ESG Audits Expected to Be Slow to Start | ETF Trends

Global regulators are slated to up scrutiny of companies boasting of environmental, social, and governance (ESG) standards, but those efforts could take time to deploy.

Whether imminent or further out, audits of ESG standards could have profound effects on a variety of multi-national firms, including members of the Invesco ESG Nasdaq 100 ETF (QQMG). QQMG follows the Nasdaq 100 ESG Index, and while the exchange traded fund is home to just 91 stocks, many of the companies behind those equities operate well beyond U.S. borders, meaning that their application of ESG standards is pertinent beyond this country.

Fortunately, QQMG member firms and others have time to make sure they’re able to navigate ESG audits with aplomb, potentially avoiding controversies that can harm investors in the process.

“Most big companies operating internationally will face mandatory environmental, social and governance reporting requirements over the next few years. The earliest mandate is coming from the European Union, which will demand sustainabiity reports from all big companies, including foreign companies operating there, starting in fiscal 2024,” reported Bloomberg Law.

QQMG allocates 59.27% of its weight to technology stocks, meaning it’s full of companies that are export-heavy and generate substantial portions of their revenue outside the U.S. Conversely, heavily domestic sectors, such as financial services and utilities, aren’t represented in the fund.

For companies looking to bolster ESG credentials, there could be added audit costs because financial and sustainability disclosures are different issues, but there is some overlap, which could keep costs in check. The International Sustainability Standards Board (ISSB), the sustainability counterpart to the International Accounting Standards Board, is planning to publish its own set of sustainability standards, which can serve as guidelines for companies.

“The ISSB has launched a project to coordinate disclosures with its sister body, the International Accounting Standards Board. The two will work together over revising guidance for the management commentary, a narrative section of the accounts that houses ESG disclosures,” according to Bloomberg Law.

Some companies, perhaps including some QQMG member firms, already have ESG protections for their audits via their accounting firms. The next question that needs answering is what entities will be conducting ESG audits.

“That remains an open question, certainly for ISSB audits, because no country has yet confirmed it will use the standards or whether they must be audited. However, the EU has said that qualified organizations in addition to accountants could do the work, in an attempt to prevent the field becoming a monopoly for the biggest firms,” concluded Bloomberg Law.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.