ESG Becoming Key Piece of Corporate Reporting Puzzle

ESG Becoming Key Piece of Corporate Reporting Puzzle

Why is ESG important to the accounting and auditing world, and how can ESG records be collected efficiently? Read this Caseware blog to find out.

The world is changing rapidly, and businesses are racing to catch up. Consumers, and even regional regulations, are increasingly requiring businesses to improve their environmental, social and governance (ESG) record. You may have also heard of this being called corporate social responsibility.

ESG records measure the impact of your business on the environment and the world. However, ESG is not merely the responsibility of the CEO, but a company-wide endeavor. Often, in-house accountants and auditors are responsible for generating ESG reports.

Such reviews let you know where your business may be failing from an environmental, social or governmental standpoint and where you can improve it. For this, auditors must collect data from across the whole organization.

So, why is ESG important, and how can ESG records be collected efficiently?

What is driving greater interest in ESG performance?

One of the first questions asked when auditors look at the increased interest in ESG performance is, “Why now? What’s changed?”

For many, concerns about the environment are one of the first things that come to mind. As climate change forecasts continue to look bleaker and much of the world enters into the Paris Agreement, businesses are being met with stronger regulations that call for compliance with certain ESG reporting standards.

Failure to stay compliant can result in hefty fines — which stakeholders want to avoid. Investors concerned about the environment are also more likely to seek out businesses that make environmentally conscious choices.

Another common driver of interest in ESG performance is modern technology and media. There’s much more accessibility and transparency between organizations and consumers now than there was 20 to 30 years ago. If consumers catch wind of an unethical business practice that offends them, not only may they stop supporting the business but they may also share that information online with the hope that other consumers also stop supporting the business.

This indicates that consumers are learning about the impact of climate change as well as a number of social issues more quickly through social media. Supporting businesses that make these factors a high priority matters to consumers now more than ever.

What are the traditional financial reporting processes?

The role of accountants and auditors in ESG reporting is similar to their role in traditional financial reporting processes. Typically, accountants have to draw up two types of financial reports — external and internal financial reports.

External financial reports, shared periodically with possible investors and shareholders, have to be compliant with international accounting standards or generally accepted accounting principles. One of the main goals of these reports is to show potential investors the benefits of investing with the company.

Internal financial reports inform the executives and department heads of the financial performance and key performance indicators (KPIs) of the business. These can take on any form, as long as they’re clearly understood within the organization.

Accountants and auditors create these reports by collecting organization-wide financial data over a period, analyzing it and compiling it into a report. Also, analyzing the data and looking at trends and KPIs is as important as making that data clear and presentable to the right audience.

How does this apply to ESG?

An ESG report is also sometimes known as a sustainability report. ESG reports can be published and shared with potential investors, as well as with executives. Just like external financial reports, external sustainability reports are designed to show why your business would be a good investment. A sustainability report shows the efforts the business is making to follow environmentally and socially beneficial practices.

Like financial reporting, ESG reporting begins with the auditor collecting and analyzing data. The accounting department then draws up the report.

Any published reports must follow generally accepted accounting principles, so the ESG report should include:

  • A defined statement on the company’s ESG goals, metrics to define those goals, and the ESG reporting framework and standards
  • An assessment of the company’s current ESG performance with visualizations and where they hope to improve
  • A design to boost the ESG record and how that will be implemented
  • Frameworks and guidelines for success with this improved ESG performance

This ESG report must tell the story of your company’s ESG journey — where you started, where you are now, and where you are going. With an appealing narrative and solid transparency, you can draw in investors who prioritize ESG. With a clear audit trail, investors can feel more confident in the process.

What are the recent ESG regulations?

Earlier this year, the U.S. Security and Exchange Commission (SEC) proposed new disclosure requirements for businesses. According to this proposed rule, businesses would need to include climate-related disclosures in their registration statements and periodic reports and share their climate-related risk management process and any climate-related metrics as part of their ESG audit.

The goal is to offer investors consistent, measurable and transparent information about ESG issues so that the investors can make a decision with that information in mind. The proposal also suggests requiring disclosure about greenhouse gas emissions and “indirect emissions from purchased electricity or other forms of energy.”

In the European Union, other ESG regulations are emerging. These include green taxonomy, which is designed to define sustainable investments, as well as the Sustainable Finance Disclosure Regulation (SFDR), which is similar to the SEC’s disclosure requirements proposal. As the Paris Agreement becomes more widespread, more of these regulations can be expected in the future.

Let Caseware help you improve your ESG record

Caseware offers solutions for accountants and auditors, including secure cloud or hybrid integrated technologies, where you can store data, keep accurate records and ensure your compliance with any current ESG regulation stays up to date. When it comes to financial reporting, we can help you stay on track, no matter what the changing trends. Contact Caseware today to learn more or to get started with our reporting solutions.