5 questions accountants should ask themselves about ESG in corporate finance

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According to Ocean Tomo’s “Market Value of Intangible Assets” study, three decades ago, intangible assets represented about 20% of the value of state-owned enterprises. Today, they represent an astonishing number 80% of the value of these companies. The boom in ESG (Environmental, Social and Governance) investments is forcing boards of directors as well as corporate finance professionals to rethink the way they measure company performance, but it also offers a new opportunity to ” support decision making based on sustainable business data.

It is undoubtedly useful to measure and manage against non-financial parameters. Academic studies have demonstrated the positive relationship between a range of relevant ESG issues and superior financial performance. At the same time, however, corporate finance and investor relations professionals are feeling survey fatigue as they answer an ever-increasing number of investor questions about sustainable business data and, at times, on intangible problems.

There is no doubt that market players aim to strike the right balance between what is useful in decision-making for businesses, investors, policymakers and other stakeholders and what is intangible. Management accountants play a crucial role in the evolution of ESG reporting, and they have a vested interest in ensuring that their concerns are taken into account in these developments. In a presentation I gave in New York in November 2019, I discussed the key areas where dialogue between ESG promoters and accounting and finance professionals needs to take place for all parties stakeholders are reaping the benefits of these new types of information.

(1) What’s in it for Financial Statement Preparers? Learning and applying new reporting frameworks can consume the time and resources of a finance professional (and an organization). Why is it beneficial for those who prepare financial statements to apparently create new work? Can we specify and articulate these advantages?

(2) How do we know which reporting standards are the best? When it comes to ESG reporting, many have said that there is a veritable “alphabet soup” of ESG executives – Sustainability Accounting Standards Board, Integrated Reporting, Global Reporting Initiative, Principles for Responsible Investment, Climate Disclosure Standards Board, Task Force on Climate-Related Financial Disclosures. Accounting and finance professionals may be the most used to acronyms, but it’s not unreasonable to say that the sheer number of standards and benchmarks is confusing the market. It is clear that the market will need additional information that clarifies and defines the key aspects of competing frameworks. The Integrated Reporting Council (IIRC) Corporate Reporting Dialogue (CRD) Platform Better Alignment Project, which seeks to reconcile different standards, frameworks and metrics, is a positive step in this direction.

(3) Does a particular framework have specificity and adequate guidance to create confidence and assurance? Insurance is one of the main responsibilities of the accountant. Accountants should audit a company’s processes and controls to ensure that the financial information a company discloses is accurate. There have been concerns about keeping ESG information at the same high level as financial information. Regardless of the ESG reporting framework, guidelines will be needed to enable auditors to provide assurance.

(4) Rather than focusing on reporting frameworks, should we be supporting more quantitative academic research that links sustainable financial and business data to the value it creates? Research plays a crucial role in driving market adoption, as it can potentially prove a link between sustainable business data and business performance. Conversely, research can show what kinds of sustainable business information not affect business performance.

(5) Should we support voluntary or compulsory adoption? This is an ongoing debate between supporters of voluntary ESG reporting and supporters of regulation. The ultimate parameters and guidelines for ESG reporting and other sustainable corporate data are evolving in the marketplace, but the issue of voluntary versus mandatory will become more important as investors and stakeholders continue to question the adequacy and comparability of the information that companies voluntarily disclose. Market dynamics have prompted almost every major global company to publish some form of external ESG report; they also pushed for the constant improvement of the information disclosed. If market forces cannot ensure the quality and reliability of sustainable business information, regulators can intervene to promote disclosure and comparability.

There are many other questions finance professionals have about ESG reporting, but there is great optimism about it. Although there is still a lot to learn – and best practices must be established – the involvement of management accountants brings rigor and link with materiality, accuracy and performance. It is happening now – and moving fast. This work can help the market understand many factors that create intangible value. By answering these five key questions, the involvement of management accountants will ensure success.

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