Environmental, Social, and Governance (ESG) is not necessarily new; it has existed for over 50 years. Still today, there are grey areas within ESG, as it covers a wide range of topics.
In its most basic form, this is meant to cover how a company’s operations affect the environment and how its mission and strategies change its effect on the environment. Examples include:
This represents how a company’s mission, strategies, and operations drive change with internal and external stakeholders. Examples include:
“Within Social, we are seeing companies look for different ways to bring on people that historically may not have been the typical employee they hired,” said Jeff Binford, Principal at Clearview Group. “These companies are also finding ways to work with their local community and grow their operations within that community.”
The “G” in ESG includes compliance with regulation and is the driver of how all three elements are reported through accounting. Examples include:
Broadly, organizations need help with creating and applying a framework around ESG in the following areas:
As companies drill down into ESG, they discover it requires a significant need for data from disparate sources that are currently unstructured, not systemized, and often outside the organization. This requires the development of new frameworks from processes and controls to reporting and materiality to systems and validation.
The further the data and process are from an organization’s accounting and finance, the more effort is required. To overcome this, silos need to be broken down and integrated.
When organizations are complex, it is natural to hunker down in the solos of financial reporting, audit, risk, etc. However, these teams have different perspectives based on their experience that add value when integrating ESG.
As ESG continues to emerge, evolve, and mature, stakeholders demand greater disclosures and transparency. Regulators are moving to require disclosures of ESG-related topics in financial reports.
With this convergence of integrated reporting, the need for organizations to ensure the integrity and consistency of ESG information reported through all communication channels is essential.
As a result, audit and risk teams are working with their ESG teams to ensure that risk areas are identified and are effectively operating, all with the intent to prevent errors or manipulation as data is gathered, aggregated, analyzed, and reported.
When ESG experts collaborate with financial reporting experts, organizations can identify and properly map the data required for their regulatory reports, ensuring that ESG reports leverage the same "source of truth" to guarantee accuracy and consistency.
The convergence of financial reporting and ESG teams is reinforced by audit and risk professionals lending their expertise to create integrated reporting with assurance.
You may wonder how to get your organization to the point of convergence or even general integration of ESG.
Small and midsize businesses don’t face the issues of complexity with convergence but still require ESG. No matter the size, your organization requires a practical strategy for ESG transformation.
Finance and Accounting teams implementing an ESG framework early will give their organizations a competitive advantage.
The growing need for ESG reporting will become mandatory by larger public downstream customers. According to a PwC survey, 83% of consumers think companies should be actively shaping ESG best practices.
A Deloitte survey indicated that 88% of companies with solid ESG practices had better operational performance.
“If you can position your business with a strong control or reporting environment, it will put you at a significant advantage,” said Binford. “With increased data and a better understanding of the flow of data outside the typical financial space, you now have more information for operational decision-making.”
This competitive advantage doesn’t only apply to customers and decision-making but also to investors. Activist investors are some of the primary drivers of the ESG movement.
The current turbulence of the marketplace requires organizations to be flexible and nimble in their funding and exit strategies. Early adoption of ESG could significantly affect your organization’s ability to raise capital or exit at a premium.
The regulatory situation for ESG is still evolving, and waiting until all the regulations are finalized is a risky strategy
.Ultimately, organizations must build their ESG programs on a solid foundation. Successful teams are utilizing a standardized process and technology that enables agility and scalability, flexibility, and integration from start to finish.
Start building your business’s ESG foundation today. Contact Jeff Binford.
Check out the on-demand webinar to dive further into this topic! Watch now: How ESG is Altering the Finance & Accounting Landscape.
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