The Business Case for ESG Repor ting

BY CAROLYN TANG KMET

Environmental, social, and governance—more commonly known as ESG—reporting is having a moment. As investors, employees, supply chain partners, and stakeholders of all stripes turn to ESG reporting to inform key business decisions, business leaders and their advisors are struggling to establish and prioritize ESG efforts. The challenge is that while ESG reporting becomes increasingly popular and valuable, the lack of formal regulations and standards stymies leaders looking to make meaningful changes to how they do business.

Part of the problem is that ESG reporting examines a wide variety of factors, both tangible and intangible. Put simply, ESG reporting is an examination of an entity’s involvement in environmental, social, and governance issues. Environmental factors could include an organization’s impact on climate change, natural resource scarcity, pollution, and waste. Social factors commonly explore an organization’s values and practices around issues such as labor and supply chain standards; diversity, equity, and inclusion efforts; and customer privacy. Governance factors often delve into issues like oversight and management structures, diversity within the board of directors, executive compensation, and crisis response. While some issues like diversity within the board may be easier to quantify, other factors like sustainable supply chain measures or the effectiveness of oversight aren’t immediately apparent in financial statements—yet the appeal and influence of these standards are undeniable.

“Investors, executives, and consumers increasingly understand that a company’s value is largely intangible and consists of more than just assets and products,” explains Marcy Twete, CEO and founder of ESG consultancy firm Marcy Twete Consulting. “How a company interacts with its stakeholders, community, and the planet is a value driver that directly impacts its bottom line.”

The Bottom Line for ESG

The COVID-19 pandemic is an active example of how ESG factors impact the bottom line. Organizations with solid lines of support for employees, nimble business operations that were able to pivot to serve rapidly changing needs, and adaptable strategies for successfully navigating uncertain times were more likely to survive—or even thrive—during the pandemic.

Mary Adams, founder of Boston-based Smarter Companies, believes that the pandemic’s impact on ESG investment activities proves that ESG is more than just a passing fad. “If it was a fad, then everyone would drop it in a crisis,” Adams explains. “What happened during the pandemic is that companies that had the trust and confidence of their employees and customers performed better through the disruption. We know there’s a link between ESG and a company’s performance. It may not be easy to pin down, but there’s definitely a connection.”

Even if we can’t see the impact of ESG on the bottom line, we can definitely see it in the flow of investment dollars. According to Moody’s Investors Service, investments in ESG products increased 140 percent in 2020. Similarly, Morningstar reported that ESG-rated funds took in $51.1 billion in new investments in the same year.

Chirag Shah is chairman of Simfoni, a company focused on leveraging spend analytics to help companies achieve supply chain sustainability. In July 2021, he successfully raised $15 million in Series B funding. “ESG goals are a moral and ethical necessity. As responsible corporate citizens, it’s our duty to take care of the future of our society,” he emphasizes.

Shah believes that product and technology innovations have progressed to the point where companies are able to achieve both ESG goals and business benefits. He says that raising the bar on ESG efforts not only mitigates risks but improves corporate performance.

“Focusing on ESG can reduce unnecessary costs,” Shah says. “Additionally, with social media enabling customers to have more of a collective voice, it’s evident that making responsible choices can result in higher brand value. Corporations that make a positive impact can increase their appeal to existing and potential customers and attract new market opportunities.”

Corinne Dougherty, audit partner with IMPACT, KPMG’s sustainability program, and a member of the AICPA Sustainability Assurance and Advisory Task Force, agrees that there are measurable business benefits: “Implementing an ESG strategy and reporting on progress will help companies unlock new value, build resilience, and drive profitable and measurable growth today and in the future,” she says.

Dougherty adds that ESG reporting further benefits the bottom line by helping business leaders understand and address emerging risks that threaten profitability; attracting a new investor base while meeting the ever-changing and increasingly stringent requirements of institutional investors; gaining access to capital; competing for top talent; and building a loyal customer base.

The Momentum Behind ESG

The motivation to implement ESG practices is driven by both external and internal factors. Externally, investors, customers, and regulators are calling for increasingly rigorous and sophisticated ESG reporting to help inform investment decisions and to hedge systemic risks in their portfolios.

“There’s no way you can hedge against climate change, right? You have to start advocating for a systemic solution,” Adams explains. “Additionally, during a time of great disruption, we often see exciting and innovative solutions, so that could be driving external interest in ESG efforts as well.”

According to a November 2020 report issued by the Forum for Sustainable and Responsible Investment, 33 percent of total U.S. assets under professional management are using sustainable investment strategies. By their count, those assets grew from $12 trillion at the start of 2018 to $17.1 trillion at the start of 2020—an increase of 42 percent.

But there are also internal pressures driving companies to implement ESG best practices. “In both public and private companies, employees are demanding better supply chains, carbon footprints, and labor practices, leading companies to prioritize their ESG efforts,” Adams explains.

Bryan English is the CFO of Elkay, a global manufacturer headquartered in Downers Grove, Ill. He says the momentum toward ESG practices goes further than the financial or branding concerns, with much of it driven by societal expectations and the innate need to “do the right thing.”

“Today’s consumers and workforce, who are really one and the same, expect companies to do right by their employees and their customers, to do good within their communities, to be good stewards of the planet, to be good corporate citizens, and to be a company with a purpose,” English says. “Because these expectations drive buying behaviors and affect whether you’re an employer who can attract top talent, they’re at the heart of why ESG is becoming such a critical focus area for companies today.”

The Regulatory Vacuum

Currently, ESG disclosure is a voluntary best practice, though the U.S. Securities and Exchange Commission (SEC) is signaling that more formal guidance may be coming soon. In March 2021, the SEC announced the creation of a climate and ESG task force in the Division of Enforcement that will develop initiatives to proactively identify ESG-related misconduct. Their initial focus will be identifying any material gaps or misstatements in climate risk disclosures. And in April 2021, the SEC’s Division of Examinations issued a risk alert, noting deficiencies and internal control weaknesses within investment funds that purported to be engaged in ESG investing. The seven-page alert included examples such as portfolio management practices that were “inconsistent with disclosures about ESG approaches,” controls that were “inadequate to maintain, monitor, and update clients’ ESG-related investing guidelines, mandates, and restrictions,” and proxy voting that “may have been inconsistent with advisors’ stated approaches.”

“Regulators have certainly increased their ESG scrutiny,” acknowledges Kristie Paskvan, CPA, MBA, board director of Smith Bucklin, NCCI, First Women’s Bank, and the United Way Metropolitan Chicago and an Illinois CPA Society member and Insight columnist. “In the United States, we expect rules will be implemented that require banks to account for the sustainability impact of their lending and investment policies. Therefore, all banks have this on their radar and are moving at various speeds to implement policies and procedures.”

Twete says there’s a natural tension between wanting to emphasize materiality and wanting to achieve standardization. “As readers of sustainability reports or ratings, we want to be able to easily compare Apple to Exxon, Macy’s to McDonalds, even though their business models and material issues are different,” she explains. “That kind of standardization is not only difficult, but it can also be a slippery slope. But while no system will be perfectly ‘one-size-fitsall,’ there’s hope for a more streamlined measurement framework for companies.”

English believes that we’re starting to see some standardization among ESG models that work best for businesses, though he’s still hesitant about the possibility of the level of standardization associated with traditional financial reports. “There are too many variances between businesses and their impact on consumers, society at large, the planet, their own people, and the communities where they do business. When you standardize a reporting model, you leave out room for all the nuance—the good, the bad, and the ugly—that’s at the heart of why consumers care about ESG reporting in the first place,” English says.

Starting Your ESG Journey

Even without across-the-board standardization, English believes ESG reporting should be undertaken because it’s a powerful way to express corporate social responsibility. “ESG reporting backs up storytelling with data and facts, which adds credibility and helps distinguish those who are doing the work and making a real difference,” he says.

While each company’s ESG journey is unique, the process of implementation is similar across all industries. Here are Dougherty’s four steps to start your own journey:

1. Develop an ESG strategy. Understand and anticipate stakeholder expectations by identifying issues and assessing gaps, risks, and opportunities to integrate ESG into your business strategy.

2. Operationalize the strategy. Embed strategy into operations by understanding the implications for the workforce, supply chain, operations, controls, technology, infrastructure, and governance and managing the controls around collecting and processing data to track progress.

3. Measure, report, and assure. Understand the different standards, frameworks, and metrics for reporting ESG data, develop capabilities to measure the ROI of ESG initiatives, and provide accurate and fit-for-purpose disclosures and reporting.

4. Transform with ESG. Growing with ESG in mind requires a new approach to transactions, strategies, and partnerships. All these events create risks and opportunities for ESG strategy. Understanding those implications and developing processes to evaluate them during the transaction life cycle can future-proof your ESG approach.

Twete suggests that an initial step toward ESG reporting might be to conduct a materiality study to understand the risks and impact of ESG issues within your own company. “Consider which issues have the potential to negatively or positively impact your business. What do your stakeholders expect of you? From there, you can assess these key material ESG issues with your existing risk management process,” she says.

She emphasizes that companies need to address ESG issues with the same rigor they apply to operational or financial risk—and remember that ESG cannot succeed in a silo. These efforts will reach across and transform every aspect of an organization.

With increased regulatory and social attention on ESG issues, now is the time to identify, prioritize, and act on ESG measures that can improve your organization’s reputation and resilience—while also making the world a noticeably better place.

The COVID-19 economy has been a wild ride, a roller coaster of recession and rebound in a compressed time period. But although reports suggest the economy is almost back to normal, there could be a big roadblock to full recovery: mass resignations.

A record number of people quit their jobs in April 2021, according to the U.S. Bureau of Labor Statistics. Almost 4 million employees turned in resignations—the highest level since the Bureau started tracking quits in December 2000, and research suggests that the wave of resignations will continue to build.

Data from Microsoft’s Work Trend Index and Prudential’s Pulse of the American Worker survey show that up to 40 percent of U.S. workers plan to quit their jobs, with some industries already feeling the effects. Hospitality and retail, two of the industries most affected by the pandemic, are struggling to return to pre-pandemic employment rates. In hospitality, the 5.4 percent quit rate is more than double the average across all other industries, and 42 percent of retail workers say they’re considering or planning to leave retail altogether.

The hospitality and retail industries illustrate a key demographic in the big quit: workers who are not shopping for higher pay in a similar position, but who are planning to opt-out of their industry entirely. And they’re not coming back: According to a survey from JobList, more than 50 percent of former hospitality workers say that no pay increase or incentive could lure them back to their old restaurant, bar, or hotel job.

But labor shortages are not limited to the lower end of the wage spectrum or hourly workers: According to data from Visier, managerial resignation rates also rose during the pandemic, especially in health care and high-tech industries. Mid-career workers, ages 30 to 45, are the most likely to walk away from current positions.

Businesses are desperate for employees, says Sheldon Schur, CEO at Brilliant, an award-winning consulting firm. “Hiring has been on the rise since the beginning of the year, with a bigger acceleration in the last three months,” he notes. “As an employer, you cannot hide your head in the sand and think that none of your workers are part of those 40 percent who plan to quit—because they are. You have to adapt to that and understand what it means.”

The Foremost Factors

According to Prudential’s research, two crucial issues are driving workers to quit: a lack of potential for career growth within their current company or industry and the dramatic mindset changes created by the pandemic. When workers were sent home, remote work took away the distractions, good and bad, of office environments, casting the actual daily work of positions in harsh relief. For many, the stark distillation of an entire career down to a few distinct tasks and skills brought a wave of clarity that instigated change. For those with jobs that don’t translate to remote positions—such as retail, hospitality, and other service-based positions—the perspective of time away from demanding, unstable, and often risky work made returning to those jobs unthinkable.

“There’s been a huge change in the cultural dynamic of what people are willing to do,” says Devin Wells, senior talent acquisition lead at the Georgia Nut Company. “More people are examining their work-life balance; more people want to work from home. The working atmosphere has changed, and companies and firms are going to have to change as well.”

A few additional factors come into play, such as the impact of higher unemployment benefits, the huge number of women leaving the workforce, and the ongoing health and safety concerns of returning to the workplace. There’s also an increasingly vocal contingent of workers demanding to work from home: A May 2021 survey for Bloomberg News found that 39 percent of respondents would consider quitting if their employers weren’t flexible about remote work—and that figure jumped to 49 percent among millennials and Gen Z.

“Basically, you have three categories of people: those who want to stay fully remote, those who want to return fully to the office, and those who want a hybrid work situation,” says Andrea Herran, founder and CEO of Focus HR Consulting. “How employers negotiate with all three of these groups will require a lot of flexibility and adaptability.”

And, of course, for many workers it’s likely that their decision was made from a unique combination of reasons. That’s exactly what makes it so difficult for employers to respond: While the big quit might be a mass event, each individual resignation is a risky personal decision.

What Workers Want

Given the wide variety of personal reasons driving these resignations, as well as the number of workers who flatly say they won’t return to their industry for any amount of money, employers will need to approach this challenge with creativity and open ears. Herran believes the future of the workplace is what she calls “personalized employment,” providing targeted incentives and greater flexibility to woo workers.

“Organizations that don’t adapt to more individualized employment situations will bear the brunt of this mass exodus,” Herran says. Schur agrees: “You have to stay close to the individuals. Do your frontline managers understand how each of their staff members lives and how they feel about the company and their personal goals in coming back to work?”

In the thick of pandemic shutdowns, companies and firms who quickly pivoted to remote work arrangements were the ones to thrive. In the post-pandemic world, an effective transition to personalized employment will play the same role.

To claim and keep the talent they need, leaders must focus on the issues most often cited by workers:

• Adequate compensation, including benefits.

• The need for flexibility in work hours and location, including options for remote work and/or a hybrid work schedule.

• Sensitivity to mental and physical health concerns, including burnout, exhaustion, and increased risk of exposure to COVID19 and its variants.

• Career growth opportunities and options for continuing education and training.

• An increased focus on quality of life, including adequate holiday time, and real help with childcare logistics.

• Good work conditions and company culture.

Of course, employers cannot meet every need or anticipate each unique situation. What they can do is focus on results. “When you’re paying people a salary, you’re not paying them for their time,” Herran says. “You’re paying for their expertise, their knowledge, and their ability to achieve a result.” If companies and firms focus on the results while offering more flexibility and creativity in how people achieve them, there’s room for unique solutions that meet individual needs while also attaining organizational goals.

Small businesses and businesses that rely on hourly and/or inperson employees face unique challenges in fending off the big quit as they often lack either the resources or the flexibility to meet worker demands. However, small businesses have the advantage of being able to provide flexibility and personalization faster than their larger counterparts—an advantage they need.

“Small businesses are now reporting that their biggest business problem is not finding new customers or making new sales, it’s finding employees,” says Derek Sasveld, senior investment strategist at BMO Global Asset Management.

For hourly workers and positions in which remote work is not an option, employers can focus on creating short-term incentives and improving the overall satisfaction of a given position. “We try to be as flexible as possible with scheduling, but there’s not much we can do in terms of flexibility from an hourly worker standpoint,” Wells says. “So, we’ve developed internal incentives for short-term goals and rolled out a plan to revamp our whole employee experience.”

The Brand of a Business

Employers expect job candidates to come in with a pitch for themselves as workers, but today’s employees expect the same from potential workplaces. “What’s your message? Why should people come in and join your company? Present your pitch on social media, on your website, on LinkedIn, and with your team,” Schur says.

Consistent branding will help get candidates in the door, while a good hiring strategy will get them on the payroll. “A hiring strategy should tell you what kind of people you’re looking to bring in while also ensuring that it’s a good place for them to work,” Herran says.

After all, bringing in the wrong people or promising a culture or benefits you can’t deliver will only lead to more resignations. “What the candidate sees during the interview process and what they see on day 30 or day 90 should all connect,” Schur says.

A strong hiring strategy also means moving quickly when you find the right candidate: When it’s a good fit, there’s no time to waste. “You can’t take 10 days to interview candidates,” Schur explains. “Our strategy internally is 48 hours from the first interview to making an offer. We know that if we wait, the best people are going to get another offer.”

CPAs can help their business clients understand and respond to the big quit by being a source of helpful and relevant information and identifying a financial path toward making necessary changes. After all, the financial risks of inadequate staffing and ongoing turnover can quickly outweigh the price tag of new incentives or workplace changes.

“There’s always something that can be done to improve on whatever perceived shortcomings exist,” Herran says. “You can always take a step in the right direction.”

Clients will need accurate numbers and excellent forecasting to build effective strategies, and they will need industry-specific advice and sound financial insights to identify and execute the right moves. “You cannot wait to make this a priority,” Schur says. “The most important thing I do every day is help bring the right talent on board.”

All in all, workers finally feeling able to ask for what they really want is a boon for companies and firms willing to make creative changes quickly. Employers who take worker demands seriously can develop a huge strategic advantage over those who dismiss the big quit as a trend and refuse to adapt. “It’s an unusual wrinkle that we’ve had this short, severe shock to the economy,” Sasveld says. “There’s much more uncertainty, but overall it’s still a pretty positive picture.”

Annie Mueller is an experienced Puerto Rico-based financial writer. She is a frequent contributor to various industry publications.