ESG reporting has become a hot-button topic in recent years. Stakeholders, including investors, employees, and customers, are increasingly interested in a company’s ESG performance. They want to know how businesses manage their environmental impact, how they treat their employees and other stakeholders, and how they govern themselves.
Essentially, individuals expect companies to follow standards of conduct that align with their perceptions of ethical and moral behavior, even if they exceed legal requirements. They want to invest in companies that not just reduce their environmental impact but improve it. They want companies that actively engage in the improvement of their workers, not just give them standard raises and promotions. They want to invest in companies trying to uplift humanity, not just make a quick buck and go home.
Therefore, companies must swiftly adapt to a rapidly transforming landscape to stay relevant to investors. As per a report by US SIF, portfolios specifically adhering to ESG standards held assets totaling $17 trillion in 2020, or a third of all assets under professional management. What’s truly astounding is the steep 42% surge from just two years earlier.
The American government hasn’t established any official laws regulating what ESG standards should look like. However, the SEC expects every company to provide any material relevant to investors. And because investors want ESG reporting, companies have to deliver it. Consequently, multiple companies, such as Morgan Stanley Capital International and Morningstar, have formulated their own methodologies to rank and score companies based on their behavior.
On a more global scale, efforts are underway to standardize ESG methodologies and reporting with the CFA Institute and the International Sustainability Standards Board, creating international standards for companies to adhere to voluntarily. Simultaneously, the EU has recently finalized ESG reporting rules for both EU companies and international companies that do business in the EU, which is of prime importance to American companies.
What does this have to do with CPAs?
We hereby observe a threefold intersection of significance for CPAs: investors are growing increasingly conscious about their investments, both corporations and the public place high trust in CPAs, and emerging regulations are being established that CPAs are distinctly equipped to navigate and comply with.
CPAs’ expertise in data analysis, assurance, and reporting positions them perfectly to guide businesses on their ESG journey. If a company did its own reporting, the public likely wouldn’t trust its self-assessment, and that company would be left out of the increasingly-popular ETFs and Mutual Funds composed of firms with high ESG scores. Plus, companies already have strong partnerships in place with established CPA firms they can efficiently utilize to take care of their ESG reporting.
How can CPAs help?
ESG Consulting
ESG rules will likely be similar to tax rules – ever-changing and challenging to analyze. CPAs can greatly benefit companies by staying up to date with these changes and guiding them through identifying, tracking, and reporting on relevant ESG metrics. This could involve helping clients understand the benefits of ESG reporting, such as improved reputation, increased investor interest, and improved risk management.
Assurance Services
As with financial reporting, companies, even if they execute their own ESG reports, often seek third-party assurance to ensure accuracy and enhance their credibility. CPAs, with their expertise in audit and assurance, are well-positioned to provide these services. Besides assessing the reliability and accuracy of their ESG data, CPAs can also inspect the effectiveness of the company’s ESG-related controls and processes.
Integration with Financial Reporting
CPAs can help companies integrate ESG factors into their financial reporting, such as identifying how ESG risks and opportunities could impact their financial performance and ensuring these factors are appropriately reflected in financial statements.
For example, a tech company invests in renewable energy for its data centers, reducing energy costs and carbon footprint. As a CPA, you quantify these impacts, reflecting them appropriately in both the company’s ESG reports and financial statements, providing investors with a holistic view of the company’s financial health and commitment to sustainability.
Benchmarking and Analysis
CPAs can help companies benchmark their ESG performance against their counterparts and industry standards and pinpoint their strengths and weaknesses. They can also perform analyses to understand the relationship between ESG and financial performance, helping companies make more informed decisions.
Training and Education
Finally, many companies may need help understanding the needs or implications of ESG reporting. CPAs can provide training and education to clients and their employees on what ESG reporting is, why it’s significant, and how to do it effectively.
ESG Toolset
Having discussed the significance of ESG reporting and why it’s beneficial for CPAs to offer this service to their clients, let’s now shift our focus to the actual tools that CPAs can employ in their practice.
Sustainability Accounting Standards Board (SASB)
SASB focuses on the financial materiality of ESG issues, meaning it emphasizes those ESG factors that are most likely to impact a company’s financial condition or operating performance in a material way. SASB’s standards are industry-specific, recognizing that material ESG issues vary by industry.
Global Reporting Initiative (GRI)
GRI’s sustainability reporting framework identifies principles and indicators organizations can use to report their ESG impacts. It focuses on the broader impacts of an organization’s activities on the economy, the environment, and society by providing a universal framework applicable to organizations of any size, sector, or location.
Task Force on Climate-related Financial Disclosures (TCFD):
TCFD offers a framework for companies to develop more effective climate-related financial disclosures, providing better information to stakeholders.
ESG Risk Analysis Software
Various software tools are available that can help CPAs analyze and report on ESG risks. These tools can track and evaluate ESG data, integrate it with financial data, and assist in creating reports.
Carbon Footprint Calculators
To report on environmental impact specifically, tools like carbon footprint calculators can be used to quantify a company’s carbon emissions.
United Nations Sustainable Development Goals (SDGs)
While not a reporting tool per se, aligning company goals with the UN SDGs can provide a roadmap for ESG initiatives and create a connection with global sustainability efforts.
In Conclusion
The ESG wave is not just coming; it’s here. As the business world pivots to a more sustainable and equitable future, CPAs have a pivotal role to play in this journey. By embracing the opportunities that ESG reporting presents, CPAs can not only add value to clients but also contribute to the broader goal of sustainable development.
