Today’s accountants have the ability to combine their technical skills with professional, ethical standards and personal conviction needed to tackle social and environmental challenges facing the planet.
Not only that, but financial professionals can encourage the organisations they work with to build momentum and expertise that results in widespread, positive impact.
Read on to discover if ESG factors could contribute to a sustainable future in accounting.
ESG stands for Environmental, Social, and Governance. These three core pillars measure the sustainability, societal impact and the investment potential within a business, company or organisation. The purpose of ESG criteria is to help more concretely determine the financial performance of a company based on return and risk.
Environmental, social and governance factors are all closely tied to responsible investment. Learn more about ESG Investments in our recent guide.
From 2010 to 2020, most of the work around ESG focused on raising awareness and building momentum for change. While ESG efforts have existed for a number of decades, it’s only recently since ESG became a key priority for modern companies.
The biggest ESG issues include:
- Climate Change. Companies must aim to improve their resource productivity (such as reducing energy consumption) and decrease their carbon emissions.
- Sustainability. Environmentally sustainable business practices encourage corporations to interact responsibly with the planet to maintain natural resources and avoid jeopardising the needs of future generations.
- Waste Disposal. By reducing, reusing, and recycling waste, businesses can preserve the environment while conserving natural resources.
- Equality & Diversity. Inclusivity typically centres around creating a balance of individuals from different demographics, backgrounds, and cultures. Learn more about diversity in accounting in our recent article.
- Consumer Protection. Investors value consumer protection as it makes markets work for both businesses and consumers.
- Human Rights. It’s vital that employees all over the globe have access to fair and just working conditions.
- Employee Relations. When employers build healthy relationships with their employees, the entire company stands to benefit.
- Management Structure. Investors gravitate toward organisations with well-structured management with a clear direction for business activities.
- Board Composition. The expertise, experience level and diversity in an organisation’s boardroom play a critical role in making sure a business is led effectively.
- Strategy & Innovation. Innovation is critical to growth, and an effective business strategy offers clear direction for companies and prospective investors.
Despite disruptions caused by COVID-19, the focus on sustainability and ethical issues has continued to sharpen. The trajectory of the current trend reflects in the growth of responsible investing, popular among internal and external investors.
Investment analysis has an increasingly ESG focus. But, before diving in, it’s key for organisations to consider the different demographics of parties of interest. For example:
- Each stakeholder has different priorities in each individual of three ESG pillars. However, every shareholder will be looking for companies with long-term profitability.
- Consumers commonly look for ways to maintain a clean conscience when they purchase (and consume) products and services.
- Employees want to work for a company that aligns with their personal goals and values.
While they’re undoubtedly gaining traction, ESG metrics aren’t currently a standard part of a corporation’s financial reporting. But, as environmental, social and governance issues are growing increasingly important to investors as they decide where to put their money, more companies are encouraged to record and report on their efforts in their annual reports.
ESG criteria have emerged as a critical element of measuring performance, meaning its essential for organisations to quantify their efforts reliably.
Even although ESG is widely valued and broadly understood to some extent by every organisation, linking tangible impacts to real-world outcomes is a challenge. Unfortunately, due to inconsistencies in measuring ESG, its full potential is often undermined.
On top of that, without a standard measurement across industries means that individual businesses are prone to overlooking unique ESG risks and opportunities. Databases contain thousands of ESG indicators that reflect a company’s individual position. With a data-led approach, businesses can both understand and utilise collected information to boost ESG performance.Interestingly, 62% of accounting professionals identified sustainability data analytics as the area they’d most like to develop further skills. This shows there’s work to be done in the world of accounting.
Just like an increasing number of organisations, more and more CPAs are primed and ready to play their part in meeting ESG challenges head-on. Professional accountants and finance teams can deploy their skills to help businesses redefine their approach, pivot their systems and processes to create efficiencies, as well as clearly capture the value of efforts.
Modern accounting and auditing professionals have the potential to perform a huge variety of crucial tasks that allow their clients to foster a sustainable approach going forward. For example, as the COVID-19 pandemic continues to cause uncertainties, finance teams have the opportunity to lead the way and positively shake up ‘business as usual’ practices.
That said, CPA firms face several barriers to properly integrating ESG impact management into the day-to-day role of a finance team. From building a valuable knowledge-hub of sustainable financial practices development to applying analytics skills, professional accountants can take a number of steps towards building positive impact into their work, skills and client’s businesses in a meaningful way.
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