PwC dishes up some transparency about its diversification plans

So PwC has now formally launched itself into the business of environmental, social and governance (ESG) consulting.

Last month it announced that it will be investing $12 billion (more than R175 billion) globally in recruitment, training, technology and deals designed to capture a share of the rapidly growing market for ESG advice.

This New Equation strategy will see PwC SA increase its headcount by 50% to 7 500 and target a 66% increase in local revenues to $1 billion.

The new strategy has been on the cards since at least January 2020, when a consultation draft report was released at the World Economic Forum (WEF) annual get-together in the Swiss Alps. Titled ‘Toward common metrics and consistent reporting on sustainable value creation’, the report was the result of collaboration between Deloitte, EY, KPMG, PwC and the WEF.

The collaborators said they wanted to identify what they called “a core set of material ESG metrics and recommended disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries”.

First the boxes, then how to tick them

Having identified these core metrics then, presumably the thinking goes, who better than EY, KPMG, Deloitte or PwC to do all the hand-holding for their clients?

PwC’s New Equation plan also involves the launch of “trust leadership institutes” that will train clients in business ethics and the basics of ESG.

Trust, it seems, is a big part of PwC’s strategy; it’s never been more important to build trust, nor more difficult, says PwC.

“Organisations increasingly need to earn trust across a wide range of topics that are important to their stakeholders. Success depends on fundamental shifts in the way executives think, organisational culture, systems and ambition.”

No doubt the environment and sustainability have become big business; much bigger and slicker than a few decades ago when it was only faith and Church-based activists as well as the odd non-governmental organisation (NGO) that seemed bothered about the damage being wrought on the environment and social stability by corporates.

Consulting, a ‘growth’ industry

According to the latest Global Environmental Consulting Strategies & Market Assessment report by UK-based think tank Environment Analyst, consulting income grew by 5% to 6.5% a year between 2017 and 2019; in 2020 it took a hit from the pandemic but still managed to increase by 0.6% to $38 billion.

Given that things do seem to have deteriorated over the past two decades, it’s difficult to gauge what impact that $38 billion of consulting income has had on the environment or society or the screeds of corporate reporting that attest to the good environmental and social works being undertaken.

Is it possible the environment and social instability might have been even worse without all this effort?

Or is it possible that all of this is nothing more than lip service designed to placate an increasingly anxious public?

If the WEF, the Big Four audit firms, and powerful players such as the International Financial Reporting Standards Foundation (IFRS) – the latter of which is working on the establishment of a sustainability standards board – are successful in standardising ESG metrics, then mandatory application can be expected to follow.

If this happens, the demand for ESG consultancy would skyrocket and quickly make the $38 billion look like chump change.

Conflict of interest?

Mike Martin of Active Shareholder, one of those faith-based NGOs that’s been prodding corporates over ESG issues for years, is unimpressed by the PwC development.

“It’s probably not good,” says Martin, adding that it might seem a logical step for PwC but shouldn’t be.

“It’s as though they said ‘Well, auditing isn’t doing well, so we’ll diversify’ – instead of saying ‘Well, auditing isn’t doing well, so let’s focus on it and try fix it’.”

Martin, is particularly interested to see how PwC will navigate the seeming conflict between consulting clients on anti-social levels of executive remuneration and consulting them on ESG issues.

Profit over people and planet

Just Share’s Tracey Davies is appalled by PwC’s plan.

Selling ESG services to clients as well as auditing and other consulting services could be hugely problematic, even if the ESG aspect is only superficial.

“The rise of ESG integration into investment decision-making was primarily a response to the fact that capitalism ignores the impacts of business on people and the environment,” says Davies.

“PwC’s announcement appears to herald a new era: the commercialisation of ESG itself.”

She points out that the global consultancy firms have been among the primary drivers of an approach to economic activity that prioritises profit over people and planet.

“It is bad news for everyone if these consultancies are now making plans to dominate ESG analysis itself,” says Davies.

Are standardised metrics even necessary, or possible?

Businessman Simon Mantell, who’s had a few run-ins with members of the Big Four, questions whether we should even be trying to establish standardised metrics for ESG.

“It will be impossible not to have a high degree of subjectivity, which means when it comes to accountability you won’t be able to pin down executives,” says Mantell. He describes a situation where executives with appalling ESG behaviour will be able to claim they had all the recommended systems in place, and ticked all the boxes. (Think Steinhoff and Tongaat on the accounting front.)

‘Inappropriate’

It’s a point focused on by Carol Adams of Durham University Business School in the UK and Subhash Abhayawansa of Swinburne Business School in Melbourne in a recent Elsevier article titled ‘Connecting the Covid-19 pandemic, environmental, social and governance (ESG) investing and calls for harmonisation of sustainability reporting’.

The calls for metrics and standardisation are an inappropriate attempt to place investors and report-writers at the centre of ESG, say these academics.

This, as Davies points out, is essentially why we are currently in the mess we’re in.

Adams and Abhayawansa warn that having a rules-based rather than principles-based approach will allow companies to hide material facts that are not specified in the metrics. The calls for harmonised standards “demonstrate a lack of regard for different users of corporate sustainability information, a lack of analysis of the alternatives, an overestimation of the IFRS Foundation’s expertise and a mischaracterisation of sustainable/ESG financing.”

And as Martin says, you might think that an industry that has been in crisis for the past few decades would want to hunker down and focus on getting the basics right.

Wherever you look across the globe, regulators are battling to tighten up the oversight of auditing, particularly of the powerful Big Four audit firms whose names keep cropping up whenever there is mention of high-profile corporate collapses.

Last year the UK’s Financial Reporting Council (FRC) told KPMG, PwC, Deloitte and EY that they would have to separate their auditing divisions from the rest of their operations by June 2024.

This latest attempt to overhaul the profession, the third government-backed review of the issue, was prompted by the collapse of two well-known British companies, outsourcing giant Carillion and high-street retailer BHS.

In 2018 the US Department of Justice revealed that charges had been brought against former PCAOB employees who had allegedly helped KPMG cheat on its watchdog inspections by alerting them to upcoming inspections.

In South Africa the minister of finance continues to try and beef up the Independent Regulatory Board for Auditors (Irba) to ensure that it performs its critical role of overseeing the country’s auditors.

For many in the industry Irba was perceived as a cosy extension of the Big Four and for years it demonstrated little evidence of independence – board membership was dominated by auditors and there were few known consequences of any investigations it might have undertaken. That perception was shaken up dramatically in early 2017 when former Irba CEO Bernard Agulhas launched a campaign to make the rotation of audit firms mandatory.

Accustomed to getting its own way for so long, the stunned industry fought back with everything it had.

During appearances before the parliamentary portfolio committee tasked with considering the necessary legislative changes, the Big Four trashed the notion that they were not independent from their clients and ridiculed the need for them to resign every 10 years.

Thanks to Steinhoff, by December that year it was no longer possible to perpetuate these claims or argue that South Africa’s audit profession was in good health.

But Irba’s ability to exert effective oversight over the Big Four remains questionable. Its recently appointed chair is a long-serving PwC executive who retired just weeks before taking up the appointment. Hopefully the amendments to the Auditing Profession Act , which were introduced in April and are the focus of much of the work done by Agulhas before he left Irba, will create more effective sanctions.

Reputational damage

KPMG’s reputation had been brought close to ruin by its involvement in the Gupta state-capture saga, while the collapse of Steinhoff amid allegations of accounting irregularities was a major blow to Deloitte – which suffered a second blow shortly after in 2018 when it became evident that another high-profile client, Tongaat, had for years relied on irregular accounting practices to bump up its profits. Later that year PwC hit the headlines for all the wrong reasons when questions were raised about its SAA audit.

For a few months in 2018 it did seem that wherever you looked across the SA corporate landscape unscrupulous executives had been allowed to get away with slack oversight by auditors.

In South Africa the audit firms’ response to the growing sense of public outrage over the last few years has essentially been one of ‘stay calm and issue transparency reports’.

Transparency reports?

The original plan was that the big audit firms would use their new transparency reports to reveal more details about how they actually function and in this way build up trust.

Remarkably, for companies that play such a high profile role in the corporate sector, very little is known about audit firms.

One of the previous regulators told Moneyweb the hope was that the audit firms would use transparency reports to help deal with the evident lack of trust between the firms and the public by providing some insightful details without compromising any competitive advantage.

Details were expected about their various sources of profit as well as revenue and an indication of the extent to which each firm’s client base comprises private, public or state-owned entities (SOEs).

It was also hoped that the transparency reports would provide some details on the extent to which they supply clients with various services other than auditing.

KPMG transparency

KPMG came closest to dealing with the public trust issue when it announced in its second transparency report, released early this year, that effective March 31, 2021 it would cease to provide non-audit-related services to its listed audit clients.

“The firm has taken this step following an intensive review process with the primary aim [being] to improve the perception of the role of auditors in creating independence and protecting the interests of the public,” said KPMG.

Under current law and regulations the provision of non-audit services to audit clients is technically permissible – but, says KPMG, this “understandably creates challenges in the public perception of auditor independence”.

Several months later there has been no indication that any of its three major competitors intends following this trust-building initiative.

PwC ‘transparency’

As for PwC’s ‘Transparency Report’, the latest, for 2020, reveals that its SA revenues grew 8% to R5.4 billion and that R3.5 billion of that (equivalent to 65%) came from assurance work. The assurance work includes core audit work of R2.6 billion, which was up 9% on 2019, and “broader assurance services” which increased 14% to R0.9 billion. In addition, “Advisory” contributed R1.3 billion and tax consulting R573 million.

That’s about the limit of what many looking for transparency might consider useful information; the remainder of the 48 pages looks to be more of a marketing campaign.

Moneyweb sent PwC SA a series of questions it would like to see dealt with in a trust-enhancing transparency report.

The questions included a revenue breakdown in terms of private, public and SOE clients; details of profit margin on each of its services; an indication of the numbers of customers to whom it provides multiple services; the number and outcome of disciplinary processes conducted during 2020; and the number of existing or new clients it had rejected for ethical and other such reasons.

Nothing that shouldn’t be expected from a transparency report intended to boost trust.

PwC responded by saying it plans to publish a new transparency report later in 2021. “We are therefore unable to respond in detail to the majority of the questions you posed.”

It didn’t respond in any detail to any of the questions. Hardly a good start to life as a trusty ESG consultant.

Ann Crotty does occasional research for Just Share.