Throughout this past year, we’ve had the opportunity to develop numerous, client-tailored webinars for various specific training needs. But can you guess what many of our clients have specifically requested we discuss? ESG (sustainability) reporting! My initial reaction was a mix of surprise and confusion (but that’s usually how I react to everything!). ESG? Really? We’re teaching an accounting training, so how does ESG correlate?
Well, the more I dove into ESG, the more I understood why it was such a hot topic! Let’s do a quick refresh on ESG and then get into the fun stuff.
When I refer to sustainability reporting, this is referring to three key (non-financial) factors that are used to measure the sustainability and ethical impact of an investment in a company:
- Environmental: This encompasses the impact a company has on the conservation and protection of the natural world (e.g., climate change, pollution, emissions, energy efficiency, waste management, environmental protection, etc.)
- Social: This refers to the impact a company has on employees and on society as a whole (e.g., health and safety, human and labor rights, employment equality, diversity, working conditions, etc.)
- Governance: This is the way in which the Board and company management conduct themselves and navigate the business (e.g., ownership transparency, shareholder rights, BOD diversity, BOD oversight and independence, data protection, ethics, executive compensation, etc.)
So why the focus on ESG? Well, investors want more! I like to think of it as a new chapter of disclosures – investors are steering away from the financial and internal control aspects of a company and are turning their attention to these three non-financial aspects. This is because this new generation of investors (i.e., millennials) believe that if a company performs well in ESG, a company is less risky, better positioned for the long-term, and can better handle uncertainty. And we’ve had a lot of economic uncertainty (and pressure) this past year as a result of the COVID-19 pandemic. Additional factors such as increased climate risk and regulatory pressures, data privacy concerns, and social justice movements have all impacted companies, and companies that are facing these risks are under greater scrutiny if they are not adequately managing these ESG risks. And if investors are not happy with how a company is handling its ESG areas, then the company is at risk, financially, as stock prices will drop, and financing opportunities will not be available.
Check out Larry Fink’s letter to CEOs, which is just an example of the passionate plea to companies about the importance of ESG (Larry Fink is the CEO of BlackRock).
So, all of this is great information, right? Well, here’s the problem (this is my opinion, but I do happen to share it with many others!)…there is no standard framework in place to govern ESG! Also, many investors want to “rate” a company in ESG (e.g., high quality/low quality), but nobody has a structured process to come up with a standard rating.
Companies are turning to their independent auditors to “verify” a rating in order for a company to supply investors with an audited, verified ranking. And this can be costly, but companies are sparing no expense in order to have some sort of verified rating or ranking. But again, this ranking or rating will depend on the auditor and the process they are using. And then where do companies report it? In their annual report? In a separate 8-K? Nobody knows! In a recent FEI article, it stated that “71% of the top 250 companies globally, obtain independent assurance for their sustainability reporting, up from 30% in 2005.”
With the surge in ESG investing, the SEC is looking to increase the amount of information on ESG factors available to investors as the only current guidance relates to climate change that was released in 2010 (and my, how things have changed since then). Check out the SEC’s response page, which includes information on all of the SEC’s actions on ESG (which have all happened in 2021!).
Additionally, there is a separate IFRS sustainability project plan in place to establish some type of global-reporting standards. The next big step in this project is to formally announce in November 2021 the formation of a Sustainability Standards Board (SBB) under the governance of the IFRS Foundation. I’ll be keeping tabs on this as I’m interested to see if the SEC will adopt/incorporate any of these provisions/ideas.
As always, if you are interested in more information on ESG reporting, that’s what we’re here for! We are planning to incorporate an ESG discussion into our 2021 A&A update (which we are planning to offer both in person and in webinar format). So, contact us today! As I mentioned in the beginning of my blog, we also offer customized webinars, so if you want to have a webinar on only ESG matters, we can do that too (and I’ll make sure to be one of the instructors, because ESG is growing on me)!
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