How Big 4 Are Fuelling the Sustainability Divide: A Deep Divide greater than Digital Divide (2024)

Introduction

The global conversation surrounding sustainability and corporate responsibility has never been louder. As climate change intensifies and environmental degradation accelerates, businesses are under increasing scrutiny to address their impact on the planet. In this context, the Big 4 accounting firms - Deloitte, PwC, Ernst & Young (EY), and KPMG - play a pivotal role in shaping corporate strategies, reporting practices, and, ultimately, the sustainability divide. This article delves into how the Big 4 are both contributing to and addressing the sustainability divide, exploring their responsibilities and impact on the path towards a more sustainable future.

I. The Big 4's Role in Shaping Corporate Sustainability

1. Sustainability Reporting

The Big 4 are influential in shaping corporate sustainability reporting standards. They provide advisory services to companies on sustainability disclosure and compliance with various frameworks, including the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). By assisting businesses in reporting their environmental, social, and governance (ESG) data, they help build transparency and accountability. However, this influence also raises concerns about the potential for "greenwashing," where companies might exaggerate their sustainability efforts to appear more eco-friendly than they are.

1. ESG Advisory Services

The Big 4 offer a range of advisory services related to ESG (Environmental, Social, and Governance) issues. These services can include sustainability strategy development, risk management, and investment analysis. By providing these services, the Big 4 contribute to corporate clients' efforts to align their operations with sustainability goals. But, some critics argue that the profit motive of these firms can sometimes overshadow their role in guiding companies toward genuine sustainability practices.

1. Auditing and Assurance

The Big 4 also audit and assure financial statements, which can include ESG disclosures. Their role in verifying the accuracy and completeness of these reports is crucial for investor confidence and accountability. However, concerns arise regarding the potential for conflicts of interest, as these firms often provide both advisory and auditing services to the same clients. This duality can compromise the objectivity and impartiality of their sustainability assessments.

II. Conflicts of Interest

1. Dual Roles

One of the primary criticisms directed at the Big 4 firms is their dual role as advisors and auditors to the same clients. This creates a potential conflict of interest, as their advisory work may influence the content of ESG disclosures and impact their auditing of these disclosures. To mitigate these conflicts, the Big 4 firms have established various safeguards, such as separating advisory and auditing teams within the firm. Nevertheless, some believe these safeguards are not sufficient to prevent undue influence and bias.

1. Profit Motive

The profit motive of the Big 4 firms is another area of concern. Critics argue that their primary goal is to generate revenue for their shareholders and partners, which may sometimes conflict with the imperative to hold clients accountable for sustainability commitments. As a result, the Big 4 firms could prioritize maintaining client relationships and generating advisory fees over rigorous scrutiny and accountability.

III. Greenwashing and Transparency

1. Greenwashing

The Big 4 firms, due to their influential position in sustainability reporting, are often criticized for enabling greenwashing. Greenwashing refers to the practice of companies exaggerating or misrepresenting their environmental or social efforts to appear more sustainable than they genuinely are. Some argue that the Big 4 firms, in their advisory role, may inadvertently facilitate this by helping clients present their sustainability efforts in the best possible light. This can erode trust in sustainability reporting and hinder genuine progress.

1. Lack of Standardization

Sustainability reporting and ESG disclosures lack standardized metrics and guidelines, making it challenging to compare and evaluate companies' sustainability performance. The Big 4 firms, along with other stakeholders, have made efforts to promote standardization. Still, the absence of a universally accepted framework can lead to inconsistency and a lack of clarity in reporting, making it difficult for stakeholders to assess companies' true sustainability commitments.

IV. Accountability and Reform

1. Regulatory Oversight

In response to the challenges posed by the Big 4's involvement in sustainability reporting and auditing, regulatory bodies have begun to take action. Various jurisdictions are implementing stricter rules and regulations aimed at enhancing the accountability of firms and reducing conflicts of interest. For example, the European Union has introduced the Sustainable Finance Disclosure Regulation (SFDR), which establishes disclosure requirements for financial market participants, including the role of auditors in assessing sustainability information.

1. Evolving Practices

The Big 4 firms have started to adapt their practices to align more closely with sustainability goals. They are investing in their own ESG initiatives and have developed training programs to equip their employees with the skills and knowledge required to address sustainability issues effectively. However, to foster more meaningful change, the Big 4 firms must continue to refine their approach and ensure that their advisory and audit services genuinely contribute to sustainability.

1. Stakeholder Pressure

Pressure from stakeholders, including investors, consumers, and advocacy groups, is also pushing the Big 4 to be more accountable in their sustainability roles. Investors increasingly demand accurate and reliable ESG data, and they expect auditors to rigorously scrutinize these disclosures. Consumers are becoming more discerning and are quick to call out companies engaged in greenwashing. This growing scrutiny is forcing the Big 4 to reconsider their practices and prioritize transparency and accountability.

V. The Path Forward

1. Enhanced Regulation

As regulations related to sustainability reporting and auditing continue to evolve, it is crucial for governments and regulatory bodies to strengthen their oversight of the Big 4 firms. Robust enforcement mechanisms, stricter rules on conflicts of interest, and clear guidelines for ESG reporting are essential for ensuring the integrity of sustainability efforts.

1. Collaboration

The Big 4 firms should collaborate with stakeholders, including governments, non-governmental organizations, and industry associations, to develop and implement standardized sustainability reporting frameworks. These frameworks should be transparent, comprehensive, and globally recognized to eliminate confusion and facilitate meaningful comparisons among companies.

1. Education and Training

The Big 4 should invest in comprehensive education and training programs to equip their employees with the skills and knowledge required to address sustainability challenges effectively. This includes understanding the intricacies of sustainability reporting, auditing, and the ethical responsibilities associated with these roles.

1. Transparency

The Big 4 firms need to commit to greater transparency in their sustainability practices. They should disclose the steps taken to mitigate conflicts of interest, the measures in place to prevent greenwashing, and the processes they follow to ensure the accuracy and reliability of ESG disclosures.

Conclusion

The Big 4 firms play a substantial role in shaping corporate sustainability practices through their advisory and auditing services. While they have made positive contributions by promoting transparency and accountability, they also face criticisms and challenges, including conflicts of interest and greenwashing concerns. The path towards a more sustainable future requires enhanced regulation, industry collaboration, ongoing education, and a commitment to transparency. By addressing these issues, the Big 4 firms can better fulfill their responsibilities and genuinely contribute to closing the sustainability divide.

In an era where sustainability is a pressing global concern, the role of the Big 4 firms in this endeavor is pivotal. Their actions and practices have the potential to either fuel or bridge the sustainability divide, making it crucial for them to act responsibly and be held accountable for their role in shaping the future of corporate sustainability.

For further information and Sustainability Requirements Contact

Dr Rakesh Varma Ex-IAS (VR)

Certified ESG Professional |Certified GRI Standards Sustainability Professional (CGSSP) | Govt. EGOsystem & ECOsystem Coder | ESG BRSR GRI Leader | MBA, LLB, Public Policy Maker & Analyst