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5 trends driving the importance of understanding ESG

06/03/2022 11:55 AM | Anonymous member (Administrator)

June 2, 2022

Hosted by Neil Amato

On May 24 in New York, the AICPA and CPA.com hosted the inaugural ESG Symposium, bringing together a group of accounting leaders, investors, standard setters, and others to exchange ideas and perspectives on environmental, social, and governance (ESG) issues.

One presenter and a leader in the ESG field is Ami Beers, CPA, CGMA, senior director–Assurance and Advisory Innovation at the AICPA.

In the episode, Beers explains the reasons for increased focus on ESG, what she took away from the symposium, and what's coming next. She mentions several resources that can be found online. One good place to start is the AICPA's ESG-focused resource page.

What you'll learn from this episode:

  • More details on what the letters in ESG signify.
  • An overview of the recent ESG Symposium in New York.
  • Why Beers says that "accountants are the right people to be leading in this area."
  • The five drivers of ESG implementation, according to Beers.
  • The reason Beers says "there is a lot to learn" still about ESG topics.

Play the episode below or read the edited transcript:

Transcript:                                                            

Neil Amato: Thanks for coming back for another episode of the Journal of Accountancy podcast. It's the first episode in June, and our focus today is an interview on the topic of ESG. And we'll also have mention of a news topic: the IRS Dirty Dozen tax scams. First, here's a word from our sponsor.

Amato: Hello and welcome to the Journal of Accountancy podcast. This is Neil Amato. Today's episode is a focus on ESG — that is, environmental, social, and governance — and ESG topics are one of rising importance for CPAs. We'll also be talking about an ESG symposium held recently at the AICPA's New York office.

That rising importance is the result of both proposed regulations and growing interests from potential clients, as well as growing demand for advisory services. To talk about ESG and the symposium, I'm joined for this segment by Ami Beers. Ami is a CPA and colleague of mine who is senior director–Assurance and Advisory Innovation. Ami, first, I think people understand maybe what the E in ESG stands for and means, but could you tell me more about the S and the G?

Ami Beers: Sure, and thank you very much for having me today. I agree. I think a lot of people automatically think of E and think of the climate and capturing of carbon emissions and reporting on that information. But E really encompasses other environmental matters that are having an impact on companies' value or business model; so information about water usage and waste and biodiversity and how these impact some industries.

When we talk a little bit about the S in ESG, which is really becoming increasingly important, especially after the pandemic, these social issues cover people and relationships, so the health and safety of workers, the diversity and equity inclusion within companies, as well as a company's brand or reputation and the policies that they instill, specifically potentially related to, say, child labor laws.

These are really important issues for employees and customers, but investors are also very interested in these topics. They want to understand how a company manages these social issues and the risks, because these risks have an impact on the company's value.

Then finally G, governance. Very important to understand that companies have the right structure and policies in place. Some of the topics that fall under this governance pillar, policies related to, say, executive compensation or board composition, or even risk management.

Amato: Ami, your role at the Association obviously includes a focus on ESG because you know a lot about it, you talk about it, but what is it about that focus area that interests you?

Beers: Here at the Association, we have been working in sustainability and enhanced business reporting for years. However, recently, ESG issues have become really important, and they've taken a big interest amongst many stakeholders because ESG issues impact a company's long-term value creation, and so that is of interest to investors, boards, employees.

There are risks and opportunities related to ESG that are imposed on companies. Companies really need to manage these risks and have a strategy to mitigate them, so this falls right into an accountant's sweet spot. Finance and accounting professionals really need to provide the trust in that information.

As it relates to ESG, some of the things that need to be done is establishing processes and controls and collecting the right data to report on, measuring that data against established standards, using the information for decision-making, and allowing companies to tell their story to stakeholders. This information is reported to external parties, and then, of course, providing the assurance on that information provides that confidence and trust.

Accountants are the right people to be leading in this area, and that is really what my focus has been on, is really providing the profession the tools to be able to engage in this area and really lead in this area.

Amato: I mentioned the ESG symposium. It was May 24th in New York. What would you say was the goal of that symposium?

Beers: Yeah, as I mentioned, we believe that the finance and accounting profession needs to lead in the ESG ecosystem, and so we brought together the top leaders in the ESG space. We looked at people in the investment community, we looked at firm leaders, technologists, CFOs, and really brought them together to really understand the ESG ecosphere and how it would impact the profession.

The goal was to discuss this accelerating market demand for ESG services, understand the opportunity for the accounting and finance profession, and help lead the way for our Association to support that journey.

Amato: I mentioned the demand for ESG knowledge or advisory services is growing. There's obviously evidence for that all around. Some people still might think that ESG is not all that important, but why, in your mind, is it something that's here to stay?

Beers: I think that there are about five key drivers for ESG implementation, and those are first, regulations; movement in the reporting standards, number 2; three is really the investors and the investor demand. Four is companies themselves and their supply chains, and fifth would be your customers and your employees.

The first is regulation. Obviously, the US is joining a growing list of countries that are mandating disclosure in this area.

The SEC had announced in its regulatory agenda last year that it would be issuing four different ESG-related rules. The first two were released in March of this year, one on cybersecurity reporting and the other on climate-related disclosure.

We're expecting two more in the remainder of 2022, which would be one on board diversity and another on human capital management. We're also seeing within the states and at the local level that these organizations are looking to have some level of reporting in this area, both on climate-related issues as well as social issues.

The second is standards, and where we've been in the past is that reporting on sustainability information has been all over the place with lots of different frameworks and different standards, and what we've been seeing recently is that the major standard setters in the ESG space are coming together.

The IFRS Foundation had announced in this past November that it was be forming a new standards board called the International Sustainability Standards Board. That standards board will be sitting as a sister organization to the International Accounting Standards Board, which sets financial reporting standards.

What we're seeing is that sustainability standards setting is becoming really important just at the same level as financial reporting, and that's because investors are very interested in it. Which is my third driver of why ESG is becoming so important. Because investors are demanding that companies start reporting on this information.

They understand that ESG risks impact the value creation of a company and that it has a real impact over decisions related to capital allocation and investment. They want to understand a company's strategy, risk, and how they're mitigating these risks. They want them to be reporting on the KPIs and metrics and the progress against any commitments companies are making towards ESG policies.

The fourth area: companies themselves. Companies are making commitments and setting targets regardless of whether they're required to by the SEC or by some other regulator. They're not only setting these targets, but they are setting targets that impact the companies that they do business with, so their supply chains. Specifically when it comes to carbon emissions, companies look at up and down their value chains.

Scope 3 carbon emissions — really what that means is that your Scope 3, which is any carbon emissions that are indirectly related to or someone else's direct carbon emissions. Some of these companies are asking their suppliers to sign pledges to reduce carbon emissions and to even make commitments on some of the social issues that I talked about before in terms of child safety and child labor laws, and employee health and welfare, and diversity and inclusion.

That leads me to my fifth driver, and that is customers and employees. That is why these companies are in business. More and more, we're starting to see customers make decisions based on a company's sustainability strategy.

The younger generations really care about these issues. They will change their purchasing habits for companies that they believe meet their values. They also want to work for companies that align to those values.

We're looking at this war against talent and how important talent is to a company. Well, so it's really important for companies to be able to attract new talent, to be able to demonstrate that they have strategies in this area.

Amato: What would you say are some of the key takeaways for you after hearing the group's discussion on May 24th?

Beers: I think that one of the most important things we heard were that, obviously, the investors are very interested in this information. They want comparable and reliable information. Quality is so important to them. They want to be able to rely on ESG reporting in the same manner that they rely on financial reporting.

The profession will have a strong voice in helping shape the future of these global ESG standards. We know that CPAs are well positioned to meet marketplace demands. They have the skills, the experience, and the systems to provide assurance and quality services. They have independence, integrity, and competency.

We already know that firms are starting to build on these services to help their clients with ESG strategy, reporting, and assurance needs. We know corporate finance leaders are beginning their efforts in starting their journeys and starting to gather the information to report on ESG efforts and improve their decision-making and demonstrate that value creation.

But we also heard that accountants and finance professionals will need to expand their knowledge. They need to get the necessary training that will help them in terms of this new subject area.

Amato: To you, as a closing thought, what's next regarding ESG?

Beers: There is a lot to learn. AICPA and CIMA have been developing lots of resources to help upskill our profession for the sea change that is coming. We have many resources on our website that provide education that CPAs in this space will need.

For example, we've got some educational briefs on understanding ESG, specifically the E, the S, and the G that I talked about earlier on. We actually recently released a paper on carbon accounting.

We've got additional guidance for the auditors to help them in performing either a separate attestation on sustainability information. Or we also released a practice aid that help auditors deal with ESG risks as they may impact the audit of the financial statements.

Also, coming soon, we'll be releasing a new course on ESG fundamentals. I suggest please check out our website for these valuable resources that will help you get up to speed.

Amato: We will link to some of those pertinent resources in the show notes for this episode. Ami, we appreciate you taking the time to be on and sharing your expertise today. Thanks very much.

Beers: Thank you so much for having me.

Amato: Again, that was CPA Ami Beers.


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