Sustainability Reporting on the Rise

BY THOMAS L ZELLER, PH D , CPA, DAVID R FAUST, AND RACHEL D PHAN

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 par tners alike are demanding both private and public companies par ticipate in and report on relevant sustainability and social efforts Two main factors seem to be driving the rise in sustainability repor ting

First, stakeholders, owners, and employees either willingly or due to generational changes and social pressures want to par ticipate in sustainability ef for ts Companies engaged then typically measure and repor t 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 oppor tunities fall outside the lens of traditional financial repor ting 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 oppor tunities think risks associated with scarce resources (like clean water or rare ear th materials), geopolitical issues, and labor shor tages Oppor tunities associated with labor practices, leadership styles, and technology also escape the traditional financial reporting lens These risks can become dire, and oppor tunities may be forgone, without the proper repor ting framework to identify and measure them Additionally, companies that do not repor t beyond their traditional financials will miss out on appealing to a growing class of socially responsible investors and consumers

Although the need for sustainability repor ting 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 dif ferent goals and to deal with the trade-of fs that they face,” writes

Julie Battilana, Joseph C Wilson Professor of Business Administration at Har vard Business School and Alan L Gleitsman Professor of Social Innovation at Harvard Kennedy School, for HBS Working 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 repor ting? The independent Sustainability Accounting Standards Board (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 repor ting standards cover 1 1 sectors for 79 industries Each industr y 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 of fers two resources to uncover the material topics and measures per tinent to a business’s sustainability ef for ts a downloadable standard for each respective industr y and an interactive SASB Materiality Map that identifies the relevant topics and accounting metrics for each dimension of the framework for a respective industr y 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

For tunately, there’s no need to recreate the wheel when it comes to sustainability repor ting; the SASB has done the heavy lif ting Accounting and finance professionals now just need to do their part by educating themselves and those they ser ve about how and why sustainability repor ting matters