Accountants - the secret to ESG success?

According to accountancy group UHY Hacker Young, accountants “prove that businesses are what they say they are. We use professional expertise and experience to interrogate the evidence and come to firm, factual conclusions”. Firm, factual conclusions – and the actions taken from those insights – form the fundamental basis of a meaningful ESG strategy.

ESG reporting is here to stay – whether as part of legally enforced government regulation, or as a response to values-driven consumer pressure - companies of all sizes are coming to realise that financial disclosures make up only a part of their much wider reporting responsibilities.

As such, the expertise accountants can bring to bear on ESG reporting has the potential to be a game changer. Again, quoting UHY Hacker Young, “new frameworks and standards that marry financial and non-financial reporting – showing the effect of each on the other – will cement accountancy’s position at the heart of the ESG reporting process.”

bringing financial and non-financial reporting together

Many organisations already issue annual sustainability reports, but these are often separate from their financial reports, so the relationship between financial performance and sustainability performance is difficult to assess. However, as we come ever closer to wholesale business-wide and national environmental reporting requirements, the need for accurate ESG KPIs as part of a company’s overall reporting process is only a matter of time. Indeed, a company’s reputation and credibility will soon come to rest on its position as a responsible business – to compromise this will be to compromise its potential future earnings.

According to the Institute of Internal Auditors report, “Organisational well-being is tied not only to financial strategies and metrics, but also to those that reflect environmental, social, and governance aspects. This holistic approach is indispensable to long-term value creation” This means that ESG-related risk management will become just as important as financial strategies typically handled by accountants.

In a manner of speaking, ESG strategies will become financial strategies. ESG risks and opportunities are being incorporated into investment decision-making - whether it's lending, equity investing, or green bonds etc. To be ESG driven is to put your company on a sound financial footing. Neil Stewart, Director of Corporate Outreach at the Sustainability Accounting Standards Board (SASB) puts this perfectly when he says “value creation, its preservation or erosion as a result of these ESG risks is now being quantified, and so too is corporate performance against these risks. This is what puts the accounting profession at the centre of this ESG world.”

standards are here

As ESG and ESG reporting have gained traction, a major stumbling block has been the lack of standardised reporting tools and metrics. That changed with the roll out last year of the International Auditing and Assurance Standards Board (IAASB) sustainability reporting standards – a framework to help accountants ensure that their reporting methodology is both rigorous and trustworthy.

In 2019, the EU introduced its double-materiality concept that takes account of the significance of ESG issues affecting a company’s development, performance and position (sometimes known as “outside-in” materiality) and the significance of the impact of the company’s activities on the environment and society (sometimes known as “inside-out” materiality).

Along with the new terminology, it also introduced guidelines on non-financial reporting with a focus on how best to audit and assess environmental information.

These policy documents and standards are not yet used as industry-wide benchmarks. Progress is likely to be turbo-charged (in the UK at least) by the adoption in April this year of the Task Force for Climate-related Financial Disclosures (TCFD) reporting standards - any company with 500+ employees and over £500 million in turnover is now legally obliged to report climate-related financial data in line with the TCFD recommendations. As such, the need for standardised reporting to allow meaningful cross sector comparisons will be unavoidable.

It is worth remembering that these reporting frameworks do not require accountants to suddenly become sustainability experts. It is about having a broader understanding of how ESG issues relate to your (or your client’s) business, what it means and helping management connect these issues to the company’s long-term performance and providing analysis and insight into organisational decision-making.

potential impacts of esg accounting

Accountancy-based auditing as a key player in responsible ESG management is at a very early stage, but the impact of professionalised third-party sustainability reporting will be enormous.

Executives will be better able to factor sustainability issues into strategy and capital-allocation decisions – similarly, investors will seek both financial and ESG-related data to assess upcoming investment decisions. Boards of directors will see sustainability not as a side issue to be managed by a volunteer committee but as a business-critical issue that the entire board needs to focus on.

Harvard Business Review even speculates that sustainability reporting will eventually lead to these metrics informing executive pay. Rigorous standards for measuring and reporting on sustainability will make it possible for them to be used alongside financial returns in determining the compensation of executives, board members, and investors.

As with the TCFD reporting standards in the UK, in the long run this data will be rolled up to inform companywide and even nationally governed limits on greenhouse gas emissions along with overarching corporate rules on social and community issues.

At ESGmark® we believe that these changes won’t come overnight, but momentum is such that they are inevitable. It’s an exciting tipping point for corporate responsibility and the power of positive business, whilst also being an important moment for the accountancy profession as it expands to support one of the most important corporate developments of the 21st century.