- 23 de June, 2021
- Posted by: Filipa Ferreira
Corporate reporting has ‘permanently expanded’ to include ESG, but navigating the different frameworks requires careful attention.
Demands from investors, communities, employees, customers, and in some cases suppliers has meant corporate reporting had now “permanently expanded” to include environmental, social, and governance (ESG) information, according to Robert Hirth, co-vice-chair of the Sustainability Accounting Standards Board (SASB).
Speaking at the annual AICPA & CIMA CFO Conference in May, Hirth, who is also senior managing director at internal audit and risk consultants Protiviti, said ESG matters because companies with good ESG practices have a lower cost of capital, better operational performance, and better share price performance. “ESG performance is part of that competition for capital,” he said. Companies that take ESG seriously benefit from greater attraction and retention of employees, he added.
ESG, Hirth said, is also about risk and uncertainty. “Risk is a two-sided coin. There are going to be some situations that are negative — about weather events, climate change, or greenhouse gas emissions or use of plastics. But more and more people are seeing opportunities with respect to ESG — creating new products, developing new materials, finding new ways to get a product to market.”
ESG reporting also has an impact on traditional financial statements. ESG reporting needs to be accurate, and there needs to be effective internal control over it, Hirth said.
Many private companies have public company customers — and as pressure increases for public companies to report more and address the supply chain in helping them achieve their net carbon zero goals, private companies will also need to address ESG, Hirth said.
According to figures issued last year by the US-based Governance and Accountability Institute, 90% of S&P 500 companies published sustainability reports in 2019, up from about 20% in 2011. Of this 90%, 29% used external assurance.
Towards standards coherence
Moves towards a coherent sustainability reporting landscape have accelerated this year. An early June communiqué issued after meetings of the G7 finance ministers and central bank governors said: “We agree on the need for a baseline global reporting standard for sustainability, which jurisdictions can further supplement.”
Principal organisations creating ESG reporting frameworks include:
- The United Nations. The UN’s 17 Sustainable Development Goals (SDGs) were adopted by all member states in 2015. Hirth said: “A lot of organisations start with those 17 [goals] and select the most important, material, and relevant ones that apply to them.”
- The Sustainability Accounting Standards Board. SASB standards are a set of 77 industry standards across 11 sectors, introduced in 2018.
- Task Force on Climate-Related Financial Disclosures. Its recommendations are centred on four areas: governance, strategy, risk management, and metrics and targets.
- World Economic Forum. Its Stakeholder Capitalism Metrics involved work by the Big Four accounting firms that looked at existing standards and extracted “the best subset” in their view, according to Hirth.
- COSO and the World Business Council for Sustainable Development. The two organisations partnered to produce guidance that integrates ESG factors into ERM.
Advice for companies
Hirth and Farrar offered the following advice to management accountants and companies starting ESG reporting:
- Understand what your company is already doing on sustainability. This includes reporting and KPIs in this area.
- Evaluate how the different sustainability standards would apply to your company. Do you have some of that information already? Or is the information easy to obtain?
- Look at reporting done by peer companies.
- Carry out an assessment of stakeholder ESG behaviours. Understand who is driving your ESG journey. Farrar suggested establishing whether this is consumers, customers, regulators, or investors.
- Build your ESG literacy. This can also be done by having interdisciplinary conversations outside your organisation, including with climate change and biodiversity experts. He said: “What are your supply chain companies doing? What’s your sector or industry doing?”
- Don’t regard sustainability as a cost. Hirth said that companies should not look at ESG factors as a cost but “as a way to focus on some factors that make you a better company, that reduce risk, that [make] you more attractive to customers, to employees, [and create] a better supply chain”.
Adapted from “6 ways to start the ESG reporting journey”, by Oliver Rowe, in Financial Management Magazine, 18 June 2021