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ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

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By Rhys Madoc, CEO, UHY International

October 2021

Environmental, Social and Governance is taking over from Corporate Social Responsibility (CSR) as a way for businesses to demonstrate a measurable commitment to sustainability.

ESG covers environmental impact, company culture and leadership, and takes into account factors like diversity, inclusion and board composition, as well as more familiar green and philanthropic measures.

Pressure for more responsible business is being applied by consumers, regulators and investors. ESG is an acknowledgement that sustainability in particular, is evolving from a voluntary ambition to something that increasingly feels like a requirement. Compared to CSR, ESG provides measurability.

Which is exactly where accountants come in, of course. We prove that businesses are what they say they are. We use professional expertise and experience to interrogate the evidence and come to firm, factual conclusions. We have a huge role to play in ESG reporting.

ESG reporting is inconsistent

More fundamentally, we have a role to play in deciding what ESG reporting actually involves. ESG is in its infancy, and reporting standards and frameworks are still inconsistent, which can create confusion for companies, consumers, investors – and accountants.

Paul Polman, the former CEO of Unilever, recently wrote in the Harvard Business Review that “investors are increasingly asking companies to report on their sustainability performance. Having a set of standards will greatly improve this dialogue and enable both to better understand the relationship between sustainability and financial performance”.

Accountants are already part of the development of these standards. Bodies like the International Federation of Accountants (IFAC) and International Accounting Standards Board (IASB) are pushing for the creation of consistent global criteria against which ESG claims can be judged.

Accountants are reporting specialists

Accountants are experts at setting and adhering to standards, and are trusted by corporations, investors and regulators to provide reliable information. New frameworks and standards that marry financial and non-financial reporting – showing the effect of each on the other – will cement accountancy’s position at the heart of the ESG reporting process.

Global standards for ESG will help business to develop and prove responsible practices. With that in mind, accountancy firms big and small are able to take steps today to develop the skills and specialisms required to offer non-financial auditing and reporting services to business clients.

The opportunities are clearly there for those who do. Why wouldn’t a business trust its ESG reporting to the firm that expertly completes its financial audit every year? Accountants are the right people for the job.

Clients want ESG advice and expertise

Certainly, clients want us on board as they navigate new ESG reporting standards, and we have written about this in the latest issue of UHY Global, our business magazine. In the feature The Colour of Money is Green, Joyce Bruce, sustainability and CSR manager at UHY Fay & Co, UHY’s member firm in Spain, says companies are increasingly seeking her services because of regulatory pressure to provide non-financial reports.

There is a wider perspective too. According to Datuk Alvin Tee, group managing partner of UHY’s member firm in Malaysia, “there are changing expectations of the role business plays in improving society and protecting the environment”.

That requirement is filtering through the business world, so we see for example how large firms are demanding that smaller companies prove their own environmental credentials as part of a sustainable supply chain.

Investors are also pushing for consistent, reliable ESG information, as more evidence points to sustainable businesses providing better returns in the long term. In fact, Black Rock – the world’s largest asset manager – published an ESG Integration Statement in May this year outlining the company’s ‘firm-wide commitment to integrate ESG information into our investment processes’. Research shows that three quarters of institutional investors now consider ESG factors an integral part of sound investing.

ACCOUNTANCY EXPERTISE WHERE IT IS NEEDED

As the clock ticks down towards national and global environmental deadlines, it is fair to assume the demand for ESG reporting will grow. Experts also predict that, in the near future, other business measures such as executive remuneration could also be tied to ESG metrics alongside financial performance.

If our profession acts now, accountants will be well placed to meet the environmental, social and governance reporting needs of our clients as ESG becomes established.