Why ESG reporting matters

Feb 15, 2024 12:15:28 PM

"A study from AICPA & CIMA in partnership with the International Federation of Accountants found that 95% of companies reviewed report some level of sustainability information."

Business executive busy with esg reports

By Tariro Mutizwa, ACMA, CGMA, Regional Vice President – Africa, at AICPA & CIMA, together as the Association of International Certified Professional Accountants

With up to 90% of a company’s value now resting in intangible assets, it seems clear that we can no longer manage businesses the ways we managed them in the past. In an ever-changing and complex business environment, we can no longer solely focus on financial data to assess business performance, drive long-term strategies, and generate sustainable value.

As a consequence, corporate reporting itself is changing. We are seeing companies move from strictly financial reporting to a more integrated approach, which includes an organisation’s non-financial information such as its ESG data. A study from AICPA & CIMA in partnership with the International Federation of Accountants found that 95% of companies reviewed report some level of sustainability information.

Groups, such as customers, workforce, society, governments, and investors, all demand greater organisational transparency beyond the traditional financial metrics. ESG is fast becoming the lens through which an organisation is judged.

Being able to clearly and effectively share this information will help organisations grow their resilience and strengthen their reputation by demonstrating their commitment to ESG priorities:

1. Enhancing trust

As with everything in business, if something is to be managed it must be measured and businesses can’t build trust with their stakeholders unless they provide consistent, comparable information on a variety of metrics, including ESG metrics. A willingness to engage with ESG matters in corporate reporting improves stakeholder engagement and shows investors that the company is forward-thinking and aligned with strong, unified, and global reporting standards supporting consistent and transparent reporting, such as the IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2, Climate-related Disclosure standards, which will come into force in January 2024.

2. Long-term sustainability

While many still believe that sustainable growth requires financial trade-offs, research shows that this is not always the case. A recent analysis from McKinsey indicates that financially successful businesses that integrate ESG priorities into their business strategy to drive long-term value creation outperform their peers, provided they also outperform on the fundamentals when it comes to profit and growth. Investors are also showing greater interests in ESG and sustainable business practices for evaluating businesses as it correlates with higher returns, lower risks, and long-term business success.

3. Employee retention and attracting the next wave of talent

By increasing their focus on ESG, businesses can also attract and retain a diverse pool of talent. This is especially true for the younger generations who want to work for organisations that share their vision, values, and purpose and that have a positive impact on society as a whole. In fact, more than 40% of Gen Z and millennials would switch jobs over climate concerns, highlighting the growing importance of having a clear ESG strategy with measurable actions in place. In addition, data shows that a greater focus on diversity and inclusion helps businesses perform better. A recent BlackRock study showed that companies with more gender-balanced workforces tended to outperform their country and industry peers by as much as 1.6% percentage point (29%) on average per year over the 2013-2022 period.

Accounting and finance professionals play a crucial role

The accounting and finance profession has long focused on assessing and managing financial risks. However, the global risks we are seeing today are pushing our profession to expand its remit.

As core members of almost every business and non-governmental organisation, accounting and finance professionals have a pivotal role in providing non-financial and financial management information to drive business performance, develop strategies, and influence decision-making. They own the processes, systems, data, management information, reporting, and assurance that will support their organisations’ transitions to sustainable businesses.

They bring a unique set of skills and knowledge to the table and can work with stakeholders to integrate responsible and sustainable practices into their business and operating models. Without the rigour and business acumen of finance and accounting professionals, it may prove impossible to truly embed sustainability into “business as usual”. The profession’s very nature makes it a powerful force for supporting and implementing strategies and programmes aligned to organisational goals and assuring this information and the systems.

Businesses are being called upon to look beyond profit maximisation and demonstrate their accountability to people and the planet as well as generating revenues. If businesses want to thrive in an ever-evolving environment, they need to incorporate a wide range of capitals, notably environmental and social capital, into their strategy and operations, creating value for all stakeholders, not just a few. ESG matters are now increasingly at the top of people’s minds, that means they are central to business strategy.

ESG reporting is no longer a nice-to-have, it is a must-have.

Tariro Mutizwa, ACMA, CGMA is a highly accomplished accounting professional with close to decades of experience in the accounting and finance industries.