This piece was contributed by Dr. Kevin Hale and Dr. Steven Kaszak, Assistant Professors of Accounting within CSB.
To many the term ESG reporting is a foreign concept that holds little significance to their every day lives. But should the business world be paying more attention to ESG reporting data? To break it down, ESG reporting stands for environmental, social and governance reporting. Traditionally ESG reporting allows companies to identify and manage risk and opportunities related to their environmental and social impact. This allows firms to build trust with stakeholders and hopefully draw in long-term investors. While an organization may create a corporate culture that empowers its employees to engage in socially responsible behaviors, it publishes an ESG report to communicate its performance to interested parties and to increase transparency.
The ESG information reported is dependent upon different organizational factors such as the company’s industry, size, and location. For example, Live Oak Bank’s 2021 ESG report includes information regarding:
- The amount of loans dedicated to renewable energy projects and CO2 emission saved.
- Their partnerships with six Wilmington-based diversity, equity, and inclusion programs. This includes their loan volume dedicated to underrepresented communities.
- The diversity of backgrounds for their Board of Directors.
In today’s world, where the public’s interest in companies’ commitments to the environment and equitable work practices is rapidly growing, ESG reporting may very well be moving from a voluntary practice to a required report.
Other traditional financial reports for United States-based organization are mandatory and subject to strict regulatory scrutiny, reporting standards, and third-party attestation. With several new SEC ESG disclosure requirements expected to be finalized in 2023, the voluntary nature of corporate ESG reporting is likely to come to an end in the not-too-distant future. For example, one SEC proposal would require public companies to include certain climate-related disclosures such as information about their greenhouse gas emissions.
As these mandated ESG metrics would be included in a company’s financial statements, they would be subject to an audit by an independent registered public accounting firm. Such an evolution in reporting requirements has led accounting firms to invest heavily in the development of their own ESG attestation methodologies. Companies are also competing over a scare talent pool of individuals with backgrounds in both accounting and ESG issues. Some firms have begun to pull current staff from all financial service engagements to train these staff members in ESG assurance to become ESG specialists.
Historically ESG data is used to highlight potential risks for a company; however, with this shift in ESG reporting research has shown that a corporate commitment to ESG initiatives leads to a plethora of positive firm outcomes. Literature has also documented ESG performance to influence firm decision-making. For example, firms engaging in ESG activities are less likely to engage in tax avoidance. Likewise, there have been numerous accounts of the ESG “halo effect” – a strong company commitment to ESG practices leads to greater perceptions of the company.
In essence, while ESG reporting is often perceived to be risk-focused, perhaps equal consideration should be afforded to the opportunities in this changing landscape.