What does ESG reporting mean for Accountants?
Sustainability accounting is becoming a necessity in the modern business world as all the stakeholders are showing increasingly more interest in getting access to ESG performance data alongside the financial information of the companies. Embracing ESG reporting and sustainability practices might help not only enhance a company’s reputation but also get some financial benefits and build a more sustainable future. Accounting professionals can use their skills and knowledge of the business processes to help integrate ESG practices and reporting in their companies.
Environmental, social, and governance (ESG) is a growing focus for businesses, investors and auditors as sustainability practices are gaining momentum in the business world over the recent years. Businesses are increasingly encouraged to share about their ESG strategies and performance based on the demands of investors and consumers, intensified by ESG regulatory changes.
The emergence of sustainability accounting, which integrates ESG metrics into financial reporting and decision-making processes, proves that we can see a shift towards sustainability in the mindset of many people. This growing concern for environmental, social, and governance factors isn’t new and doesn’t seem to be a passing fling, rather a practice that’s here to stay.
ESG or Environmental, Social and Governance criteria are a series of standards for a company’s performance used by socially and environmentally conscious investors to evaluate their potential investments. In a nutshell, these criteria help determine whether a business is socially and environmentally responsible and goes beyond just maximizing profit, which makes it worthy of investments. Initially ESG was more a concern for investors, who wanted to find the companies with the values matching theirs. Today ESG is the concern for investors, consumers, regulatory bodies, governments and companies themselves, including management and employees. ESG criteria consist of three parts:
Environmental criteria (E) show how a company works toward safeguarding the environment, which might include policies addressing climate change like minimizing the amount of carbon emissions, using renewable sources of energy and reducing waste.
Social criteria (S) are focused on the relationships with people: employees, suppliers, customers, and the communities where a company functions. Social criteria might include such factors as employee diversity and inclusion, labor practices and human rights to mention just a few.
Governance criteria (G) help measure a company’s leadership, board composition, executive pay, shareholder rights and risk management. ESG accounting, in its turn, is the process of measuring and reporting on a company’s ESG performance. Let’s look at why ESG factors are becoming increasingly important to investors and other stakeholders.
Why is ESG important for businesses and public accounting?
With ESG accounting, the traditional focus of profit-loss statements shifts towards sustainability including environmental consciousness, social responsibility and good governance. There are three clear factors proving the importance of ESG.
On the one hand, taking into account ESG factors contributes to long-term sustainability and gives the company insights into its non-financial performance, which is crucial in terms of risk management and decision making.
On the other hand, ESG accounting helps build trust with the stakeholders, including investors, customers and employees, who are more and more interested in investing, buying and working for a company with stronger ESG commitments.
Finally, governments around the globe are introducing new ESG regulations that companies have to comply with.
The benefits of ESG accounting
As ESG performance is gaining its importance for many companies and their stakeholders based on the information in the previous section, there are some clear benefits that a business can count on when implementing ESG strategies.
Access to capital
Many mutual funds, brokerage firms, and investment advisors now offer investment products with strong ESG principles in place. It’s recommended to avoid companies not committed to ESG practices to keep a good investment portfolio.
Reduced risk
ESG accounting is the way to identify and deal with risks in relation to environmental, social, and governance factors. And once more, reducing risks makes a company more attractive for potential investors.
Improved financial performance
Companies with strong ESG performance tend to outperform their peers financially, which means that investments in companies with good ESG performance have generated higher returns than the average within their broader market.
Enhanced brand reputation
ESG accounting can help companies enhance their reputation as responsible and sustainable businesses, which, as it was mentioned before, draws investors and consumers. Making into the top ESG company lists that are compiled by various companies will surely add trust to the brand.
