As the business world evolves to focus on environmental, social, and governance (ESG) factors, the role of accounting is expanding beyond traditional financial metrics.
Namely, sustainable accounting practices enable businesses to show their commitment to ESG in a bid to attract socially responsible investors and build their reputation in today’s increasingly eco and socially-conscious landscape.
This article examines how accountants can integrate ESG metrics into financial reporting to deliver far-reaching benefits for both businesses and wider society. Read on to learn more.
The Rise of ESG in Financial Reporting
ESG has gained significant traction in recent years among investors, regulators, and consumers who demand more transparency about companies’ impact on their environment and society as a whole.
According to a recent report by Morgan Stanely, 57% of investors say they have become more interested in sustainability over the past two years, and 70% of those surveyed also believe that investing in companies with strong ESG principles and sustainable accounting practices will generate higher returns.
This shift in investor attitudes has led to the development of sustainable accounting and various ESG reporting frameworks and standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Corporate Sustainability Reporting Directive (CSRD).
Integrating ESG frameworks into financial reporting allows companies to give a more holistic view of their performance and potential risks, including:
- Environmental: Tracking a company’s greenhouse gas emissions, energy and water consumption, waste management practices and biodiversity impact.
- Social: Monitoring a company’s commitment to hiring diverse teams, creating an inclusive working environment, and upholding human rights across supply chains.
- Governance: Ensuring ethical business, board diversity and risk management practices.
Best Practices for Sustainable Accounting
While some ESG reporting standards are mandatory, others are voluntary and depend on your industry requirements. Navigating the evolving landscape can be challenging, requiring a strategic approach.
Here are some best practices to consider to ensure you effectively manage and integrate relevant ESG factors into financial reporting processes:
- ESG assessment: Conduct a thorough evaluation of relevant ESG factors that impact your business, industry and customer base and choose the most appropriate ESG reporting framework.
- Data collection and management: Establish robust systems for collecting, verifying and storing ESG data to ensure data accuracy and reliability.
- Integrate your existing financial metrics: Connect your ESG performance metrics with your financial outcomes to demonstrate the business case for sustainability initiatives. For example, demonstrate how lowering carbon emissions through energy-efficient processes can reduce energy costs.
- Analyse your ESG data: Regularly analyse your ESG data to identify trends and areas for improvement. Consider obtaining independent verification of your findings to enhance transparency and credibility.
- Disclose your ESG findings: Prepare your ESG reports clearly and transparently to provide stakeholders with a comprehensive understanding of your company’s sustainability achievements.
INAA: Helping Accountants Foster a Better Business Landscape
The future of sustainable accounting is bright. As regulatory bodies evolve and ESG standards become more integrated into mainstream financial reporting, accountants need to stay ahead of the curve.
Here at the INAA, we keep our fingers on the pulse of the changing needs of businesses and investors in today’s dynamic business landscape. So, if you want to ensure that your accounting firm accesses the latest tools and teachings to become more proactive in shaping the future of sustainable business, consider joining the INAA today.