ESG: There isn’t an ‘opt-out clause’ for accounting, finance professionals

Like financial reporting, environmental, social, and governance (ESG) reporting and sustainability issues are set to become an integral part of an accountant's job.

In a recent FM podcast episode, Association Chair and CIMA President Paul Ash said that with more businesses including ESG in their strategies, the accounting profession needs to help organisations comply with their ESG goals.

"I don't think that they [management accountants] have an option … because there isn't an opt-out clause on ESG," said Ash, who is also the CEO of Emerge Earth, a company that aims to use artificial intelligence to provide real-time carbon emissions data. "Whether we like it or not, ESG already defines us and our profession in so many ways."

He added that both management and public accountants have "an extraordinary opportunity" to lead on sustainability reporting.

Ash's interview is the final episode of a five-part podcast series on ESG, featuring perspectives from standard-setters, an investor, and business leaders.

In the past few years, there has been increased scrutiny of companies' impact on the environment and society by investors and regulators. ESG and sustainability reporting is also moving from a voluntary to a mandatory basis. Globally, the EU is leading in this respect.

Earlier this year, the trading bloc announced a proposal to extend its sustainability reporting requirements to all large companies and companies listed on regulated markets in the EU. Companies will be required to provide audit (assurance) on their reported information. The first set of standards would be adopted by October 2022, and companies based in the EU or with significant operations in the market will have to prepare now to comply with the directive.

The IFRS Foundation has also proposed to create an international sustainability standards board to develop globally accepted sustainability standards in line with market demand for a consistent and comparable set of sustainability information.

"Businesses don't have the ability to choose whether these [sustainability issues] are real issues. The issues are there whether businesses acknowledge them or not," Jeffrey Hales, Ph.D., professor of accounting at the University of Texas at Austin and chairman of the Sustainability Accounting Standards Board (SASB) said in an episode of the ESG podcast series. "Management accounting is actually part of this conversation because of the important role that management accounting has in analysing information."

Matthew Hurn, OBE, FCMA, CGMA, the CFO for Disruptive Investments at Abu-Dhabi-owned Mubadala Investment Company, said that ESG should not be a box-ticking exercise.

Hurn, who was also interviewed in the series, said that if organisations are looking at ESG merely as a compliance issue, it would miss the bigger picture that organisations should live out ESG values.

"[We] actually wholeheartedly believe in what we do. Part of our business has been investing in the renewable space now for over a decade," Hurn said. "So [ESG] resonates very much with us."

He added that there has been a lot of focus on the "E" aspect of ESG, and it's now easy to obtain data such as carbon emissions, raw materials usage, and waste created.

Hurn urges companies to look into ESG issues, and businesses that fail to evolve to become more sustainable in their practices may lose their customer base or investors.

"Has the lightbulb moment happened? Is it a fad? Is it going away?" Hurn said. "If I look at my children and their approach to life and future life, they're not going to invest in many of the traditional companies that you see listed today. They don't resonate."

Apart from the growing awareness that companies need to change their way of operating, board members play a crucial role in highlighting ESG matters, said Jeremy Osborn, FCMA, CGMA, director of business relationships and networks at the Value Reporting Foundation.

The Value Reporting Foundation was formed through the merger of the SASB and the International Integrated Reporting Council (IIRC) to improve consistency in ESG and sustainability reporting.

In an episode of the ESG podcast series, Osborn said that integrated thinking can help boards and senior executives make decisions in order to create long-term value.

He gives the example of a company deciding on a capital investment to illustrate the application of integrated thinking. Integrated thinking includes six capitals — financial, manufactured, intellectual, human, natural, and social and relationship — in business considerations. If a company deciding on a location of a factory is using a traditional accounting approach, the answer might be to build the factory in region X.

"But when the same decision is put through a slightly different set of calculations and the organisation looks at what would the impacts of this decision be, for example, on natural capital erosion [and] what benefits would we create for the society that will help staff and service this factory … [then rather] than leading necessarily to the same conclusion that it should be located in region X, the answer might be region Y."

Osborn added that by considering other impacts a business can have on other stakeholders, rather than just on its finances, an organisation is enabled to optimise value creation. As a management philosophy, integrated thinking fits well into the current focus on ESG and sustainability, as it enables board members and senior management to manage resources and create value in as many capitals as are relevant to organisations' business model.

Ash said that as ESG reporting gains even greater momentum, management accountants will have to collaborate with others to obtain reliable data in all ESG aspects.

"Management accountants have always been at the centre of the action of any business, and I'm highly confident that will continue to be the case."

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.