ESG Continues to Be in the Spotlight as Regulators Move to Enforce Transparency

ACCOUNTING & AUDITING

DOWNLOAD PDF

By Don Carpenter, MSAcc/CPA

It is evident that the focus on environmental sustainability, climate change and equitable business practice is intensifying. We have featured issues related to this important area in the column twice this year (see “Sustainability Reports Rapidly Becoming Expected Disclosure” in the March/April issue and “SEC Proposes Controversial Rules Requiring Climate Related Disclosures” in the May/June issue).

Shareholders are increasing their demands regarding insight into the impact business decisions have on climate and the environment, as well as its effects on community structures and equity. In response, an emerging sector of the financial market is developing to allow investors to tailor their portfolios to meet their environmental, social and governance (ESG) priorities.

RELATED CPE:

Webcast - ESG 101: What is Environmental, Social and Governance?

Several recent enforcement actions on the part of governmental agencies spotlights the fact that as investors put emphasis on this area, regulators will as well. (See TXCPA’s 2022 Accounting Industry Outlook Report in the July/August Today’s CPA issue for insights on ESG initiatives.)

In April, the Federal Trade Commission levied penalties totaling $5.5 million against Wal-Mart, Inc. ($3.0 million) and Kohl’s, Inc. ($2.5 million) for marketing bamboo products as eco-friendly, which were in fact bamboo-derived rayon products. The environmental claims were the basis for the deceptive trade practice penalties as the process of converting the bamboo to rayon requires toxic chemicals resulting in harmful pollutants.

In addition to the penalties, the retailers have to cease claiming that the products are bamboo unless it can be substantiated and to stop marketing the products as environmentally friendly.

In May, on the heels of the FTC penalties, the Securities and Exchange Commission (SEC) assessed a $1.5 million penalty on BNY Mellon Investment Advisor for misstatements related to ESG targeted investment policies governing certain mutual funds. The case highlights the practice of “greenwashing” or asserting undocumented claims that products (in this case mutual funds) are environmentally friendly.

The advisor could not document that it had conducted the quality reviews it asserted had been made on funds purporting to contain environmentally responsible investments.

A week after the SEC penalty was announced, German authorities initiated a similar greenwashing investigation of DWS Group, the asset management subsidiary of Deutsche Bank AG, asserting investment fraud. Due to its relationship with U.S. markets, the SEC is joining in this investigation.

Concurrent with the announcement of the above penalty, the SEC also released two proposed rules addressing the substance of this issue. The first addresses misleading or deceptive fund names. Currently, if a fund name suggests that its focus is on a particular type of investment, it must adopt a policy to invest at least 80% of the fund’s value in such investments.

The proposed new rule would extend this requirement to include funds that target investments with specified characteristics. Such characteristics could include such terms as “value,” “growth” or “tax-exempt.” But it would also include characteristics referring to “environmental,” “social” or “governance” factors. The 80% requirement is determined at the time the fund makes an investment. If the 80% investment threshold is not met later, future investments must be made under a methodology that would bring the fund back into compliance.

The rule specifically discusses deceptive or misleading use of ESG terminology in fund names. The discussion focuses on “integration funds” that incorporate ESG factors alongside other non-ESG criteria. In many cases, the ESG factors carry no more weight than the other factors and are therefore not determinative. In such cases, using ESG terminology in a fund’s name would be deemed misleading.

A second rule would require investment advisors to provide more specific disclosures in fund prospectuses, annual reports and advisor brochures to address ESG strategies. If a fund is identified as seeking certain ESG impacts, it would be required to describe the specific impact, as well as regular updates on the progress toward that goal.

For example, if greenhouse gas emissions (GHG) were the focus of a particular fund, disclosure of the specific emissions, targeted reduction goals and regular disclosure as to the progress toward that goal would be required. Arguably GHG disclosure will become more readily available as the SEC requirements for registrant reporting on such emissions become effective (see May/June article referenced above).

As part of the additional disclosure, fund advisors would be required to give investors insight into how advisors use their influence with the portfolio companies to achieve the stated ESG goals. Generally, the advisors vote a major portion of the fund’s shares in the portfolio companies via proxy.

In addition, they may meet with management of the companies. If either proxy or management meetings are deemed significant to achieving the fund strategy, the fund must also disclose how it engages with the portfolio companies to achieve its objectives.

Also in May, the Financial Accounting Standards Board (FASB) announced that it is considering new rules regarding accounting for financial instruments with ESG features or credits. The project will address recognition, measurement and disclosure for programs that generate ESG related credits such as cap-and-trade, carbon offset credits or renewable energy credits. The scope will initially be limited to credits that can be traded and excludes tax credits or incentives.

It is apparent that a new level of complexity is rapidly emerging with regard to the impacts businesses have on society and the environment. Enterprises would be well served to understand the implications of these new rules and regulations on their operations, perception of these operations with customers and suppliers, and their ability to raise capital.

About the Author: Don Carpenter is clinical professor of accounting at Baylor University. Contact him at Don_Carpenter@baylor.edu.

 

 

 

 

  • The Future of CPA Licensing: TXCPA Members in Action at the State Capitol

    With the profession facing a talent shortage, legislative efforts are underway to introduce alternative pathways to licensure. Additionally, bills have been introduced to address CPA mobility and practicing accounting across state lines. TXCPA members took action at the Texas Capitol to address and emphasize the importance of these initiatives in strengthening the profession.
    View Article
  • CPE: Corporate Codes of Conduct - Similarities and Differences, and Implementation and Communication Strategies

    Codes of conduct serve as essential guidance for organizations, ensuring ethical behavior, regulatory compliance and corporate integrity. This article examines the significance of codes of conduct, highlighting examples from Fortune 500 companies. Effective implementation involves executive endorsement, ongoing communication and integration, and reinforcing accountability.
    View Article
  • Build on Our Momentum

    During TXCPA's 2025 Advocacy Day at the state Capitol, CPA professionals met with legislators to discuss proposed legislation on alternative CPA pathways and mobility. These efforts strengthened relationships with lawmakers, positioning CPAs as trusted advocates for the profession. The positive feedback from legislators reflects the impact of these advocacy efforts.
    View Article
  • Assessing AI From a Tax Perspective, Part 2

    In part 2 of a series, this article examines the risks and limitations of using AI in tax preparation. While AI tools like ChatGPT, Copilot, Perplexity, and TaxGPT can assist with tax research, their accuracy depends on precise prompts and professional oversight. Responses are often outdated, misleading or incorrect, posing risks to professionals who rely on them without verification.
    View Article
  • Understanding Sustainability Accounting Standards Board Standards

    The Sustainability Accounting Standards Board (SASB) provides industry-specific guidelines for companies to report on ESG factors that impact financial performance. Companies use SASB metrics to enhance investor transparency and manage ESG risks. While SEC regulations on sustainability remain pending, over 3,000 companies worldwide have voluntarily adopted the standards to improve corporate performance.
    View Article
  • What’s Happening Around Texas - March-April 2025

    TXCPA chapters across Texas hosted various events to engage members and support future CPAs. TXCPA Dallas held a Coffee & Connections event, while TXCPA East Texas members inspired students at UT Tyler’s Beta Alpha Psi meeting. TXCPA Fort Worth welcomed new licensees at a luncheon and in San Antonio, members celebrated new iDEAL graduates and elected the 2025-2026 Officers and Directors.
    View Article
  • Navigating Timekeeping Compliance in Government Contracting

    Texas contractors receiving government funding must maintain rigorous accounting practices, particularly in timekeeping and labor distribution, to ensure they are adhering to federal regulations. CPAs and finance professionals play a crucial role in enforcing applicable standards. Mastering timekeeping is essential to help meet federal standards and uphold the integrity of taxpayer-funded projects.
    View Article
  • Spotlight on CPAs: Shilpa Boggram Sathyamurthy, CPA-Houston, CA

    Shilpa Boggram Sathyamurthy is an accounting profession leader with experience in both public and industry accounting. In this Spotlight on CPAs article, she discusses the differences in their focus, workload and learning opportunities. She also actively contributes to TXCPA through committee service, valuing collaboration and professional development.
    View Article
  • Do New SEC Disclosure Requirements for Share Repurchases Dilute Their Benefit?

    The SEC introduced new disclosure requirements for share repurchases, aiming to increase transparency. Under the updated rules, companies must now disclose daily repurchase data in quarterly reports. Companies must also disclose whether insiders traded in the four days before or after announcing a buyback. The rules do not specifically address accelerated share repurchase programs.
    View Article
  • Custom Reporting Solutions for ASC 842 Lease Accounting

    ASC 842 compliance remains challenging as organizations manage complex lease portfolios and multiple accounting systems. While standard software offers reporting features, many require custom solutions to integrate specific accounting attributes and enhance internal controls. Using a structured approach to developing custom reports can help improve efficiency and support the decision-making process.
    View Article
  • 2024-2025 Accounting Education Foundation Scholarship Recipients

    The TXCPA Accounting Education Foundation (AEF) awards scholarships to outstanding students, providing not only financial aid but also connections to a supportive community of experienced professionals. Congratulations to these exceptional students for their dedication and commitment to excellence!
    View Article
  • Take Note

    In this edition of Take Note: How to Get the Latest Updates on BOI Reporting; Safeguard What Matters Most; Accountants Confidential Assistance Network; Advocacy Day and Midyear Leadership Council Meeting; TXCPA Career Center; CGMA® Designation
    View Article
  • Classifieds

    The classified ad section features listings for practice owners looking to sell, professionals seeking firms to purchase and a variety of specialized services. Whether you're looking to expand, sell or explore niche opportunities, these classified ads can connect you to valuable business prospects and resources.
    View Article

CHAIR
Mohan Kuruvilla, Ph.D., CPA

PRESIDENT/CEO
Jodi Ann Ray, CAE, CCE, IOM

CHIEF OPERATING OFFICER
Melinda Bentley, CAE

EDITORIAL BOARD CHAIR
Jennifer Johnson, CPA

MANAGER, MARKETING AND COMMUNICATIONS
Peggy Foley
pfoley@tx.cpa

MANAGING EDITOR
DeLynn Deakins
ddeakins@tx.cpa

COLUMN EDITOR
Don Carpenter, MSAcc/CPA

DIGITAL MARKETING SPECIALIST
Wayne Hardin, CDMP, PCM®

CLASSIFIEDS
DeLynn Deakins

Texas Society of CPAs
14131 Midway Rd., Suite 850
Addison, TX 75001
972-687-8550
ddeakins@tx.cpa

 

Editorial Board
Derrick Bonyuet-Lee, CPA-Austin;
Aaron Borden, CPA-Dallas;
Don Carpenter, CPA-Central Texas;
Rhonda Fronk, CPA-Houston;
Aaron Harris, CPA-Dallas;
Baria Jaroudi, CPA-Houston;
Elle Kathryn Johnson, CPA-Houston;
Jennifer Johnson, CPA-Dallas;
Lucas LaChance, CPA-Dallas, CIA;
Nicholas Larson, CPA-Fort Worth;
Anne-Marie Lelkes, CPA-Corpus Christi;
Bryan Morgan, Jr, CPA-Austin;
Stephanie Morgan, CPA-East Texas;
Kamala Raghavan, CPA-Houston;
Amber Louise Rourke, CPA-Brazos Valley;
Shilpa Boggram Sathyamurthy, CPA-Houston, CA
Nikki Lee Shoemaker, CPA-East Texas, CGMA;
Natasha Winn, CPA-Houston.

CONTRIBUTORS
Melinda Bentley; Kenneth Besserman; Holly McCauley; Craig Nauta; Kari Owen; John Ross; Lani Shepherd; Patty Wyatt

 

Your TXCPA membership has not been renewed for 2025 -2026. Renew now.