insight magazine

Sustainability Reporting Is Gaining Corporate Traction

Accounting and finance professionals need to know two main factors seem to be driving the rise in sustainability reporting. By Thomas L. Zeller, Ph.D., CPA, David R. Faust, and Rachel D. Phan | Fall 2018

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

Consumers, investors, suppliers, and business partners alike are demanding both private and public companies participate in and report on relevant sustainability and social efforts. Two main factors seem to be driving the rise 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 better business model.

Second, several business risks and opportunities fall outside the lens of traditional financial reporting that impact a company’s value. Studies show only 20 to 40 percent of a company’s value is tied to tangible assets, meaning financial statements generally fail to capture and measure ESG-related risks and opportunities — think risks associated with scarce resources (like clean water or rare earth materials), geopolitical issues, and labor shortages. Opportunities associated with labor practices, leadership styles, and technology also escape the traditional 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 their traditional financials will miss out on appealing to a growing class of socially responsible investors and consumers.

Although the need for sustainability reporting is growing, business knowledge and understanding of it remains 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 HBSWorking Knowledge.

The pressing question now is how will your company, and how will you, prepare to answer the call when your stakeholders, customers, or clients ask about sustainability measures and reporting? The independent Sustainability Accounting StandardsBoard (SASB) might have your answer.

The SASB aims to guide public corporations in disclosing financially material information regarding ESG issues to investors and the broader public. The SASB’s current reporting 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 offers two resources to uncover the material topics and measures pertinent to a business’s sustainability efforts — a downloadable standard for each respective industry and an interactive SASB Materiality Map that identifies the relevant topics and accounting metrics for each dimension of the framework for a respective industry. All you need to do is match your business — or your client’s — to one of the sectors and industries.

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.