As governments and businesses race to decarbonise the global economy, the environmental, social and governance (ESG) movement is gathering pace.
The topic has catapulted to the top of boardroom agendas, especially as major investors from Europe and the US look to direct their investments towards more environmentally sustainable companies and activities.
To succeed, ESG requires accurate and transparent reporting, which is where chartered accountants have an important role to play.
ESG is used to measure the environmental, social and governance impact on a business. While this can be likened to corporate social responsibility (CSR) and more broadly sustainability, the two should not be conflated.
ESG views the traditional pillars of sustainability through a business and financial lens, using a quantifiable assessment of the risks posed by the environment, society and governance to an organisation.
Environmental, social and governance are the three pillars that pose the greatest risk to business.
However, this has resulted in ESG assessments becoming increasingly complex, as traditionally separate areas of business activity are now compiled into a single report, giving those tasked with reporting a challenge to streamline the process.
As is the way of digitalisation, data has become a prized asset, and this is no less true for ESG.
Ultimately, ESG is a form of data collection – presented in a way that highlights a corporation’s responsibility to sustainability.
ESG is not a prescriptive way of becoming more environmentally or socially responsible; rather it is a quantifiable measure of sustainability that enables businesses to enact realistic change and provide transparency to all its stakeholders.
Financial reporting is a legal requirement for organisations across the world. Yet accounting for the effects of their strategies, practices and outcomes on external stakeholders requires non-financial measurement of social and environmental performance.
Such actions are fundamentally necessary to creating a world of strong economies – where businesses are profitable and sustainable; where public institutions are effective and accountable; where developing economies have the infrastructure to thrive; and where everyone has access to decent jobs and services, with economic opportunities benefitting all.
The profession has a vital role to play not only in making things happen but to enable the public to hold businesses to account. It will be chartered accountants who will lead ESG goal setting, support business transformation, and report to stakeholders.
However, the regulatory grey area of non-financial reporting further complicates matters. Currently, there is no single global mandatory standard for ESG reporting.
By and large ESG reporting is a form of voluntary disclosure, although it has become a legal requirement for public joint-stock companies listed on many of the world’s stock exchanges, including the Abu Dhabi Securities Exchange and Dubai Financial Market, as part of their annual reporting.
And these reports are being relied upon by institutional investors with increasing frequency – as demonstrated by the 53 percent growth in sustainable mutual funds and ESG-focused exchange traded funds, last year.
Talent acquisition and brand reputation are also being impacted by ESG, as ethical decision-making begins to guide stakeholders.
Given the infancy of ESG auditing, chartered accountants can help bring much-needed clarity to investors, employees, customers and other interested parties.
To support the evolution of ESG reporting, ICAEW has created a Sustainability and Climate Change community, which provides inspiration, insights and collective ambition to enable members to share knowledge and align on reporting standards.
The shift in social mindsets and mounting social pressures have led many businesses to rethink the traditional practice of prioritising shareholders’ needs over other stakeholders.
By identifying environmental, social and governance risks, the likelihood is that ESG will incentivise corporations to become more sustainable, not just financially, but also environmentally and socially.
The cornerstones of ESG are transparency and accountability; taking them on is a responsibility that chartered accountants are best placed to bear.
This will shape stakeholder decision-making and will be fundamental in championing a sustainable future.
That is only if the integrity of reporting is upheld, avoiding the path of many other governance initiatives that have preceded ESG, which were used as impact washing tools.
Vanessa Heywood, Head of Middle East at ICAEW.
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