Why All Businesses Should Consider ESG and Sustainability Reporting
The concept of environmental, social and governance (ESG) is older than you might think. As the landscape of financial reporting has evolved, the idea of ESG and sustainability has grown exponentially. In 2011, only 5% of S&P 500 companies reported on ESG or sustainability. Today, in 2023, all S&P 500 companies are reporting on various ESG and sustainability metrics. According to a study by PwC, companies are increasingly relying on their chief financial officer and financial reporting management team as the change and adoption agent for these reporting metrics.
Businesses have come to recognize that these metrics are important as they can provide benefits to the bottom-line profit. Customers, employees, governments and communities have expressed that they want to work for and do business with companies that represent more than just the product or service the business offers. The shift is being driven by the younger generations, Generation Z (born between 1995-2010) and millennials (born between 1981-1994), who make up 50% of the world’s population. According to research by Nielsen, the majority of Gen Z and millennials are environmentally conscious and are willing to alter their purchasing habits to favor eco-friendly products.
The ESG metric has also impacted investors as well. Individual investors and institutional investors are now more inclined towards placing funds in companies that prioritize eco-friendliness. A study by KPMG revealed that 50% of potential M&A transactions fail due to information discovered from ESG compliance evaluations.
Through adopting and communicating ESG and sustainability frameworks, your business demonstrates a commitment to the environment, social issues, and strong leadership, which may result in the following benefits:
- A stronger brand story, workforce and customer base.
- Potential for greater access to capital.
- Less regulatory risk (ESG and sustainability concepts ensure executive management is focused on being compliant with regulatory policies).
Below are some common ESG and sustainability metrics. For each of these metrics, your company can provide current consumption, benchmark it to industry averages, and present a future goal and a roadmap to obtain that goal. In future reporting periods, you can provide updates and the progress the company has experienced in obtaining that goal.
- Environmental: Energy consumption
- Environmental: Waste output
- Environmental: Commitment to policies
- Social: Comparative living wages
- Social: Employee engagement
- Social: Charity activities
- Governance: Commitment to ethics policies
- Governance: Executive diversity ratios
As more and more parties are demanding information on ESG and sustainability metrics, governing bodies across the globe are looking to standardize the reporting. In the US, Gary Gensler, Chair of the Security Exchange Commission, has submitted a draft proposal for regulatory action on disclosures relating to climate risk, human capital and cybersecurity. The proposal is structured in a three-phase roll-out. Phase one focuses on the company’s activities, phase two is focused on its products and customers, and phase three on its suppliers. Phase three has the potential to impact a large majority of private businesses, as essentially any company doing business with a public company will have to be ready to provide data on ESG and sustainability metrics.
The SEC is in the process of reviewing the 13,000 comment letters received in response to the proposal, however, it has been noted that 85% of those letters expressed support. The SEC has set a target date of October 2023 to issue the final rules, and new disclosures appear likely with an effective date of 2024/2025. As Jack Welch, the former chairman and CEO of General Electric once said, “change before you have to.”
Contributing author: Kevin Didio, CPA, CISA, is an audit partner with over 10 years of experience providing accounting, assurance and consulting services to private and publicly-held domestic and foreign companies. He specializes in working with manufacturing, transportation, consumer and retail, technology and life science industries. For more information on this topic, contact Kevin at KDidio@dmcpas.com.