ESG: A Roadmap to Value Creation
With continually evolving frameworks and numerous data points to navigate, the road to incorporating an effective ESG strategy into any business model is a foggy one. But a carefully charted roadmap can reveal a clear path to long-term value creation. Here’s what today’s accounting and finance professionals need to consider if they want to drive their organizations toward sustainability and success.
As investors, employees, customers, and other stakeholders turn their increasingly watchful eyes toward the ethics, sustainability, and global impact of the businesses they support, the acceleration of organizations prioritizing the integration of environmental, social, and governance (ESG) initiatives and reporting into their operations has gained momentum. Caught in the slipstream of that momentum is the imperative that these newfound ESG strategies be a value creator, fulfilling stakeholder concerns while also bettering the business by attracting talent, reducing costs, improving corporate image, and fostering innovation, just to name a few. But the road to implementing such an effective ESG strategy remains a foggy one. In turn, business leaders being challenged to adopt continually evolving ESG concepts and frameworks are increasingly turning to their accounting and finance teams to navigate this uncertain terrain. Charting a roadmap that offers a clear path to sustainability and success won’t come easy, but it’s an opportunity that offers CPAs a new frontier for which they can position themselves as strategic business advisors that drive long-term value creation.
Regulating a Roadmap
Socially conscious organizations have been behind much of the early ESG momentum, taking action to respond to society’s growing concerns about the global climate crisis and social issues plaguing our world, but this momentum is gaining further traction in the United States thanks to, unsurprisingly, rising regulations.
In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed new regulations enhancing and standardizing public company climate-related disclosures in registration statements and periodic reports.
“The proposal is intended to address investors’ needs, help registrants disclose climate-related risks more efficiently and effectively, and strengthen existing disclosures, including the SEC’s 2010 climate-related interpretive guidance,” explains Elizabeth Sloan, CPA, Grant Thornton’s managing director of ESG and sustainability services.
In summarizing the SEC’s proposal, Sloan points out a number of new disclosures:
- Qualitative disclosures on climate-related risks, governance, and risk management, and impacts on a registrant’s strategy and business model.
- Identification of any board members or committees responsible for the oversight of climate-related risks, and the frequency by which they meet to discuss the risks.
- Whether and how climate-related targets or goals are set, and how progress is measured.
- Processes to identify, assess, and manage climate-related risks.
- Whether any climate-related risks are reasonably likely to have a material impact on a registrant’s business or consolidated financial statements that might occur in the short, medium, and long term.
- Greenhouse gas emissions for the most recent fiscal year and the historical periods included in the financial statements.
Given that the SEC received more than 15,000 responses during the proposal’s public comment period, it’s yet to be seen if any or all these disclosures will ultimately become part of a final regulation expected this year. However, as record-breaking temperatures sweep through the United States and across the globe, wreaking havoc on transportation, infrastructure, the agricultural industry, and overall economic productivity, the urgency over the SEC’s proposal has become immediately evident. Consider this: A 2021 study published in Nature Communications revealed the impact of historical heatwaves, finding that these climate crises lowered annual gross domestic product growth in Europe by as much as 0.5% over the past decade, and up to 1% in more vulnerable regions.
Investing in Transparency
Regardless of the SEC’s proposals and ultimate mandates, the call for increased corporate transparency is coming from multiple fronts. How organizations respond will be critical.
“In times of crisis, investors in particular will increasingly look at what steps a company is taking to minimize risks,” says Mark Stout, CEO of Apollo Energies Inc., a consulting firm that helps organizations become carbon-free and develop or improve their ESG reporting.
Pointing to climate change, for example, Stout says it’s led to instances of “business disruptions, lost revenue, employee turnover, lost investments, and lost customers. Investors want to know how companies are mitigating the risk of losing revenue or slowing down operations.”
Beyond business risks, Stout believes it’s becoming increasingly important for organizations to demonstrate how they’re actively reducing their environmental impacts. “The extent to which a company manages their environmental footprint provides transparency into their actions and impacts the minds of stakeholders, regulators, and government agencies,” Stout says.
According to Chris Bolman, co-founder and CEO of Brightest, a software platform that provides individuals and organizations with an ESG and sustainability dashboard, 61% of institutional investors consider strong ESG performance an indicator of ethical corporate behavior and good management.
“Strong ESG performance is becoming intrinsic to your business model now and increasingly correlates with access to capital,” Bolman notes. “There are also many examples of companies generating millions in incremental revenue, or cutting millions in expenses, from thoughtful ESG implementation.”
“For example, acting wastefully regarding energy or other resources usually comes with a steep price tag for companies. The same goes for operating in an environmentally harmful way—taxes and other measures could substantially raise operating expenses,” explains Sarah-Marie Rust, founder and CEO of EVE, an intelligence and data analytics company that helps organizations electrify their transportation fleets and report their emissions.
Emphasizing that adopting a meaningful ESG reporting framework can help organizations uncover value creation opportunities, Rust says, “Companies are usually able to uncover wasteful activities that aren’t sustainable and are able to implement measures that reduce costs in the long run.”
A clear investment in ESG initiatives and reporting also signals to stakeholders that an organization is actively engaged in corporate responsibility, beyond the bottom line. “ESG reporting allows companies to take a stand on ethical and sustainability measures. It creates transparency, which builds valuable trust with customers, employees, and shareholders,” Rust suggests.
ESG initiatives also help build trust with employees—an important component in a competitive labor market where there’s increased scrutiny from potential employees. “Companies are noticing that attracting, hiring, and retaining talent is reliant upon an alignment of company values and documented actions,” Sloan says.
Keys to Your ESG Roadmap
When it comes to developing an ESG strategy, Luke Jacobs, co-founder and CEO of Encamp, an enterprise technology company for environmental compliance data management and reporting, says organizations need to start with empowering their employees to get involved—internally and externally. He suggests providing resources for employees to organize internal sustainability groups and providing paid time off for employees to volunteer at mission-driven organizations.
“Measuring these efforts and making them visible builds the momentum necessary for effective sustainability programs and evolves a company’s brand to genuinely reflect the desire to make an impact at an individual and at a corporate level,” Jacobs says.
With a noticeable shift in consumer attitude toward corporate social responsibility, companies also need to consider how they build trust with customers.
“Sustainability and impact are now the core of a customer’s purchasing decision, and some even go as far as to not purchase products or services from companies that don’t align with their values. This is putting significant pressure on companies looking to retain and grow their customer base,” Rust observes.
One key to building trust with customers is to be transparent with your ESG initiatives and reporting. While some organizations may be hesitant to share their ESG metrics for broad consumption, which could expose operational weaknesses, Jacobs stresses that “remaining truthful to your organization’s mission and purpose is the best way to avoid backlash when sharing ESG metrics and providing the larger directional narrative about where the company is on its ESG journey.”
In fact, Rust argues that backlash isn’t always a bad thing—it could create a sense of urgency for organizations to improve their metrics and behaviors in order to be perceived in a more positive light: “Companies shouldn’t fear backlash when it comes to their ESG performance metrics but embrace it as a tool for becoming better.”
Ultimately, instilling an ESG mindset into your organization requires strong, clear leadership, and a commitment to investment and action. After all, it’s a cultural and operational shift. ESG needs to become part of your analytics practice, influence corporate goals, and be embedded in performance incentives.
When you further consider that ESG touches every department in your organization in some way, and impacts everything from board governance to sustainability, Stout advises that setting clear key performance indicators (KPIs) and goals are critical to getting buy-in, measuring success, and making meaningful change. Getting started doesn’t have to be a big ask, either. He suggests going after the low-hanging fruit first to start building internal frameworks for gathering data. “You have direct control over your energy use, and how your electricity is generated. So that can be your first destination to visit,” Stout says. “From there, you can visit your value chain.”
“As a company, we’re setting up milestones and KPIs that we want to achieve in order to be both more sustainable and inclusive, from the way we run our business to the way we hire new colleagues,” Rust shares as an example.
Point being, your milestones and KPIs must be informed by data, so it’s important that you understand where the data originates, where it lives, and how it’s collected, managed, and interpreted.
“Not knowing where your data is leads to inconsistent, inaccurate, and poor reporting. You can only improve your ESG roadmap and performance over time if you get command of your data,” Jacobs stresses.
“It’s important to not only set and track big milestones—for example, being carbon neutral by 2030—but to also focus on an engagement plan that allows you to follow through,” Rust says. “While large, ambitious goals are typically the most publicized parts of an organization’s ESG strategy, don’t overlook small changes you can implement quickly that’ll have a lasting impact on your ESG performance.”
No matter the scope, ESG-related initiatives and reporting will remain challenging for all organizations to navigate as the regulatory and social landscapes develop, and accountability will be critical, Sloan says. She suggests assigning responsibility for ESG initiatives to someone with the support of management and the board to ensure greater acceptance and accountability for success.
As we’ve already seen, many organizations put their finance leaders in the driver’s seat, banking on them using their regulatory know-how and deep insight into financial health to guide the organization toward meaningful ESG initiatives and reporting metrics that bring added value to the organization and all its stakeholders.
Sloan says ESG initiatives are a terrific opportunity for accounting and finance professionals to provide strategic value and insight. A new or deeper emphasis on ESG practices in your organization is also a positive change for all employees, as it offers a new opportunity to upskill talent, helping them to fully understand the impact of ESG initiatives, and enabling them to incorporate ESG best practices into their everyday job functions.
While navigating the road to integrating ESG concepts into daily management and internal and external reporting may seem daunting, the benefits of doing so are worth the trip. Being a more socially conscious organization will not only benefit your bottom line, you’ll also better serve the environment and society as a whole.
Carolyn Tang Kmet is a senior lecturer in Loyola University Chicago’s Quinlan School of Business and a frequent Insight contributor.