Ever wondered how a company impacts the world beyond its bottom line?
In today’s business landscape, environmental, social, and governance factors, known collectively as ESG, are playing an increasingly important role. ESG reporting provides a framework to assess a company’s sustainability efforts and its commitment to social responsibility. This encompasses a company’s environmental footprint, its treatment of employees and communities, and the fairness and effectiveness of its leadership. By understanding a company’s ESG performance, investors, customers, and other stakeholders can make more informed decisions about their business engagements.
The emergence of ESG
Concerns about corporate responsibility and environmental impact began to take root in the mid-20th century, with topics such as corporate responsibility and environmental impact laying the groundwork for today’s ESG reporting practices. A landmark development occurred in 2004, when the UN Global Compact’s “Who Cares Wins” report coined the term “ESG” and established a link between strong ESG performance and financial success. The report addressed all facets of the stakeholder tree, from management to investors, to encourage the adoption of the new sustainable practices. This, along with the Carbon Disclosure Project’s encouragement of climate reporting, helped normalise ESG reporting practices within the financial world.
Since then, ESG reporting has gained significant traction. The United Nation’s Principles for Responsible Investment (PRI), launched in 2006, has grown into a global network promoting ESG integration. Being the leading proponent of responsible investment, the PRI is an independent set of guidelines that introduces six principles of responsible investment:
- Incorporate ESG issues into investment analysis and decision-making processes.
- Be active owners and incorporate ESG issues into our ownership policies and practices.
- Seek appropriate disclosure on ESG issues by the entities in which we invest.
- Promote acceptance and implementation of the Principles within the investment industry.
- Work together to enhance our effectiveness in implementing the Principles.
- Each report on our activities and progress towards implementing the Principles.
For the first time, ESG principles were required to be integrated in an organisation’s financial reporting. Governments around the world are also increasingly emphasising ESG considerations, further being pushed by the Paris Agreement (2016) which aimed to reduce the increases in global surface temperatures.
As the ESG reporting landscape evolves to a more crucial element of business reporting, accounting firms will play a pivotal role in the business’s sustainable growth. This is because accounting firms are uniquely positioned to help businesses unburden the complexities of ESG reporting.
- Enhancing corporate transparency and accountability
ESG reporting, verified by accounting firms, offers stakeholders transparency into a company’s environmental, social, and governance practices, building trust in today’s accountability-driven business world.
- Meeting regulatory requirements
Stricter ESG disclosure regulations, such as the emerging IFRS S1 and IFRS S2, necessitate accounting firms’ ESG expertise to ensure client compliance and avoid penalties.
- Facilitating access to capital
Strong ESG practices, verified by accounting firms, attract ESG investors and enable sustainable growth through access to capital.
- Driving strategic decision-making
Beyond compliance, ESG data analysis by accounting firms helps companies find sustainability, social, and governance risks and opportunities, leading to strategic planning and better business decisions.
- Enhancing reputation and brand value
Verified ESG performance by accounting firms builds reputation and brand value, attracting customers and employees for long-term success.
- Promoting sustainable growth
Aligning business with sustainability goals through ESG reporting, accounting firms measure progress and foster a culture of environmental and social well-being.
The Road Ahead: Standardisation and Technology
While ESG reporting is gaining traction, there’s still ongoing debate about standardisation. Currently, multiple frameworks exist, which can be complex for businesses to navigate. However, initiatives like the International Sustainability Standards Board (ISSB) are working towards establishing a global baseline for ESG reporting. This could bring more clarity and consistency to the process in the future.
Challenges also remain for businesses implementing ESG reporting. Collecting accurate and comparable data across different ESG metrics can be a hurdle. Additionally, ensuring data integrity and navigating the nuances of various frameworks require careful management.
Fortunately, technology is emerging as a powerful tool to streamline ESG reporting. Cloud-based platforms can help businesses collect, manage, and analyse ESG data more efficiently. Additionally, blockchain technology has the potential to enhance data security and transparency in ESG reporting. As technology continues to evolve, it’s likely to play a significant role in overcoming current challenges and shaping the future of ESG reporting.
If you would like more information regarding ESG, please do not hesitate to contact our team of advisors at Accru Felsers.
