Creating long-term value through ESG

Dr Rodney Irwin explains how Chartered Accountants can fulfil their professional duties by strengthening company value through environmental, social and governance criteria.

The COVID-19 pandemic has its origins in nature, and through poor biosecurity, it made its way into the human population. Everyone has been impacted to some degree, but how many have considered the pandemic an issue of sustainable development and, perhaps, only the tip of an iceberg

Sustainability is sometimes seen as a cost, but this is not the case. A report by the Business & Sustainable Development Commission estimates that at least $12 trillion in business opportunities would come with the realisation of the United Nations’ Sustainable Development Goals (UN SDGs) by 2030. So, it is not hard to understand why many companies are setting ambitious strategies and targets to reap the benefits. Examples include PepsiCo pledging net-zero emissions by 2040, Stora Enso issuing a €500 million green bond, and Unilever building its successful strategy around making sustainable living commonplace. Companies are increasingly shifting towards more sustainable strategies and stakeholder capitalism by moving away from short-term shareholder primacy.

Financial and accounting systems influence decision-making, the assessment of corporate performance, and the value attributed to it. Therefore, financial and accounting systems play an important role in helping management and others evaluate a company’s ability to identify and manage environmental, social and governance (ESG) risks and create sustainable value over time.

As accountants, we are expert in financial capital, management information, and accounting standards. But I would strongly argue that the stocks and flows, impacts and dependencies of other forms of capital are equally – if not even more – important in the 21st century to understanding value creation.

I argue that we are not accounting for sustainability, value, equity and, ultimately, survival. Sure, we might be compliant with the letter of the existing rules as professionals, but we have a duty to act in the public interest, and I feel that today, we are failing in this fundamental duty.

With that in mind, what can we do in our day-to-day lives to fulfil our professional duties?

Keep abreast of the ever-changing landscape

2020 marked the five-year anniversary of the Paris Agreement and UN SDGs, and the three-year anniversary of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These are fuelling many governments to set out expectations for companies to adopt accounting, financial and reporting approaches designed to support the transition to a more sustainable future. For example, the EU’s non-financial reporting directive (NFRD) update is planned to be adopted by the European Commission in Q1 2021. In a significant move, Canada, New Zealand and the UK are looking to make climate disclosure mandatory for large companies and financial institutions.

Work is also underway to harmonise the so-called non-financial reporting landscape: the big voluntary standard makers announced their intention to work together; the World Economic Forum launched streamlined ESG indicators; and the IFRS and IOSCO expressed strong interest in taking a role in sustainability. Chartered Accountants must stay ahead of the curve to ensure that compliance does not create a burden, but unlocks insights into the company’s ability to create value for all stakeholders.

This article was first published by Chartered Accountants Ireland. You can visit the original page here.