Issues of Environmental, Social and Governance (ESG) continue to be a priority to policymakers, investors and communities. There are concerns about the impacts of human activities on the environment and the sustainability measures to protect the environment for future generations.
In the same vein, business entities are required to take far-reaching steps to protect the environment. Indeed, sustainability involves measuring and reporting the impacts of human or a company’s business activities on the environment and society.
The ESG Factors
The ESG Factors include:
Environmental factors: Pollution (air, water or land), natural resources depletion, climate change and carbon footprint. Society uses air, water and other natural resources of this planet. Therefore, it is in our collective interests to mitigate human activities that tend to harm the environment and threaten its sustainability.
Social Factors: A company that is environment friendly has a more favourable image and improved customer connections. Social factors place emphasis on improving employee engagement/retention, enhancing customer satisfaction as well as reducing business risk.
It also aims at reducing carbon emissions, improving resource efficiency and reducing water consumption. Social factors also include workplace safety conditions, suppliers’/vendors’ practices, diversity, equity and inclusion, data privacy as well as wage equality.
Governance: Governance is a key element of overall corporate strategy and performance because it directly affects its resource use in the pursuit of a company’s objectives. It establishes the basis that enables the development, implementation and assessment of corporate social responsibility and sustainability initiatives. Governance encompasses board structure and diversity, ESG disclosures (accountability and transparency), organizational integrity and ethics.
ESG Reporting
ESG Reporting means the dissemination of credible and verified information regarding a company’s ESG goals and the strategies towards achieving them. In ESG reporting, transparency is important to foster investor confidence and optimize long-term financial performance. Eco-conscious investors often view companies that are transparent about their business practices favourably.
There again, long-term performance can be achieved by steering away from unsustainable or unethical practices such as corruption, child labour, unfair treatment of staff and pollution. Indeed, ESG reporting provides companies with the opportunity to rebrand themselves as more sustainable and socially responsible. Publication of such reports can attract new customers or increase brand loyalty with existing ones.
Standards for Sustainability/ESG Reporting
Sustainability reporting frameworks provide companies with a clear roadmap on how they can operate in an environmentally friendly, socially responsible and economically sustainable manner. Some of the standards are the SASB (Sustainability Accounting Standards Board), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP) and the Greenhouse Gas (GHG) Protocol and ISO14016:2020. Clearly, these standards establish the fact that one-size-fits-all strategy or metrics cannot be used in measuring ESG practices and impacts on society.
Hence, the economic sector in which a business operates and its stakeholders’ expectations influence the choice of a reporting framework. In effect, a company’s approach to reporting its non-financial Environmental, Social and Governance (ESG) factors increasingly determines its reputation, investor confidence, transparency and consumers’ trust.
Why do Stakeholders need ESG Reports?
Reporting on Environmental, Social and Governance (ESG) has become integral to investment decisions corporate risk management and regulatory compliance. Investors are increasingly concerned about ESG issues or factors and their impacts on investments.
They want transparency about how companies are managing environmental, social and governance (ESG) performance so that they can assess the risks and opportunities related to their investments. They need such reports and metrics to critically evaluate a company’s financial performance and predict its long-term viability to determine their investment options.
Accountant’s Role
At the core of sustainability or financial reporting is data collection and analysis. Accountants are uniquely trained to apply their critical thinking skills to collect, analyze and consolidate high-quality ESG metrics or disclosures in line with stakeholder expectations.
They are to ensure those disclosures are accurate and consistent with global standards. Thus, the accountant can help businesses to identify the sector-specific ESG reporting framework, assess sustainability risks and integrate those ESG factors into the company’s overall financial performance.
To note, inaccurate or misleading ESG disclosures can lead to reputational damage, legal consequences, and financial penalties. In that regard, the accountant’s role in providing assurance on the accuracy and reliability of ESG data is more critical than ever.
To achieve success, accountants must collaborate with other professionals or industry experts to share relevant information and regulatory bodies to strengthen ESG compliance efforts. Collaboration with stakeholders also helps to understand their ESG expectations or any concerns they have. To meet stakeholder expectations, it is imperative for an accountant to:
Staying Informed on ESG: Understanding the nuances of ESG frameworks, regulations and reporting standards is crucial for effective reporting. Accountants need to train and gain the requisite knowledge and expertise in this evolving landscape to remain effective advisors.
Implement ESG Reporting Standards: Accountants should ensure that ESG reporting is integrated into their financial reporting processes and that businesses are complying with emerging regulations.
Promote Responsible Business Conduct: Accountants must strongly advocate for decisions that not only drive financial success but also support long-term sustainability. This involves pushing back on practices that may harm the environment, society, or corporate governance. The accountant must crave the indulgence of other stakeholders to be ethically responsible and legally compliant with regard to ESG standards aimed at ensuring business sustainability.
Use Data to Drive ESG Strategy: As part of the strategy, accountants can use data visualizations techniques to represent ESG data graphically to stakeholders. By creating interactive reports or working with creators to develop videos, accountants can disclose other immersive contents about company’s ESG activities.
Promoting ESG as a Value Driver
Organizations can unlock those benefits of ESG by promoting same as a value driver.
- Cost Reductions: ESG can also reduce costs substantially. For instance, effectively executing ESG strategy can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon).
- Top-line Growth: A strong ESG proposition helps companies tap new markets and expand into existing ones. When governing authorities trust corporate actors, they are more likely to issue them with licenses and the permits that afford fresh opportunities for growth.
- Reduced Regulatory and Legal Interventions: A stronger external-value proposition can enable companies to achieve greater strategic freedom, ease regulatory pressure and engender government support.
- Employee Productivity Uplift: A strong ESG proposition can help companies attract and retain quality employees, enhance employee motivation by instilling a sense of purpose, and increase productivity overall. Employee satisfaction is positively correlated with shareholder returns. ESG initiatives drive innovation and operational efficiency.
- Investment and Asset Optimization: A strong ESG proposition can enhance investment returns by allocating capital to more favourable and sustainable opportunities such as renewables and waste reduction. It can also help companies to avoid stranded investments that may not pay off because of longer-term environmental issues. ESG integration into business strategy can positively impact financial performance through effective decision-making processes.
ESG Reporting Challenges
Despite its growing importance, ESG reporting presents significant challenges to all stakeholders. These include
- Lack of standardization: Different frameworks require varying levels of disclosure to satisfy evolving stakeholder needs and expectations.
- Data collection and verification: Gathering and verifying data from multiple stakeholders and sources is difficult.
- Measuring non-financial data: Quantifying metrics like carbon footprints or social impact is complex and subjective.
Stakeholder expectations continue to shift and necessitate companies to stay ahead of emerging ESG trends while maintaining transparency and credibility. That said, overcoming these hurdles is crucial to ensure ESG reporting is effective and meaningful. It also enables companies to demonstrate their commitment to sustainability and responsible business practices.
Conclusion
Sustainability reporting provides a thorough picture of an organization’s impact on the environment and society. The call is for businesses to embark on an ESG journey and embed such considerations into their corporate strategy.
They also need to leverage the appropriate long-term value creation metrics to better communicate their ESG commitment to stakeholders. The accountant’s role cannot be underestimated in the ESG conversation and strategy. Accountant in that respect must position themselves with the requisite skills to serve stakeholders’ interest and uphold such standards and disclosures in the evolving landscape of ESG reporting.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
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