A&F Leadership Priorities: Environmental, Social & Governance (ESG)

Today’s business environment is more dynamic than ever. Business leaders are focused on strategic initiatives to position their companies for long-term growth, to gain competitive advantage, and to drive shareholder value.

Top of mind for many business leaders are topics like recruiting and retaining top talent, remote work enablement, mergers and acquisitions (M&A), and digital transformation, to name a few.

As business leaders focus on making strategic decisions around these areas, accounting teams are being increasingly relied upon to provide data and insights, and to serve as strategic advisors to the business.

This post is the first in a series to discuss areas of focus that require active accounting input, why it matters to accounting leaders, and the risk of doing nothing.

ESG is a set of environmental, social, and governance standards for companies, and it’s a topic of prominence to organizations and their boards, investors, consumers, and employees.

According to a recent PWC survey, 83% of consumers think companies should be actively shaping ESG best practices and 91% of business leaders believe their company has a responsibility to act on ESG issues.

Despite ESG being a topic of focus, it can be difficult to specifically define. ESG is broad and impacts almost every company, but impact may vary significantly based on industry, geography, or other factors.

Business leaders are focused on determining how ESG impacts their company and how ESG should be incorporated into their corporate strategy. They’re addressing questions like:

• Where should we focus?

• What are our risks and opportunities?

• How can we solve problems and create value?

• How are we tracking against established targets?

To help answer these questions, business leaders are looking to accounting and finance leaders to inform and help shape the corporate strategy.

For accounting leaders to support the corporate strategy, they need to provide complete data, accurate reporting, and meaningful insights. They also need to ensure that ESG activities and related transactions are recorded properly. In many cases, this may require a significant amount of effort from accounting teams as guidance evolves.

According to the Wall Street Journal, executives at large public companies want the Financial Accounting Standards Board (“FASB”) to provide guidance on how to treat transactions related to ESG issues. This includes companies asking the FASB to provide rules on topics such as how to account for renewable-energy certificates and carbon-offset credits, which companies can purchase and apply toward their greenhouse gas emissions-reduction targets.

In addition, accounting leaders need to ensure they have implemented proper controls around the collection and disclosure of material ESG information. However, there are still many uncertainties around the reporting of ESG. What is clear is that investors, lenders, and rating agencies expect greater visibility into a broad range of metrics to understand companies’ ESG policies and performance.

The Securities Exchange Commission (SEC) has recently announced that it is evaluating climate change disclosure rules, with a focus on facilitating disclosures that are consistent, comparable, and based on reliable information.

Not only are company financial statements and disclosures impacted by new ESG initiatives, but other financial metrics or KPI’s may be impacted as well. For example, the Wall Street Journal found that an increasing number of companies are tying the interest rates on their corporate loans to environmental and other sustainability targets.

As ESG and ESG related transactions become more significant to their companies, accounting leaders must stay closely tied to standard setters to ensure they are properly guiding and informing the corporate strategy.

The importance of incorporating ESG into the corporate strategy are clear. It is a significant area of focus for many key stakeholders and establishing a thoughtful ESG policy will help drive value. According to a PwC Survey, 92% of respondents agree that companies with commitments to ESG policies will outlast competitors.

ESG is here to stay, and it is critical that accounting leaders are actively involved in the conversation. Without an active role in ESG, accounting leaders risk non-compliance with accounting guidance and reporting requirements. Further, inaccurate reporting and the lack of transparency and accountability to ESG initiatives may lead to a loss of stakeholder trust. Establishing the proper policies, procedures, and controls are critical to reduce the risk of inaccurate reporting.

ESG is transforming the way companies operate. It is an important topic, spanning across many business functions, including Accounting. It’s clear that accounting leaders must prioritize ESG, but it can be challenging to balance with the existing compliance, controls, and other record-to-report work.

As accountants are called to do more, they can’t continue doing things the way they’ve always been done. To support these strategic initiatives, accounting leaders must enhance their team’s capacity and rethink their accounting work—which is what BlackLine is designed to do.

Leading companies are deploying modern accounting technology like BlackLine to automate tasks, reduce manual effort, and enable a more strategic controllership function.

Visit BlackLine’s Collaborative Accounting Experience to learn how you can get started on your journey to modern accounting.