What is ESG, and why is it important for accountants?

What is ESG?

ESG stands for “Environmental, Social, and Governance.” It refers to the three central factors in measuring an investment’s sustainability and ethical impact. ESG information can help investors decide where to allocate their money.
The concept of ESG has been evolving for many years, but it has only recently gained traction in the financial world. A key reason for this is that, historically, there has been a lack of reliable and consistent data on ESG factors. However, this is changing as an increasing number of companies are starting to disclose ESG information. In addition, third-party organisations are beginning to produce ESG ratings and rankings, making it easier for investors to compare companies.

Increasing demand to report on ESG

As awareness of ESG grows, as does the pressure on companies to disclose information on their ESG practices. This is driven by shareholders, consumers, employees, and other stakeholders who want to know the impact of companies on the environment and society. While there is not yet a legal or regulatory requirement, an increasing number of companies voluntarily disclose ESG information in recognition that ESG factors can impact financial performance. In addition, investors are progressively interested in ESG factors when making investment decisions. As a result, companies that disclose ESG information can often gain a competitive advantage.

ESG Framework and Standards

What is missing, however, is a consistent and globally accepted framework for reporting ESG information. There has been considerable progress in recent years with the formation of various groups to tackle this important issue. The SASB (Sustainability Accounting Standards Board) was established in 2011 to guide how companies can disclose material sustainability information in a manner that is useful to investors. In June 2021, the IIRC (International Integrated Reporting Council) and SASB announced they would merge into the Value Reporting Foundation (VRF) to provide even more comprehensive guidance on how companies can report on their ESG performance.

In November 2021, the IFRS Foundation announced that it would be establishing International Sustainability Standards Board (ISSB) to develop new, globally accepted reporting standards for companies to report their ESG information.

In August 2022, the IFRS merged with the Value Reporting Foundation and assumed responsibility for SASB Standards. The IFRS Foundation’s International Sustainability Standards Board (ISSB) has committed to building on the industry based SASB Standards and developing a comprehensive set of global sustainability reporting standards for all companies. It is expected that the ISSB will issue its first set of standards in 2023.

Why ESG is important for accountants

Investors are increasingly interested in ESG factors because it is now recognised that they can have a material impact on financial performance. ESG information can be used to assess risk, identify opportunities, and make better-informed investment decisions. For example, companies with strong ESG ratings may be less likely to experience financial difficulties, and investors may be more likely to invest in them. Alternatively, companies with poor ESG ratings may presumably face legal and reputational risks. It is also an important consideration for some investors from an ethical perspective.

A company with strong ESG practices may be better positioned to manage risk, respond to changing regulations, and appeal to increasingly sustainability-minded consumers. It stands to reason that, accountants, who play a vital role in providing financial information to investors, will be instrumental in reporting and analysing ESG data and disclosures.

Accountants are uniquely positioned to provide valuable skills in ensuring the measurement, reporting, and auditing of an organisation’s environmental, social, and governance performance. They can ensure that reporting is accurate, complete, comparable, and accounts for social and environmental risks. These factors are critical in decision-making by investors, lenders, and insurers. Accountants will also be called upon to support clients in understanding and complying with new regulations related to sustainability reporting.

So why are CPA and CA Accountants uniquely positioned to help businesses with ESG?

• They have the technical skills to understand and apply environmental, social and governance (ESG) concepts.
• They are trusted business advisers with an understanding of how businesses operate.
• They are bound by professional ethics, requiring them to represent an organisation’s position accurately.
• They have access to data and information across the organisation.
• They understand the principles of corporate governance.
• They can provide assurance on ESG reporting.
• They can provide independent advice to boards on strategic ESG issues.

Conclusion

ESG reporting is becoming progressively important for accountants. As investors become more interested in ESG factors, accountants need to be up to speed on the latest developments in this area. Evidently, ESG reporting is an area that is rapidly evolving, so accountants need to stay informed if they need to advise and support their clients effectively.