Environmental, social and governance – by now, well-known by its shorthand ESG — has become a top priority in C-suites around the globe. With more than 90% of S&P 500 companies now proactively publishing annual sustainability reports, small and midsized businesses everywhere hammering out ESG strategies and governments introducing tax and regulatory credits to accelerate and incentivize this transformation, it is clear ESG will be a fixture for the foreseeable future.
That’s going to create some challenges for accountants.
Decoding the alphabet soup of ESG standardization
One unintended consequence of the widespread adoption of ESG regulation and reporting is a lack of standardization in how to account for it. To date, most companies that have been disclosing ESG strategies and reporting progress against benchmarks have been using voluntary reporting standards. The problem is, there are several different standards out there, including those administered by the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). Worse, they often provide conflicting guidance. It has created a Wild West of ESG benchmarking, and key stakeholders — such as corporate leadership, CFOs, accounting professionals — are clamoring for clarity.
Recognizing the potential for confusion, the Financial Accounting Standards Board added a project to its technical agenda this past May, which focused on accounting for financial instruments with ESG-linked features and regulatory credits. The move closely followed a Securities and Exchange Commission proposal on new rules for how investment funds can use terms such as ESG to describe their investments and a November 2021 action by the International Accounting Standards Board’s IFRS Foundation to form the International Sustainability Standards Board to write the first mandatory, global reporting standards. Still, universal alignment around ESG reporting has been hard to find.
No simple path to harmonized ESG reporting requirements
The ISSB — which does not currently apply standards for U.S. firms — published its first two draft sustainability reporting standards this March. Immediately, over 1,300 comments came in from high-profile public companies, investors, regulators and academics raising concerns, calling the standards too narrow and unclear. Proponents of the ISSB will say their standards need to be adopted aggressively, but the impassioned response from critics and the noteworthy lack of commitment from the U.S. suggest we still have a long way to go before the world can agree on a single set of rules of the road.
Whatever standards are eventually adopted, it’s clear that some form of ESG reporting is rapidly becoming an expectation that all companies will need to fulfill in one way or another. It’s also clear that meeting these standards will require a level of transparency that few companies have ever needed to deliver. For accounting professionals, it begs the question: Are your clients ready to meet that demand, and if not, how can you help them get ready?
Readiness is all
This is an exercise in vigilance and strategic planning. As we’ve seen with countless other global initiatives focused on standardizing policy and reporting processes across a fragmented regulatory landscape, the path to a single global standard is often littered with dozens of incremental, hyper-local requirements. We saw it in the endless saga on internet sales taxes; we’ve seen it in the launch of countless digital and streaming taxes; and we’re seeing it now in the OECD’s continued push to try and enact a global corporate minimum tax. Big, sweeping initiatives that seek to create a centralized rulebook for all companies in all jurisdictions often result in a rag tag assortment of compliance requirements.
Accounting professionals will have to find a way to plan for multiple scenarios at once, then be agile enough to pivot quickly to the standards that will govern sustainability.
That might sound simple, but it’s a task that will require complete organizational buy-in. Corporate sustainability does not happen in a vacuum. Final standards will likely touch virtually every aspect of a company’s operations. The key for accounting professionals at this stage in the game is to start helping clients prepare to collect and report this disparate information from across corporate silos and jurisdictions so they can be ready to follow localized, regional guidelines and harmonized global standards as they come into play. Staying on top of these fast-moving changes now will be a lot easier than playing catch-up later when a company’s absence from the ESG reporting will start to become conspicuous.
