Connecticut CPA Magazine Excerpt: The Role Accountants Can Play in Preparing for Future ESG Requirements

By Patti Martin, Audit & Assurance Managing Director, Accounting and Reporting Advisory Services, Deloitte & Touche LLP

The business world is undergoing a profound transformation that extends far beyond traditional financial statements and profit margins. The pace of societal change and environmental impacts has elevated the focus around the impact of business activities on the environment and society. Environmental, Social, and Governance (ESG) considerations have often become embedded into the enterprise risk management process, influencing investment decisions, shaping corporate reputations, and impacting regulatory requirements.

In today's dynamic business environment, ESG risks can present both potential challenges and promising opportunities. As ESG impacts can emerge rapidly, generating financial and economic impact, it is important to establish a systematic and integrated approach to address environmental and social disruptors. Businesses that can adapt to these changes can gain a competitive advantage. It is imperative for organizations to proactively navigate this ever-evolving landscape, often using ESG principles as a guiding compass to steer toward a sustainable and profitable future.

Broadly, accounting professionals often find themselves at the epicenter of this transformation, playing an important role in helping organizations not only comply with emerging ESG standards, but also thrive in an increasingly sustainability-conscious world. With ESG disclosures and reporting gaining prominence among investors, consumers, and stakeholders, there is generally a demand for greater transparency and accountability from businesses. The role of accounting professionals in supporting these changing stakeholder expectations has never been more evident.

Understanding the ESG Regulatory Landscape

Recent developments from government regulators and international sustainability standard setters show signs of ESG disclosure convergence. The European Union (EU) recently enacted the Corporate Sustainability Reporting Directive (CSRD), mandating that companies with operations in the EU, meeting specific criteria, must submit annual sustainability reports alongside their financial statements.

In the U.S., the most recent rulemaking agenda of the U.S. Securities and Exchange Commission (SEC) includes proposed climate change, human capital management, and corporate board diversity disclosures. These rules would require companies to incorporate specific climate-related disclosures, human capital management details, and information about the diversity of board members and nominees within their registration statements and periodic reports.

Individual states have also begun to propose or adopt climate-related regulation. California's recent climate legislation would require businesses that operate in California to publicly disclose and obtain assurance on greenhouse gas emission data by 2026. It would also mandate public disclosure of their exposure to physical and transitional climate risks, along with the measures they are employing to address them. Similar initiatives are also in motion in various states, including New York, where Senate bills S5437 and S897A are in the initial stages of the legislative process.

With climate regulations becoming a reality, businesses will likely face pressure to establish and strengthen governance and internal controls in ESG and climate measurement and disclosures. This may involve building cross-functional teams encompassing finance, legal, strategy, compliance, and various other departments. Accountants should also support responsible ESG policies and practices within their organizations, in an effort to achieve compliance and remain competitive.

Understanding the Impact on Financial Reporting

Accountants should be prepared to delve into the intricacies of ESG metrics and their impact on financial reporting. This involves recognizing how ESG factors can intersect with financial performance and risk management, ultimately influencing investment decisions and the overall sustainability of an organization.

For instance, a company's carbon emissions, labor practices, or data security breaches can influence its financial health and reputation. Accountants should familiarize themselves with the connections between ESG issues and financial disclosure because they may play a notable role in the evolving ESG landscape.

Moreover, it is also important for accountants to acquire a comprehensive understanding of ESG reporting. This understanding can help with navigating the intricate web of ESG considerations. Accountants should familiarize themselves with established ESG frameworks and standards, as they have played a significant role in the formation and communication of emerging ESG regulations. Notable frameworks include the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD), and the Greenhouse Gas (GHG) Protocol.

These frameworks can provide valuable guidance on how companies should measure, report, and disclose their ESG data, offering a structured approach to ESG reporting that ensures consistency and comparability across industries and regions.

By embracing these standards, accountants can help organizations accurately capture their ESG data, with the aim of fostering transparency, credibility, and trust among stakeholders. Their role positions accountants as leading contributors guiding organizations to meet ESG reporting requirements.

Integrating ESG into Financial Practices

Accountants can play a valuable role in integrating ESG considerations into financial practices, but this is likely no small task. The following are practical strategies that accountants can use to help streamline the integration of ESG into an organization's financial practices:

Upskill, Educate, and Socialize

Accountants should proactively build their competencies in ESG-related topics. To start, accountants should immerse themselves in existing sustainability reports and ESG disclosures to gain insights into leading practices and emerging trends. By scrutinizing these reports, they can learn from the experiences of other organizations and enhance their own ESG reporting capabilities. Also, there are many low and no-cost educational resources available, including specialized ESG training programs and sustainability-focused certifications.

Collaboration within organizations is another significant facet of integrating ESG into financial practices. As organizations begin to mobilize around the ESG market accelerations, there is generally recognition that ESG can no longer be managed in a silo or disconnected from the business. To shift ESG from merely a compliance exercise, it is important for all organizational functions to lean into ESG opportunities to drive overall business performance. Accountants should engage with ESG specialists within their organizations who have experience in sustainability, ethics, and social topics and impacts.

This collaborative approach fosters a holistic understanding of ESG issues and encourages the development of a comprehensive strategy for addressing them. By tapping into the collective knowledge and skills of diverse team members, organizations can forge a more robust and effective ESG framework that aligns with their broader objectives.

Establish Internal Controls

In the current regulatory environment, emphasis is often placed on complete, accurate, reliable, and decision-useful financial reporting practices and internal controls. ESG reporting will be subject to similar process and scrutiny.

Understanding both financial accounting and ESG disclosures is imperative, and accountants have a unique opportunity to leverage existing skill sets to drive consistency between financial and ESG reporting governance. Establishing effective governance over the control environment over ESG reporting is important and sets the foundation for effective internal controls for ESG reporting.

Accountants can bring rigor to the overall risk assessment process, including identification of ESG and climate-related risks and opportunities, documentation and testing of business and IT processes and controls to mitigate these risks, and an understanding of activities needed to monitor the effectiveness of controls established over this new non-financial data.

Leverage Existing Technology and Streamline ESG Data

Streamlining ESG data collection is vital, considering that sustainability data can originate from various corners of an organization, often without validation or review. This is where the finance department's role comes into play, as it can help develop strategies for collecting, analyzing, and reporting ESG data alongside traditional financial data.

By leveraging existing technology and data analytics tools, organizations can significantly enhance the accuracy and efficiency of this process. Technology can play a central role in this transformation by facilitating the monitoring of global reporting requirements, managing overlapping ESG standards and frameworks, and enabling seamless multilingual and multi-jurisdictional reporting. Automation and standardization also come into play, ensuring that reporting is streamlined, consistent, and reliable.

Integrating ESG metrics into financial analysis and risk assessments is important for a holistic view of a company's performance. Accountants can further contribute by helping organizations establish leading practices for ESG risk assessment and mitigation.

The early identification of ESG risks, coupled with proactive mitigation strategies, can protect a company's financial stability, brand value, and reputation. This proactive stance aligns with the evolving expectations of stakeholders who are increasingly concerned with ESG matters, making it a strategic imperative in today's business
landscape.

Enhance Stakeholder Communication

Accountants also play a role in transparently communicating an organization's ESG efforts to stakeholders. Effective communication in this domain can significantly impact an organization's relationships with investors, regulators, customers, and the wider public, fostering trust and demonstrating a genuine commitment to responsible business practices. Developing clear and accessible ESG reports and disclosures is not merely a matter of compliance; it can be a means to authentically showcase an organization's dedication to sustainability principles.

Stakeholders increasingly demand meaningful and relevant information about a company's ESG initiatives. Accountants can contribute by assessing if the ESG reports are accurate, clear, and comprehensive – and aligned with reputable standards. These reports should not only highlight achievements but also acknowledge challenges and the steps taken to address them. Clarity and transparency are vital, enabling stakeholders to make informed decisions and holding organizations accountable for their ESG commitments.

As the business landscape evolves, the demands for transparency, responsibility, and sustainability will likely only intensify. The role of accountants in preparing for future ESG requirements will likely be significant. Accountants can stand as the bridge between financial data and ESG reporting, allowing organizations to effectively navigate this transformative journey.

By staying informed about the ever-changing regulatory landscape, integrating ESG practices into financial processes, and engaging with stakeholders, accountants can help their organizations thrive in a world where environmental, social, and governance considerations are at the forefront of decision-making. Moreover, accountants' experience and contributions will be important in creating a more sustainable and responsible global business environment.

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