insight magazine

Sustainability Reporting Rising

As environmental and social issues inspire generational movements, companies must respond with transparent sustainability reporting. By Thomas L. Zeller, Ph.D., CPA, David R. Faust, and Rachel D. Phan | Digital Exclusive - 2018

srr-800

Environmental, social, and governance (ESG) are the buzzwords accounting and finance pros need to know as rapidly rising calls for corporate social responsibility and corresponding sustainability reporting put new demands on companies hoping to succeed in our increasingly socially conscious society.

It’s not just consumers seeking more social good, either — investors, suppliers, and business partners alike are calling for both private and public companies to participate in and report on sustainability efforts. Consider the recent reactions of Starbucks, McDonald’s, and many others who are responding to consumer and environmentalist concerns by reducing plastic waste by eliminating plastic straws and bags, for example.

Two factors are driving attention in sustainability reporting.

First, stakeholders, owners, and employees — either willingly or due to generational changes and social pressures — want to participate in sustainability efforts. Companies engaged then typically measure and report on their ESG sustainability practices, which helps to bolster corporate consciences and profits while simultaneously building a secure longevity to the business model.

Second, there are several business risks and opportunities outside the lens of financial reporting that impact a company’s value. Studies show only 20 to 40 percent of company value is tied to tangible assets, meaning traditional financial statements fail to capture and measure risks and opportunities that come along with ESG concerns. For example, risks associated with scarce resources (like clean water or rare earth materials), geopolitical issues, and labor shortages are not captured in traditional reporting. Opportunities associated with labor practices, leadership styles, and technology also escape the financial reporting lens. These risks can become dire, and opportunities may be forgone, without the proper reporting framework to identify and measure them. Additionally, companies that do not report beyond traditional financials miss out on appealing to a growing class of socially responsible investors and consumers seeking a more holistic view of the company’s position.

Although the need is clear, business knowledge and understanding surrounding sustainability measures and reporting is limited. “Too few managers are familiar with fulfilling financial and social goals simultaneously and there are few templates for developing organizational processes and systems to help them do so. Internally, organizations often struggle to allocate resources toward these different goals and to deal with the trade-offs that they face,” writes Julie Battilana, Joseph C. Wilson Professor of Business Administration at Harvard Business School and Alan L. Gleitsman Professor of Social Innovation at Harvard Kennedy School, for HBS Working Knowledge.

The deepening question is, how will your company, and how will you, be ready to answer the call when your stakeholders, customers, or clients ask about sustainability measures and reporting?

There’s a Standard for That

Established in 2011 as an independent, private-sector standards-setting organization, the Sustainability Accounting Standards Board (SASB) offers answers for the issues and questions that will likely come your way.

The SASB’s mission is to develop and maintain sustainability accounting standards that help public corporations disclose financially material information regarding ESG issues to investors in a cost-effective and decision-useful format that also improves comparability of corporate disclosures. The SASB’s current standards cover 11 sectors for 79 industries. Each industry has unique sustainability topics and related accounting metrics defined by five sustainability dimensions: Environment, Social Capital, Human Capital, Business Model and Innovation, and Leadership and Governance.

The SASB’s standards provide a valuable guide to promoting feasible sustainability goals for a variety of your client’s industries and respective businesses. All you need to do is match your client’s business to one of the sectors and industries to uncover the material topics and measures pertinent to their sustainability efforts.

Assume your client is a health care provider, for instance. The client asks, “What are the sustainable topics and measures that are material and deserve special consideration?” The SASB offers two resources to readily answer that — either download the standard for the respective industry or access the interactive SASB Materiality Map which will provide the relevant topics and accounting metrics for each dimension of the framework for the respective industry.

The SASB’s comprehensive list of topics and illustrative accounting metrics not only arm you with the ability to answer client questions about sustainability, but also to respond to material client risks and opportunities as they surface. Consider how staffing is a substantial concern for many organizations. Highlighting a turnover measure in the Social Capital and Leadership and Governance dimensions calls attention to the necessity for integrative thinking about the risks associated with staffing turnover. On another hand, posting the cost of medical services under the Pricing and Billing Transparency dimension may reveal a business risk or opportunity. With increasing patient insurance co-payment and deductible amounts, patients are increasingly likely to consider costs when deciding if, when, and where to have a medical procedure.

All in all, the collective trend towards sustainability is clear. Investors and consumers value companies that express interest and action in managing their social and environmental impacts. There’s no question that sustainability accounting is soon to become a best-practice. Fortunately, there’s no need to recreate the wheel when it comes to sustainability reporting; the SASB has done the heavy lifting.

Accounting and finance professionals now just need to do their part by educating themselves and those they serve about how and why sustainability reporting matters, and about the business risks and opportunities missed by sticking to traditional financial reporting practices.

Illinois CPA Society member Thomas L. Zeller, Ph.D., CPA, is an Accounting and Business Law professor at Loyola University Chicago’s Quinlan School of Business. David R. Faust is an Accounting and Information Systems student at Loyola University Chicago and Incoming Audit Assistant at Deloitte & Touche LLP (January 2019), completing the undergraduate programs in fall 2018. Rachel D. Phan is an Accounting and Sustainability Management student at Loyola University Chicago and Gannon Scholar in the Gannon Center for Women and Leadership, completing the undergraduate programs in summer 2020.