ESG: A new era for accountancy

While once a seemingly radical idea, Environmental, Social and Governance (ESG) principles now represent a vast ecosystem in the world of business and finance.

Investors are increasingly conscious of how sustainability impacts their risk profiles, banks and insurers are factoring climate and social risk into their products, and companies are reacting to mounting demands for transparency from investors, consumers and other parties.

Naturally, then, accountants and business advisers have also become key stakeholders in this. Not only are they a conduit for the disclosures themselves, but with this being a new and complex landscape for businesses to navigate, they must also act as an educational resource for their clients.

But while awareness of these issues continues to increase, a critical piece of the puzzle is still missing: a set of guidelines to standardise the practice.

However, efforts to establish such a global consensus took a major step in recent months as the International Financial Reporting Standards Foundation (IFRS) announced a series of significant developments. Most notably, this included its new International Sustainability Standards Board (ISSB).

The ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) by June 2022, resulting in the formation of a new global standards setter. The board’s inception was also accompanied by the publication of prototype climate disclosure requirements.

According to the IFRS Foundation, the prototype requirements were developed by the Technical Readiness Working Group (TWRG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB.

It is the result of six months of deliberations between a number of groups, including the International Accounting Standards Board (IASB), the Task Force on Climate-related Financial Disclosures (TCFD), and IOSCO.

The TRWG has consolidated key aspects of these organisations’ content into an enhanced, unified set of recommendations.

Crucially, the IFRS noted that there is a “significant demand” for high-quality, climate-related information as a result of financial markets’ need to assess risks and opportunities, and that a number of investors and regulators have called for globally-comparable reporting on sustainability matters to the financial markets.

But with the ISSB still being yet to finalise its key personnel, it remains to be seen when exactly this will occur. And what’s more, there remains a great deal of speculation as to how convoluted this landscape could become, with the European Commission having ordered the creation of its own set of standards via the European Financial Reporting Advisory Group (EFRAG).

A certainty, however, is that the creation of these standards will mark a new era for non-financial disclosures and the accounting profession.

Stay up-to-date with the latest on the race to net-zero and the ESG agenda with our ESG hub.