Accounting for sustainability

Sustainability needs to be measured, reported and evaluated – areas of expertise that fall naturally under an accountant’s remit. However, ESG reporting is tougher than simply measuring how much money a business has made or lost, and is no longer just for the ethically engaged, having become commonplace in mainstream investment practice.

Richard Spencer, ICAEW’s Head of Sustainability says: “As businesses begin to focus more on their impact on society and the environment, chartered accountants can expect to be involved in a wider range of activities which require additional training, such as embedding a company’s impacts and dependencies on nature or society into its mainstream decision-making, testing the rigour of the data necessary to do that and providing insight on it.”

According to the Governance and Accountability Institute, ESG reporting has increased by more than 4 times since 2011 among S&P 500 companies, and as global interest grows there has been calls for more uniform metrics. ESG reporting provides more accountability, enhances legitimacy, increases profitability and improves governance, and as climate change affects all markets and presents risks that shareholders can no longer ignore, investors are demanding answers about ESG fundamentals in the investment process.

Having committed to the UN Sustainable Development Goals and the Paris Climate Agreement, companies operating in Europe need to fulfil an ambitious agenda by 2030 and accountants have a critical role to play. The evolution of non-financial reporting has been fast and fragmented, but with greater transparency driven by regulatory and market forces, organisations will increasingly be held accountable for their ESG-related behaviour.

In June 2017 the EU Accounting Directive for Non-financial Information was passed, requiring “large companies to disclose certain information on the way they operate and manage social and environmental challenges”. The Alliance for Corporate Transparency analysed 105 EU companies in 2018 regarding their sustainability disclosures following the implementation of the EU directive and found that more than half of the companies did not provide key information in a clear structure.  A little over two years later on July 12, 2019 the US House Financial Services Committee rejected similar reporting in the US, highlighting the huge gulf within ESG reporting standards.

Responding to demands for a more consistent approach, there are numerous guiding principles available for businesses, including one from the London Stock Exchange Group. Furthermore, the TCFD Implementation Guide published by the Sustainability Accounting Standards Board and the Climate Disclosure Standards Board, aims to help accountants convert ESG issues from principle to practice. However, additional training is needed, and the ICAEW is already incorporating specific modules into their programme.

“The ACA syllabus now includes a number of key areas, including Task Force on Climate-related Financial Disclosures (TCFD), the Natural Capital Protocol and associated supplements and guide, as well as Sustainable Development Goals. We’ve also recently signed the Green Finance Charter, which commits us to building green finance into the qualification. The frameworks produced by The Prince’s Accounting for Sustainability Project on social, human and natural capital, which are all heavily based on the Protocol, are also in the syllabus” says Spencer.

Natural starting point

Accountants advise companies about risks and opportunities and possess the correct skillset to measure ESG, so with a bit of direction and development, they are the natural starting point.

Accountancy Europe, Deputy CEO Hilde Blomme says, “Governments and companies alike are starting to acknowledge that non-financial reporting, such as on ESG matters, is essential. Accountants can be a strategic partner in the transition to a more sustainable future. They already have the right skill set to measure ESG impact and disclose these results. Accountants also offer an independent expert opinion and can verify how accurate and exhaustive the data reported is.”

So while the motivation and the mind-set is there, Blomme identifies the need for a universal standard:

“The real work now is to develop global standards for ESG reporting. There is much progress in the area of non-financial reporting, but there is also proliferation of standards and frameworks. The time has come to consolidate these to make reporting more consistent, transparent and comparable as we already stated in 2017. Accountancy Europe is working on a thought-leadership project to further interconnect financial and non-financial reporting.”

Dealing with complexity

Modern organisations need to find sustainable solutions to deal with the complexity of integrating financial, social and environmental performance, and Accounting for Sustainability recognises the need for professional development:

“The accounting profession must act responsibly towards society and the environment. Accountants need to develop skills to incorporate the Environmental Social and Governance (ESG) considerations into decision-making. However, this can only happen if they are able to recognize the risks and opportunities associated with sustainability and are equipped to act on them. At A4S, we are aiming to inspire finance and accounting professionals and provide them with practical ways to respond to these challenges. Guidance, tools and practical examples which support these aims can be found in our Essential Guide series,” says Helen Slinger, Executive Director, A4S

Accountants have the transferable expertise and can adapt their existing skillset to help businesses satisfy investor concerns and deal with ESG issues in the following ways:

1)  Costing :Environmental costs must be understood and allocated properly so that they can be managed and prices set at an appropriate level

2) Investment appraisal of projects: All other relevant costs must be considered in project proposals

3) Risk management: Investors want to see that companies are considering all relevant risks. Accountants can help identify risks and develop strategies to address them

4) Overall Strategy:  ESG must become part of the general company strategy

Companies need to be held accountable for their impact on the environment and organisations need to work proactively to pre-empt sustainability issues before they arise. Spencer says: “At ICAEW, we played a leading role in establishing the Natural Capital Coalition, whose goal it is to get all businesses to build their dependencies and impacts on nature into their mainstream decision-making.”

There has been significant headway made in ESG reporting, but more needs to be done, as corporate returns and revenues remain at risk.

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