Accounting to the Rescue? How ESG Is Seeping Into Financial Reporting

Environmental, social, and governance (ESG) investing is no doubt gaining in popularity. However, with that popularity spike comes a degree of accountability, which is causing ESG data to make its way into financial reporting.

Per a Journal of Accountancy article, this will be a prevailing trend, as the ESG space continues to see exponential growth. It’s a solid step forward for ESG, and the impact of financial reporting will make itself known in companies of all sizes.

“Companies that haven’t begun thinking about sustainability reporting and how ESG topics will impact them should start doing so, regardless of their size,” said Corinne Dougherty, CPA, a partner at KPMG who also is part of the AICPA Sustainability Assurance and Advisory Task Force. “They should factor ESG topics into their strategic plans and core business activities. They need to understand why ESG topics matter to their long-term performance.”

The article mentioned that while companies have started to churn out ESG reports, they’re typically ones that are isolated from financial reports. As a result, it can be difficult to see how ESG metrics are impacting the bottom line.

The Securities and Exchange Commission (SEC) has recently been looking to add more accountability measures to its programming. In a recent move, the SEC recently appointed Satyam Khanna as a senior policy adviser to address climate and ESG issues. Per the SEC, Khanna’s role will include advancing “related new initiatives across its offices and divisions” with regard to ESG.

What Are Accounting Organizations Doing?

In order to facilitate this integration of ESG and financial reporting, accounting trade organizations are looking to re-evaluate and re-tool the accounting process. The Journal of Accountancy article noted that the “IFRS Foundation Trustees also are considering creating a board to create a set of sustainability accounting standards that could be applied worldwide in a uniform fashion.”

“These developments are likely to create additional opportunities for CPAs to provide assurance on the ESG information reported by companies,” the article said.

This is a solid step forward for ESG.

“This is a very big development. Our members expect the need for ESG-related assurance services to increase significantly over the next three years,” said Desiré Carroll, CPA, an AICPA senior technical manager and the staff liaison to the Sustainability Assurance and Advisory Task Force.

For more news and information, visit the Smart Beta Channel.