EY's Jackie Klos explains the role accounting and finance has played in ESG reporting historically and how she sees it evolving in the future. Listen to the full interview using the player below or anywhere you get your podcasts.
Many companies these days are starting to create an ESG controller role or a similar role in the accounting and finance function, where ESG reporting has historically been primarily voluntary, moving into the regulatory environment. Accounting and finance are definitely understanding the SEC climate proposal and paying attention to that, understanding what is being reported from a voluntary perspective today and what needs to transition in order to go from that voluntary reporting to this future state reporting, including in the regulatory filing. So really understanding those requirements, looking at gap assessments to understand what are we reporting today, working through all the detailed requirements from the proposals or the finalized standards, I guess if it's CSRD. Really understanding that, comparing to what they're reporting today and then looking at those gaps and then working across the organization to be able to fill those gaps.
And sometimes those gaps are process gaps and sometimes their disclosure gaps, whereas maybe the organization has that information today, but they're not reporting on it or potentially they're collecting and reporting on that information but it doesn't have that same level of rigor that the accounting and finance function expects with what they've historically seen from SEC reporting. So in an SEC filing today, there's requirements based on the location of the information that's reported, but the core financial statements require SOX controls. And then the rest of the document requires disclosure control procedures in accordance with the SEC's requirements. Accounting and finance is really making sure, has the rigor been applied to the disclosures that have been reported historically at the same level as the expectation from an SEC perspective. They're really bringing that already existing end-to-end reporting process to the table and thinking about the infrastructure that they have in place, working with the sustainability functions or those who own those reporting disclosures today to really understand what is the level of rigor, what is the process in place.
Many companies are using Excel and have a highly manual process. A lot of the data and information that's being collected to report on comes from invoices or various different other data sources that are not structured, are not automated. Those calculations are not automated. And so the accounting and finance function is leveraging their internal control structure, leveraging the COSAL framework to really walk through and obtain an understanding of those processes, which from a carbon emission perspective, in order to prepare for the climate proposal from the SEC, there's a lot of judgments and estimates used to perform those calculations based on the GHD protocol, the greenhouse gas emissions protocol. And so that's sort of similar to our US gap from an accounting perspective.
The accountants can bring that skillset that they have of understanding estimation approaches, making sure policies are in place, driving the consistency of those policies, really ensuring that there's rigor around those estimations, leveraging experts to understand how is the data captured, what data do we have, where is there missing data, are there estimates and judgments that need to be made in order to fill the gaps on any areas where actual data is not maintained. And so that's something that's very consistent that accountants have had to apply historically with other judgments and estimates that there were reporting from a financial perspective. So really leveraging those skillsets that we've used from an accounting perspective for years and bringing that into this new element of greenhouse gas reporting. And so walking through those processes with the sustainability function or those who are capturing that data to understand that end to end process and then documenting that process and figuring out, okay, what do we need to change in order to meet this SEC reporting requirement?
Much of the voluntary reporting that happens today is several months after year end. If this information needs to be incorporated into an SEC filing, it would need to be filed with the 10K, which is much shorter and so oftentimes within 45, 60 days of year end. And so the infrastructure is not in place today with the highly manual processes in order to perform those calculations.
Understanding how it's reported today and then figuring out, okay, what are the actions that we need to take? Even if we are reporting the information that will need to go into the 10K, what actions do we need to take to bring that process to be more streamlined, more automated, increase the data availability on a more timely perspective so that they can report? So again, today from an accounting perspective, we close our books every single month, whereas many, many organizations really only capture and calculate this data on an annual basis, again, several months after the fact. So really changing that process, enhancing that process, leveraging the financial infrastructure that is in place, potentially implementing systems to capture the data or perform those calculations to really be able to meet that timeline in the future has been a significant activity that companies are looking at to really be ready for SEC reporting and to meet those timelines, but then also make sure that there's those robust controls in place so that they're comfortable and that they have the confidence to be able to report on that.