ESG 101: The Benefits and Why It’s Growing in Importance
The call for corporate responsibility has evolved for the next generation of business leaders in the form of environmental, social and governance (ESG). Investors, activists and regulators are demanding proactive, community-level commitment and accountability beyond shareholder wealth. The marketplace doesn’t want another Superfund site or child exploitation in the supply chain; it demands sustainability and harm-free business practices as well as a reasonable return. Global consulting firms and executives are now hearing this call, and the accounting profession is forwarding this movement.
ESG is a vital dimension to measuring a company’s health, performance and long-term competitive success beyond immediate profitability. Although ESG metrics aren’t yet included in standardized financial reporting, certain institutions are in the process of creating such standards; this is where CPAs come in. We can quantify a company’s present position relative to investor objectives of integration, values and impact in the areas of governance over environmental and social contexts.
The environmental component of ESG relates to a company’s impact on natural resources, including energy consumption, air emissions and waste management. The social component is a company's social impact internally and externally on its stakeholders to include diversity, employee engagement and community relations. Finally, the governance component relates to decisions made by company management and its board of directors for areas such as board composition, executive compensation and labor practices.
With ESG, a company’s strategy and operations focus on a broader set of stakeholders than the outmoded emphasis on investors: employees, customers, the entire supply chain and communities impacted. Proven effects include smoother operations, positive morale and market enthusiasm for the ethical stance of the company.
Making investments in ESG can produce positive results beyond solid financial performance. For example, in April of 2020, Deloitte Global and Forbes Insights surveyed 350 executives from the Americas, Asia and Europe to understand the impact of their company's sustainability efforts. Results showed that 59 percent of companies saw revenue growth and 51 percent saw increased profitability. Furthermore, beyond positive financial results, 37 percent saw a measurable impact on the environment while 38 percent saw increased employee morale. Lastly, having a strong ESG culture can positively affect a company's reputation as stakeholders will recognize a company's efforts in being a steward of the environment and other social issues.
Demand and Relevance on the Rise
By 2029, Generations Y and Z will make up 72 percent of the world’s workforce. These generations care deeply about ESG issues and want to work for companies that genuinely embrace ESG values. Furthermore, there will be a significant transfer of wealth from Baby Boomers to Generation Y and Z over the next few decades. Therefore, companies must clearly articulate and strategically embed ESG into their overall culture to obtain business and receive investment funding from these generations.
While small business owners often see initiatives like ESG as feel-good shine and sparkle they can’t afford, a weak ESG stance is becoming more likely to cost them their entire business. Fortunately, it’s much easier to implement ESG from the beginning stages of the business, when policies, marketing messaging, supply chains, hiring decisions and even the selection of core products and services are still being formed.
Small businesses are actually well-positioned to capitalize on their advantages, which include agility, a disproportionately positive impact from incremental changes and closer relationships with stakeholders. These relationships enable leaders of small businesses to efficiently understand and respond to stakeholder expectations and then enjoy the rewards of meeting them.
The CPA’s Role in Implementation and Reporting
ESG implementation requires leadership and board commitment as well as internal collaboration. Implementation includes assessing risks and opportunities, defining an ESG strategy that is fully integrated with overall company strategy, determining how to measure ESG outcomes and choosing a reporting framework.
Typical roles that are emerging to lead ESG implementations include not only a chief sustainability officer supported by ESG consultants but also the chief financial officer. Given the expertise that the office of the CFO already has with internal controls over reporting — combined with the ability to standardize and quantify outcomes and the experience with implementing technology to assist with data gathering, analysis and reporting — the internal accounting function is a natural fit for a leading role in ESG implementation.
CPAs have a critical role in choosing an ESG reporting framework(s). There are several voluntary disclosure standards and frameworks that a company can use to tell its ESG story. In addition, a company can use a combination of the most commonly known reporting standards and frameworks, including those from the Global Reporting Initiative, Task Force on Climate-Related Financial Disclosures and the Value Reporting Foundation, a newly created international organization that maintains an integrated reporting framework, advocates integrated thinking and sets sustainability disclosure standards for enterprise value creation.
ESG presents a major opportunity for the accounting profession. CPA firms have the experience, internal control and reporting knowledge, and quality control systems to provide ESG attestation and assurance services. Accounting is a trusted profession with the rigor needed to provide credibility for companies as they tell their ESG story to the marketplace and to investors.
Thus, making investments in ESG can allow a company to unlock a competitive advantage no matter the company's size. ESG benefits businesses, employees, customers, communities and the environment.
Alexis Garland, B.S. Ed., MBA, is a management consultant with Tier One Services and owner of AMG Business Resources, LLC.
Jaime Campbell, CPA, MBA, CGMA, CTT, MCT, is the co-owner and chief financial officer of Tier One Services, a fractional CFO and outsourced accounting firm specializing in the social justice sector. She is a member of the NJCPA.
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