Most companies have some familiarity with environmental, social, and governance reports (ESGs). With over 90% of large corporations worldwide annually disclosing their ESG initiatives, it’s safe to say these reports have become not just common but often expected. Despite that, accountants who advise small and mid-sized businesses may find that their clients have significant knowledge gaps not only in what goes into an ESG report but also in how these sustainability reports may impact those businesses’ continued success as service providers within the supply chain of larger corporations.
Accountants can help bridge that gap by consulting on the regulatory importance of ESG reports to the large companies that their clients serve. They can also help their small and mid-sized business clients perform adequate risk assessments related to consequential ESG metrics. As business advisors, accountants can also help their clients implement an ESG strategy that will help them strongly align with their larger clients and also make them more attractive providers within their niche markets.
Accountants play increasingly expanded roles with their clients. In today's market, accountants are also expected to be trusted business advisors, especially in matters that could impact revenue and profitability.
Does this mean accountants must also be experts on all aspects of ESG? Not quite. There are consulting firms, like Motive, that specialize in helping companies create detailed sustainability reports as needed. As an accountant, you likely won’t be going that far.
However, you should familiarize yourself with the broad categories associated with ESG reports. That means understanding what each term really means, and what kind of metrics and data frameworks are required to report within those categories.
It’s also good for accountants to be familiar with how these different metrics could potentially might impact their clients businesses, and what aspects of a typical ESG report make the most sense for them to respond to.
Helping clients be proactive in relation to their ESG risk assessments is the single most important role accountants can fill for their clients. Because the role and expectations of ESG are expanding beyond enterprise businesses, smaller and mid-sized companies that may never have considered the importance of ESG must now think proactively about what it means for their ability to provide services as a vendor of choice for larger organizations that with strict demands from shareholders, investors, and private equity firms.
ESG reports are, by their nature, designed for key stakeholders in those businesses. As such, these reports tend to be long, detailed, highly technical, and data-driven.
This is why organizations like Investors Business Daily annually score and rank companies on their approach to ESG. Investors who put money into public sector businesses examine ESG reports with a fine-toothed comb to determine if that business maintains practices that will continue to make it profitable. Those practices include whether that company’s supply chain (and the vendors it uses within that supply chain) aligns with a profit-driven or values-driven mission or adds unnecessary risk to profit, growth, or values alignment.
All of that being true, there are actions accountants can take to be effective partners to their small and mid-sized clients as it relates to ESG reports:
Learn how to talk to clients about different ESG factors in a way that leads to actionable decisions
Help clients understand which ESG data matter most for their business
Help clients with risk management as it relates to ESG needs for companies to which they provide services
Help clients avoid ineffective approaches to ESG, such as “greenwashing”
We’ll reiterate here: As an accountant, you don’t need to be the expert on ESG reporting. The extent of your ESG services should be on leading clients in the right direction as far their responses and responsibilities. This will be particularly important for your clients who are either vendors within a supply chain or for clients that find they need to generate ESG reports of their own.
There’s a common misconception that only large organizations are getting asked about ESG reports. However, you may find that even your smaller and mid-sized clients are being asked to respond, even if they’re not being asked to create them (although sometimes they may be getting asked to generate these reports, as well).
Just what size are we talking? Some companies with around 5 million dollars in revenue are still getting asked about their ESG journey and approach to sustainability! That includes climate-related risks such as decarbonization, their social impact, their employee development strategies, and even their data collection and management practices (some of which may require access and utilization of a customer data platform or CDP)
Generally speaking, most large organizations now have a sustainability strategy in place that’s either dictated by their shareholders or designed to attract and retain investors. Publicly traded companies and organizations that want to attract private equity must build trust. ESG reports are a comprehensive way to show that their all aspects of their business, including their vendors, align with the needs and practices of the organization.
As an accountant, your due diligence should involve helping your clients determine the risks associated with ESG from within their own client base and what they may need to change about their business to continue being seen or selected as a vendor of choice. If they provide services to larger, publicly traded corporations, there’s a high chance the way they run their own business may be impacted by the ESG needs of one or more of their customers.
Your clients may be tempted to treat ESG reporting as marketing material. While a good ESG report is certainly marketable, this is not the purpose of the report. When ESG reports lack scientific data and is all marketing material, it’s generally considered to be “greenwashing.” Your customers’ clients and potential investors will see right through this.
While greenwashing isn’t always malicious, it’s typically the result of companies producing reports hastily and haphazardly. It’s often better to produce no report than one that’s done poorly. If your clients aren’t ready, help them understand that. Then, point them in the right direction for a firm that can help them create the kind of datacentric report they need.
Environmental, social, and governance reports are important for businesses, whether they need to create them or whether they need to respond to them as a supplier. In either case, as an accountant, you can help your clients see the business value in ESG by educating yourself on this topic first and then helping your clients navigate that landscape themselves from a business perspective.
Want to learn more about ESG accounting? Check out these resources:
ESG CONSULTING: ENVIRONMENTAL, SOCIAL AND GOVERNANCE INITIATIVES
THE ROLE OF ACCOUNTANTS IN ADVISING ON ESG INITIATIVES
ESG CONSULTING: A TALE OF TWO MYTHS