Environmental, social and governance (ESG) or sustainability has become a hot topic today because of the growing awareness of climate change, inequalities, and management challenges. Investors are no longer simply targeting the most profitable companies but are also deeply interested in the commitment to sustainability. Other stakeholders, including employees and customers, also want to be associated only with responsible enterprises. One of the crucial aspects of a sustainable and responsible company is ESG accounting.
ESG accounting looks at the non-financial performance of a company, business, or organisation. It focuses on environmental, social, and governance factors and their broad implications. This post takes a closer look at ESG accounting to demonstrate how it works, guiding laws, and the main benefits, and the key requirements.
What is ESG Accounting?
This is the disclosure or reporting of an organisation's non-financial information in relation to its performance. The primary purpose is to generate value for processes that are not tied to financial operations. Environmental, social, and governance (ESG) accounting can be traced back to the late 1970s when organisations started considering environmental and social impacts, but the definition and standards remained undefined.
It was not until the early 1990s when the United Nations (UN) held the first-ever meeting on the environment and development that the whole idea of sustainability became clearer.
The concept of ESG and sustainability standards has become even more important following the realisation that the actions of companies have the largest impact on the environment and society. For example, large companies are the biggest emitters of greenhouse gases (GHG) that cause global warming and climate change. Now, new laws by different parties, from regional blocs like the European Union (EU) to capital markets such as Hong Kong Stock Exchange (HKEX), are offering guidelines for ESG accounting. You cannot be left behind as other companies adopt ESG accounting into their systems.
Benefits of ESG Accounting for Your Company
The primary benefit of ESG accounting is that it helps to identify the risks and opportunities facing your company. The process of ESG reporting starts with a comprehensive scrutiny of a company's processes to identify areas that you should target to improve its sustainability score. Here are other benefits of ESG accounting in your company:
- You can use ESG accounting and reporting to identify key opportunities and challenges for your company or business.
- It can help your company to win more investors and easily raise funds to improve the quality of services/products and management.
- It allows your company to stand out, win a bigger market share and rapidly grow its profitability.
- Crucial for compliance with local and international regulations. It is particularly crucial for complying with tax policies, capital markets’ rules, and international standards on tax matters.
- Very useful in crafting stronger strategies for company operations.
- Helps to attract and retain the best talents in a business or company. With esg accounting and reporting, the impact will be felt through the support of the community.
- Provides special satisfaction from the understanding that the company is helping make the planet greener.
- Can help in cutting down the cost of production in your company. When you install new systems, be they machinery or technology, they can help improve efficiency, cut down emissions, and enhance product quality. All these attributes can help to cut down production-related costs and increase profits.
Requirements for ESG Accounting
Like financial accounting, ESG accounting and reporting requires accuracy and verifiability of the information you present. Therefore, here are the main requirements for your company.
- ESG Reporting Plan
Every good ESG accounting system requires a proper strategy. The plan should help to create an outline to guide ESG experts gather and analyse the information they need about your company. The best way to do this is by integrating financial and ESG accounting with sustainability reporting. This implies that every part of the ESG work in the company becomes part of the larger accounting plan and is ultimately reported to stakeholders. Therefore, here are some important components of an ESG reporting plan to consider:
- A comprehensive company review to determine its current status.
- A materiality assessment to determine the best reporting topics.
- A clear strategy that targets to demonstrate the achievements outlined in the material topics.
- A report on the progress achieved through the selected strategy. This should follow key performance indicators that demonstrate progress, related challenges, and efforts made to ensure the plan for sustainability remains on course.
- Finally, the results you achieve should be captured accurately in an ESG report. This publication should capture the accurate sustainability status of the company for the stakeholders. During ESG accounting, you should capture the progress and continuity of the selected sustainability strategies. If there are areas not delivering the expected results, you will need to make changes.
- ESG Accounting Framework
In addition to having a plan, you should also have an appropriate ESG framework. We are mainly used to SASB and ISSB models, but there are other multiple options that you can use for ESG accounting. Make sure to only select the model that is developed for companies in your industry. Some of the best frameworks that you should consider are:
- The Task-force on Climate-Related Financial Disclosures (TCFD) framework.
- Climate Disclosure Standards Board (CDSB) framework.
- The Global Reporting Initiative (GRI) framework.
- Carbon Disclosure Project (CDP) framework.
- The Science Based Targets initiative (SBTi).
- The Sustainability Accounting Standards Board (SASB).
- ESG Sustainability Management Software
We must indicate that the process of ESG accounting is largely data-driven. For example, how do you determine that a company has cut its carbon footprint by a specific percentage? The answer is reviewing and verifying the presented data. This implies that your accountant or involved personnel must have an app to help you get the right data, analyse it, and make the right presentations.
The best apps for ESG accounting and reporting can help you to automate data collection and in generating quality reports. Good examples to consider are diginexESG and diginexCLIMATE.
- Assistance of an ESG Accounting Expert
If you are new to ESG matters, it might be challenging to carry out a comprehensive audit. The best idea is to work with expert firms in ESG matters. Professionals who have helped other companies will be able to not only review your ESG system but also in the adoption of the best strategies.
This post has demonstrated that ESG accounting is an important way of determining the sustainability performance of a company. It provides a new layer of confirming ESG information for your company to avoid the danger of greenwashing. It also helps to win the support of more stakeholders, from investors to customers. Make sure to have the right ESG app and expert assistance when doing the accounting for better results.