of environmental, social, and governance (ESG) reporting, synonymous with corporate social responsibility (CSR) or sustainability reporting, has gained traction globally. ESG reporting serves as a conduit to demonstrate the nexus between an organization's strategy and its commitment to a sustainable global economy.
Rise of ESG Reporting
Interest in ESG disclosures has witnessed a meteoric rise, particularly in regions like Europe, where many organizations are mandated to report on ESG information. The surge in demand for environmental transparency has given rise to a burgeoning field of ESG assurance, often conducted by audit firms or their affiliates. However, it is crucial to note that the landscape of ESG in the United States is still evolving, with a paucity of assurance engagements conducted by audit firms. This creates a compelling opportunity for CPAs to venture into attestations related to ESG disclosures as stakeholders intensify their scrutiny of the quality and reliability of such disclosures.
As the Executive Order amplifies the importance of climate-related disclosures, CPAs can position themselves as indispensable contributors in ensuring the accuracy and reliability of these disclosures. The expanding emphasis on sustainability reporting and the potential integration of climate-related metrics into financial reporting underscore the evolving role of CPAs in attesting upon broader aspects of organizational performance beyond traditional financial metrics.
In conclusion, the Executive Order on Climate-Related Financial Risk serves as a catalyst for significant shifts in financial reporting and risk management practices. For CPAs, it beckons the exploration of new frontiers, particularly in the realm of attest engagements related to climate-related disclosures and ESG reporting. As organizations grapple with the imperative of aligning with climate goals and disclosing pertinent information, CPAs can play a pivotal role in ensuring transparency, reliability, and adherence to emerging standards.
I trust that this breakdown of the Executive Order has been insightful, urging fellow CPAs to delve into the realm of ESG accounting and reporting. The financial landscape is evolving, and CPAs have the opportunity to be at the forefront of this transformation, contributing to a sustainable and resilient future.
Continue to stay informed by reading the Vishal blog for crucial updates in the accounting domain. It's paramount to remember that the content in this article is for informational purposes only and does not constitute tax advice. For advice applicable to specific situations, consulting a tax advisor is recommended.
Jennifer Louis, CPA, has been a trailblazer in designing high-quality training programs for over two decades. Her focus on practical and engaging accounting and auditing training led to the founding of Emergent Solutions Group, LLC, in 2003. Having commenced her career in audit with Deloitte & Touche, Jennifer's expertise is underscored by her summa cum laude graduation from Marymount University with a B.B.A. in Accounting.