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Q&A with Anthony Holder, associate professor of accountancy

Environmental, social and governance (ESG) is becoming increasingly important to businesses, especially publicly traded companies. But how do these companies account for their efforts? Anthony Holder, an associate professor in the School of Accountancy, is studying the issue. The Daniels Newsroom asked him to bring us up to speed on the issue in this Q&A.

I understand you research how companies account for environmental, social and governance (ESG) in their financial reports. Why did you decide to research these particular topics?

I started researching ESG because the accounting and auditing rules for them are still very much at a development stage. ESG is increasingly becoming of paramount importance to most publicly traded companies, for a variety of reasons. Consequently, there is a huge demand for research in this area.

Are there any current standards for reporting ESG? If not, what do you recommend to companies?

Tony Holder

While traditionally, there have not been a lot of requirements for what and how companies disclose their ESG activities, the ESG rules are rapidly evolving. The hodgepodge of different ESG frameworks that companies have been able to follow in the past is being trimmed down to one recommended framework (in the U.S.). At the same time, the Securities and Exchange Commission (SEC) is becoming quite a bit more active in passing additional ESG disclosure rules. This year, the SEC implemented a human capital disclosure rule which required that companies significantly expand their human capital management disclosure using a principles-based approach.

The previous, rules-based standard required only that companies disclose how many people they employ. The amended rule, by contrast, includes (or could include) far more information, including level of diversity, how much employees get paid, etc. However, it requires companies to describe their “human capital resources” only “to the extent such disclosure is material” to understanding the business as a whole. Thus, it leaves it up to the company to decide how much of this information is material to the company.

Given that the new rules follow a principle-based approach, I expect we will continue to see quite a bit of variation in what companies choose to include as part of their human capital disclosures. Similarly, In March 2022, the SEC issued an exposure draft on climate related disclosures. To date, the SEC has received more than 4,000 comment letters on this draft. In general, comment letters seem to be broadly supportive.

How are you seeing companies currently talk about ESG in their SEC filings?

Currently, companies discuss ESG either in the 10K (Items 101, 103, 105 or 303) or in a separate statement altogether. There hasn’t been a lot of consistency in the rules for how to disclose ESG on SEC filings. Up until the last year or so, companies have had the option of picking from a number of different ESG frameworks to follow. Since no one framework was followed (or required), we have observed quite a bit of variation in what ESG information is reported and how it is reported.

Some companies have chosen to emphasize the E, others the S and still others the G. In addition, companies were not required to have their ESG statements attested to or audited (something that’s about to change). This means that, traditionally, companies could say what they wanted about their ESG and there was very little verification of these statements. In fact, we have observed many companies saying something on an ESG report that is either quite different or somewhat inconsistent with what the same company said on an official SEC filing (around the same time).

One reason for these discrepancies is that a company’s SEC filing is subject to a higher level of scrutiny than a separate ESG report. In September 2021, the SEC seemingly addressed this issue by asking certain companies about inconsistencies between the company’s corporate social responsibility report and its SEC filings, and others about the lack of disclosure in the company’s SEC filing of the risks, trends, and impact of climate change for the company and its business. However, relatively few of the letters required the companies to increase or improve their ESG disclosures. In other words, a lot of bark but very little bite by the SEC.

What do you see as the future for ESG? Are there things you’d recommend so companies can get ahead now?

I agree with most pundits that there has been a fundamental shift in people’s expectation of companies’ ESG activities and disclosures. For the first time, there seems to be alignment between what ESG information investors expect and demand and what regulators will require companies to do.

In 2022 alone, proposed ESG disclosures have been released in the European Union as part of the Corporate Sustainability Reporting Directive (CSRD), internationally by the International Sustainability Standards Board (ISSB) and in the U.S. by the SEC. These proposals could potentially lead to a sea change in how companies disclose their ESG activities.  

At the same time, talk is cheap. There needs to be a verification process. Investors will want to know that the ESG information does not include any Greenwashing or Brownwashing language.

This leads to a demand for some sort of attestation (verification) of the companies’ ESG disclosures.

Consequently, I expect that the demand for auditors to verify companies ESG activities will increase at a rate commensurate with the demand for the ESG disclosures themselves. Some (not all) progress is being made in this regard. Some (not all) publicly traded companies, starting in 2023 will have to get some (not all) of their ESG activities attested to.

Are there things you’d recommend so companies can get ahead now?

My recommendation is that companies treat ESG just like any other material account, which is to make sure the internal controls are sound and that these activities are regularly reviewed by the internal auditors.

At DU, it’s a priority for faculty research to be shared in the classroom. How are you implementing this into your classes?

Where possible, I have always tried to involve my students in my research projects. This is especially important for these particular research projects, given that the outcomes will most likely affect their futures far more than mine.

With that in mind, I assigned an ESG research project. I had the students investigate current issues with accounting (and auditing) ESG. I also had them randomly read comment letters from the SEC’s E exposure draft. They investigated the tone of the comment letters, discussed any biases and speculated whether the SEC would be influenced by the arguments presented.

Similarly, they investigated ESG disclosures for at least 20 companies and they planned an audit of ESG for one selected company. They predicted potential issues they would encounter as they planed their audit of the company’s ESG disclosures. Finally, the teams presented their results to the class.

Any closing thoughts?

Currently ESG is in what I like to (affectionately) refer to as the Wild Wild West area of accounting and auditing. There is little binding guidance for how to account for and subsequently how to audit these activities. Since there is not a whole lot of guidance here, anything goes. In addition, the SEC and the FASB are both following principle-based accounting approaches.  

There will always be considerable cross-sectional variation in how firms approach principle-based accounting standards. A principle-based approach will work for the good guys. However, the good guys will follow the rules regardless.

The issue is that a principle-based approach allows the bad guys more latitude to do bad things. I hope that the FASB and SEC reconsider this approach. On the bright side, I think that these developments have led to the demand for a new type of accountant and auditor.

More: On a recent episode of the Daniels Voices of Experience Podcast, Taylor Iascone (MS 2017), senior ESG manager at Verdani Partners, explains how ESG has entered the real estate and construction realm. Plus, she discusses the politicization of ESG and how companies can practice it authentically. Listen to the podcast.

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