As more customers seek to shop from environmentally friendly businesses, more companies are adjusting their operations to meet this demand. And governments are trying to motivate change with stricter regulations.
Sustainable practices are indeed not new — but the way businesses report about them is changing. Governments, investors and customers are increasingly requiring companies to disclose more information about their eco-friendly strategies and actions. ESG (environmental, social and governance) reporting, although on the scene for over 20 years, now stands under the spotlight.
The U.S. Securities and Exchange Commission (SEC) has published new rules about how businesses must report environmental, social and governance information. This aims to boost transparency and ethical practices in business operations, positively impacting the environment and providing a stronger point of reference for customers and investors.
But following new ESG reporting regulations may prove more challenging than anticipated, especially for businesses that have never done it before. Even companies that already rely on significant sustainability practices may find themselves confused about how to report on them to stay compliant.
This is where accounting firms can step in to save the day. By including ESG consulting in their accounting services and hiring ESG specialists, accounting firms can help businesses report on their sustainable practices and meet the growing demand for transparency. Let’s see what this means precisely and how (and why) to turn to ESG reporting to expand the accounting portfolio.
What is ESG reporting?
ESG reporting refers to the process of businesses disclosing their environmental, social and governance data. This disclosure sheds light on a company’s ESG activities, improving transparency and incentivizing other companies to do the same.
With ESG reporting, businesses commit to three principles:
- Environmental. Companies examine their business practices, looking for areas to reduce waste, emissions and pollution. As there are many sustainable practices with different impacts across sectors, this is the most complex pillar of ESG reporting.
- Social. Companies disclose their employee and customer experience as well as company diversity, LGPTQ+ rights and safety practices. This disclosure helps investors screen companies with poor social impacts and avoid them.
- Governance. Companies inspect their board diversity, shareholder rights and executive compensation. Studies suggest that good corporate governance is associated with better financial performance. Investors are more likely to invest in companies with good governance, as there is less risk of future corporate scandals or fraud.
ESG frameworks and standards
Several ESG frameworks can help businesses learn what data to collect and how to structure information in their ESG reports. Common ESG frameworks include:
- Task Force on Climate-Related Financial Disclosures (TCFD)
- International Integrated Reporting Council (IIRC)
- Global Reporting Initiative (GRI)
Internal and external stakeholders may dictate the best ESG framework based on which information is most pertinent. For instance, the TCFD mainly focuses on a company’s environmental impact. The IIRC and the GRI have broader informational structures.
Now, companies will also need to follow ESG standards alongside common frameworks of their choice. ESG standards are more technical, listing precise requirements and metrics for each project. Common ESG standards include:
- European Financial Reporting Advisory Group (EFRAG)
- International Sustainability Standards Board (ISSB)
- Sustainability Accounting Standards Board (SASB)
Standardizing reporting information is essential for stakeholders, and combining frameworks and standards for ESG reporting makes information more understandable for individual investors.
The importance of ESG reporting
While ESG reporting may add to the number of regulations businesses must follow these days, it also provides a list of important benefits:
Enhances company investment portfolios
The first mention of ESG as we know it today comes from a 2004 report from the United Nations titled Who Cares Wins. This report discussed why investors should value ESG in their investments for ethical and financial reasons.
Ethically, ESG reporting helps stakeholders know that the businesses in which they invest are working to better the world at large. Financially, there is a positive correlation between high ESG scores and financial performance.
Simply put, ESG reporting helps investors determine which companies are ethically and financially stable enough to make a solid investment place. In fact, around 50% of investors already consider ESG scores before investing. While this may mean companies must invest more money, time and effort toward ESG reporting, it also provides a unique opportunity to attract new investors with sustainable practices.
Greenwashing, an act of outputting false or misleading claims about environmental practices, has grown significantly in the last couple of years. Volkswagen’s fake car emissions reports and McDonald’s plastic-to-paper straws initiative are only some examples of fabricating sustainable practices.
A new SEC task force is on a mission to decrease greenwashing across all sectors. A group of professionals will check ESG practices and information companies disclose, identifying discrepancies and violations. They will use data analysis and similar solutions to ensure businesses are as environmentally friendly as they claim.
This will reduce greenwashing trends and prevent companies from scoring well with investors and customers upon false declarations. And it will allow true eco-friendly innovators to thrive.
Not committing to the three core principles of ESG can leave companies exposed to many risks. As mentioned above, following the environmental, social and governance factors opens up many opportunities for businesses — but so does risks.
A company that fails to positively interact with the environment and society and run its operations adequately can face various repercussions. Some of them are low profitability, poor reputation and loss of long-term viability. For instance, Volkswagen lost $34.69 billion in fines and settlements after the “emission scandal.”
Companies that proactively follow and manage ESG principles will ensure this doesn’t happen to them. They’ll improve their reputation and relationships with customers and employees through more transparent and ethical operations. They’ll also comply with all the relevant regulations. All this will secure a more positive business outlook and better profits.
How can accounting firms help with ESG reporting?
As mentioned, the emerging regulations around ESG reporting aim to provide a more comprehensive picture of one company’s sustainable practices. As such, they may be challenging to follow.
Businesses will need to disclose and structure excessive data in their ESG reports. That will likely draw a lot of time, effort, and resources, especially for those who don’t have team members well-versed in ESG accounting standards and principles.
Accounting firms can capitalize on this opportunity and expand their services to include ESG reporting. They can offer their expertise to struggling businesses, attracting new clients who may not know much about ESG or its impacts and benefits. This will positively impact the bottom line of accounting firms as well as boost their brand image and client acquisition rates through word-of-mouth marketing.
Tips to kickstart ESG consulting firms
ESG reporting involves evaluating a company’s risks and opportunities for sustainable policies, assessing investor interest, creating sustainable strategies and compiling the final report. While accounting professionals may know the ins and outs of some of these processes, many will be new to them as they refer to environmental, social and governance data.
Some accounting firms may already have a backbone of accountants who work with sustainability experts to find risks and opportunities within companies for ESG growth. These will already know how to approach the ESG frameworks and standards. But small companies lacking sustainability-oriented professionals or wide networks may want to consider expanding their team.
If accounting firms want to excel at ESG consulting services, they should consider hiring or contracting ESG experts. Partnering with on-hand specialists in the field will help accounting firms navigate the intricate world of ESG reporting and provide top-notch service. It will also aid in handling the many ESG accounting standards and analyzing excessive data that comes along the way.
With a little extra help from new hires and partners, ESG consulting firms can kickstart their journey to helping leaders grow more sustainable businesses. They can not only aid in completing required ESG reporting but also guide companies in creating internal policies and educating in-house teams on the matter. This will create a long-lasting and mutually beneficial effect.
PRO TIP: Accounting firms can offer ESG accounting and disclosure services in the financial statements but have no reason to limit themselves to just one industry. ESG reporting varies based on sectors, so accounting firms can opt to offer their services across all fields or specialize in specific industries, such as the energy sector, hospitality and more.
With so many investors considering ESG scores before deciding on an investment, companies are increasingly looking for ways to improve their ESG reporting. But doing so may be easier said than done. Constantly disclosing data about environmental, social and governance practices requires a lot of work and puts companies at risk of error.
Accounting firms are now in a unique position to help companies follow ESG reporting regulations. By adding ESG consulting to their services, accounting teams can support a positive change in the whole business world.
Not to mention that they can also expand their portfolio and attract new clients. And considering the heavy competition accounting professionals now face from big firms, finding a unique way to attract new clients is more important than ever.