Introducing the Future of Sustainability Accounting: ESG
What is sustainability accounting? What is Environmental, Social and Governance (ESG)? And how can accountants benefit from it?
Awareness of social and environmental impacts of businesses is growing. Investors are seeking businesses that can evidence their corporate sustainability. Social awareness and fairness are dictating consumer behaviour. Meanwhile, transparency in how organisations are governed is being demanded by employees and customers alike.
All these factors have inspired the need for businesses to report on their non-financial performance. This is where accountants can help. Having a skillset in analysis, reporting and independent advice, means accountants are in the perfect position to assist businesses in their sustainable development.
But where do accountants start? In this article we explore sustainability accounting standards of ESG and how accountants can get more information.
- Sustainability accounting reports on the non-financial performance of a business.
- This looks at the Environmental, Social and Governance factors and impact of an organisation.
- The importance of sustainability reporting is growing due to social, investment and political pressures.
- Accountants are in the unique position of being independent and trusted to provide high-quality transparent information, skills easily transferable to non-financial statements.
- To discover more about sustainability accounting and how it can benefit businesses, register for the Demystifying ESG course by the ICA.
An introduction to sustainability accounting
Sustainability accounting is the reporting of non-financial information as a result of an organisations performance. Typically this focuses on the social and environmental impacts and performance of a business.
The purpose of sustainability accounting is to help generate value in an organisation that is not necessarily directly tied to financial reporting.
Sustainability accounting can trace it's history back to the 1970s. This is when organisations began to start looking at the social and environmental impacts of their businesses. Albeit during this time period, sustainability accounting reporting was not well defined.
It took until the late 1990s to early 2000s, after wider philosophical discussions within the sector - as well as numerous social and environmental movements - for sustainability accounting to be defined.
And with this definition, came further research, literature, training programmes and the development of standards.
Sustainability accounting has a distinct benefit for accounting firms. As more and more firms begin to understand and report on their sustainable activities and impacts, they will be seeking independent advice. There is no reason this type of independent reporting can't be conducted by accountants.
Accountants already have the skills and experience to report independently. This independence can help prevent 'greenwashing' in non-financial reporting. Accountants reporting on sustainability can help businesses benefit from sustained practices. Whether that's through employee retention, customer satisfaction, better energy consumption or reduced waste.
Understanding the value of sustainability reporting
To understand the value of sustainability reporting, you have to understand how it differs from financial reporting.
At its most basic, financial reporting looks at documenting and communicating financial performance. This is through income statements, balance sheets and cashflows. The purpose is track and analyse business performance through financial incomings and outgoings.
Sustainability reporting, on the other hand, looks at the non-financial performance of a business. Specifically, its environmental impacts, social performance and governance.
But, where is the value of reporting on non-financial information for businesses?
Understanding how a business can be more sustainable has two leading benefits.
Firstly, identifying opportunities where a business can be sustainable, can have a positive impact on financial performance. For example, tracking energy usage or waste production with the aim of reducing it, can see a positive financial gain for businesses. Similarly, a business that explores its diversity performance, can introduce new ideas, viewpoints and ways of working that can have positive impacts.
Secondly, through a sustainability accounting system, a business can add more to society than just its financial impact. Combating environmental issues, having positive social impacts and operating a business with fair governance are concerns that impact everyone globally. Whilst a business accounting for these areas may not directly impact the bottom line, they do impact on whether the business itself operates in an economy that is favourable for it.
The rise in popularity of ESG
ESG is a term used to monitor three pillars of sustainability and responsibility of a business outside of financial performance.
Sustainability accounting through ESG helps businesses report on wider range of issues. This, in turn, can encourage consumer confidence through greater understand of the social responsibility impact a business has.
But the need for ESG and sustainability reporting is growing not just from a social or even political demands. Investment decisions are now being made with ESG as major considerations. Indeed, investors and investment companies are taking notice of what the sustainable development of organisations are now. And the growth of importance in ESG for making investment decisions is rapid.
Source: 2020 EY Climate Change and Sustainability Services (CCaSS) Institutional Investor Survey.
Investors are becoming more concerned about how ESG impacts business models.
There are multiple reasons for this growth in concern. Firstly, there is the global environmental issues, as well as a rise in awareness for social justice and fair governance. Meaning there is wanting from investors to work with businesses that practice corporate sustainability.
But, secondly, there is also a case of investors wanting to be ahead of the curve in relationship to potential political changes. Indeed, the EU has already implemented directives that call on companies with over 500 employees to disclose their sustainability accounting in management reports. And indeed recent proposals by the SEC in the US will also see ESG reporting become mandatory for large businesses.
Ultimately, the rise in ESG is coming from business first. With the political demand coming second. And whilst regulation is currently focused on larger businesses, there is no reason small and medium size businesses can't also start looking at their sustainability accounting.
But what are the pillars that make up ESG? What is meant by Environmental, Social and Governance? And what areas make up each of the three pillars of ESG?
The impact that a business has on the environment should be accounted for within sustainability accounting.
Typically, this can include (but not limited to) reporting on:
- energy usage
- use of natural resources
It is also important to report on environmental opportunities. Where can the business lessen its impact on the environmental? Opportunities should be included in any sustainability reporting.
Sustainability accounting also looks at how the business maintains its corporate social responsibility. This should be treated as more than social activities it does by focusing on what policies it has and the impact of actions from those policies.
Social factors can include:
- product safety
- human rights in supply chains
- data privacy
- health and safety
- investment in people.
Being clear on your Social Factors with provable metrics to support them can further give a business a clear Human Resources strategy. Furthermore, having evidence of your Social Factors can help support your recruitment drives by proving to be an employer of choice.
Key to producing reliable sustainability accounting is an honest and transparent reporting of corporate governance. This makes companies more accountable for their actions and helps respond to stakeholder concerns.
Reporting on Governance Factors can include:
- management structure
- ownership and control
- representation of employees in decision making
- bonus payments and compensation
- pay equality across genders.
The purpose of Governance Factors is to showcase leadership accountability. Organisations reporting higher ratings of Governance transparency see less mismanagement, fewer scandals and have better reputations. This can lead to greater investor confidence as well as a more motivated workforce.
Benefits of ESG for Accountants
Sustainability accounting requires measurement and reporting in a way that carries assurance of the truth.
Being able to report ESG information in an independent capacity can help businesses be transparent with their sustainability. And this is important. Honest, transparent reporting of good quality, information that can be trusted is the only way a business can modify its behaviour for sustainable development.
Accountants are in the unique position to be able to offer this service due their existing skillsets and reputation.
With the growth of awareness in ESG, and businesses wanting to report on their sustainability, Accountants that can offer sustainability accounting create the ability to differentiate themselves from competitors.
But how can Accountants prepare themselves to offer sustainability accounting?
ESG Courses: Demystifying ESG
Mercia has teamed up with its sister company ICA to offer Accountants an introduction course into ESG.
This course is aimed to give attendees an understanding of what ESG is, the benefits to businesses, and how to being reporting sustainability.
Demystifying ESG from ICA
Environmental, Social and Governance (ESG) is a set of principles that assist a firm in becoming socially responsible. Applied across a number of industries, its popularity has grown rapidly, with an ESG framework now considered essential for many businesses.
Embedding ESG in your organisation helps identify risks and opportunities, maintain regulatory compliance, gain the trust of stakeholders, invite investment and attract and retain talent.
This timely short course, written by subject matter experts, will help you:
understand ESG and its importance globally
apply key lessons learned from those firms neglecting ESG
identify where ESG fits within your organisation, and
develop best practice to promote strong ESG engagement.
On completing this course, you will understand key ESG concepts, as well as how to explain them to your colleagues. You’ll also discover the steps required to embed ESG within your firm.
Accountants have a lot to offer when it comes to reporting on the sustainability of a business. With industries wanting to invest in sustainable development, corporate sustainability reporting is a growing market.
Having the ability to offer trusted independent reporting and advice, accountants are perfectly positioned to diversify into sustainability reporting.
ESG offers a reliable framework and sustainability reporting guidelines for businesses to begin with. Accountants can get more information on what ESG is from attending the ICA course, Demystifying ESG. This course offers to give a greater understanding of what ESG is, and the benefits that come with it.
This blog was orginally posted on Mercia Group's News and Insights page.
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