Environmental, Social, and Governance (ESG) reporting has become increasingly important in the accounting industry as businesses and investors recognize the value of sustainable practices and responsible corporate behavior. As accounting firms look to expand their services and attract top talent, accounting candidates with expertise in ESG accounting and reporting can stand out in the U.S. market.
In this blog post, we will discuss the growing importance of ESG reporting in the accounting industry and provide guidance on how accounting candidates can develop expertise in this area.
The Rise of ESG Reporting
ESG (Environmental, Social, and Governance) reporting has become increasingly important for companies as investors and consumers place more emphasis on sustainability and ethical business practices. In recent years, many companies have started using ESG reporting as a marketing strategy to promote their commitment to sustainability and social responsibility.
According to a 2020 survey by the Global Reporting Initiative (GRI), 90% of the world's largest 250 companies now report on their ESG performance. Additionally, a 2021 study by the Governance & Accountability Institute found that 90% of S&P 500 companies published sustainability reports in 2020, up from just 20% in 2011.
This growing emphasis on ESG reporting is driven by several factors, including:
- Increased awareness of the impact of climate change and other environmental issues
- Growing recognition of the importance of social factors, such as diversity and inclusion, labor practices, and human rights
- Heightened focus on corporate governance, including board diversity, executive compensation, and shareholder rights
Let’s not fool ourselves, by highlighting their commitment to ESG, companies can create a positive image and build brand loyalty among customers who share these values. This can also be used to attract socially responsible investors who are looking to invest in companies that align with their values.
How Does ESG Relate To Accounting?
As more businesses prioritize ESG-related initiatives, accounting is playing an increasingly crucial role. While ESG discussions commonly revolve around a company's strategy and performance, ESG considerations can also impact tax liabilities and financial reporting.
The Financial Accounting Standards Board (FASB) recognized the link between ESG matters and their direct or indirect impact on a company's financial statements. In 2021, the FASB published a paper titled "Intersection of Environmental, Social, and Governance Matters with Financial Accounting Standards," highlighting possible impacts of ESG factors in financial statements, such as the recognition and measurement of compensation expense. Indirect impacts can also occur, such as reputational damage from environmental contamination that reduces sales.
ESG considerations can also be taken as inputs in accounting analyses, like when estimating future cash flows used in long-lived assets or goodwill impairment analyses. Risks and opportunities can have varying effects on financial statements, either unfavorable, favorable, or neutral.
Key Skills for ESG Expertise
Another key role of accountants in ESG is to help companies develop and implement reporting frameworks. This involves working with management and other stakeholders to identify the key ESG risks and opportunities for the company, developing performance indicators to measure progress, and establishing protocols that ensure the accuracy and completeness of initiatives’ progress.
For example, they may work with the company to develop metrics for reducing greenhouse gas emissions, improving labor standards, or increasing board diversity. These indicators should be specific, measurable, and relevant to the company's operations and stakeholders. At the same time, these metrics can be reported alongside financial metrics, as well as developing processes for disclosing ESG information in financial filings.
So, accounting professionals must develop key skills to ensure they have the expertise necessary to support their clients' ESG-related efforts. Here are some essential skills that accountants should develop to excel in this field:
Familiarity with ESG Reporting Frameworks
Understanding the requirements and guidelines of different frameworks will enable accounting professionals to effectively assist clients in developing comprehensive and transparent ESG reports. Look out for talents that are well-versed in:
- The Global Reporting Initiative (GRI)
- The Sustainability Accounting Standards Board (SASB)
- The Task Force on Climate-related Financial Disclosures (TCFD)
Data Analysis and Verification
ESG reporting requires the collection and analysis of large volumes of data from various sources with the most accurate techniques and tools, as well as a strong understanding of the importance of data verification and assurance in the ESG reporting process.
Industry-Specific Knowledge
ESG factors and their materiality can vary significantly across industries. This is very important for accountants to consider as even if they dedicate their career to ESG reporting, having industry-specific knowledge can make a significant difference in better understanding the unique ESG risks and opportunities faced by their clients and providing tailored advice and guidance.
Regulatory Awareness
ESG is constantly evolving to meet social awareness expectations. As it becomes more regulated, accounting firms must stay informed about relevant regulations and guidelines in the United States and internationally. This includes understanding the Securities and Exchange Commission's (SEC) recent focus on ESG disclosures and the European Union's Non-Financial Reporting Directive (NFRD).
The future of ESG accounting
As ESG factors continue to shape the business landscape, ESG accounting is poised to become a standard practice for companies seeking to create long-term value and contribute to a more sustainable future.
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Kevin Mitchell, CPA
Senior Manager and CPA with over 20 years of experience in accounting and financial services, specializing in risk management and regulatory compliance. Skilled in managing audits and leading teams to deliver exceptional services. Proud father of two.
References:
M. (2022, December 7). The rise of ESG accounting and what it means for auditors. Tax & Accounting Blog Posts by Thomson Reuters. https://tax.thomsonreuters.com/blog/the-rise-of-esg-accounting-and-what-it-means-for-auditors/
Task Force on Climate-Related Financial Disclosures | TCFD). (n.d.). Task Force on Climate-Related Financial Disclosures | TCFD). https://www.fsb-tcfd.org/
