Nobody could have predicted how important ‘ESG’ (Environmental, Social and Governance) would become when the term was first used in a United Nations Report in 2004. Over 20 years later, it is still high on the agenda for almost every business in the UK and has become a cornerstone of business practice.
Because of this, ESG reporting is no longer a niche requirement, and ESG metrics are becoming a core part of financial reporting. There is a growing demand for accountants who can measure, report on and audit sustainability initiatives, so it’s a specialism that accountancy groups can’t afford not to have.
From carbon emissions and waste management to board diversity and corporate culture, there is no escaping the need for us as accountancy professionals to deepen our expertise in the field of ESG.
In the UK currently, only certain large companies and LLPs are required by law to make climate-related financial disclosures. This specifically applies to public listed companies and those earning above £500 million with over 500 employees.
However, the focus on ESG shows no sign of abating, so it’s likely that smaller companies will also fall under these reporting requirements in the future. And even now, these businesses can still benefit from voluntary ESG reporting to identify areas for improvement and provide transparency for stakeholders.
Large UK companies, LLPs and all quoted companies must adhere to the Streamlined Energy and Carbon Reporting (SECR) regulations. As part of this, they have to disclose annual energy usage, Scope 1 and 2 greenhouse gas emissions and efficiency actions in their Directors’ Report.
The government has also recently published finalised versions of the UK Sustainability Reporting Standards (UK SRS). Known as UK SRS S1 and UK SRS S2, these standards have initially been published for voluntary use, with the government and Financial Conduct Authority (FCA) now considering whether to introduce requirements for certain UK entities to report against the standards.
Accountants need to be aware of the particulars of UK SRS S1 and UK SRS S2, as it’s likely that, one day, our clients will have to adhere to these, and they’ll need our help in doing so.
Accountancy professionals already have the basic skills needed to support clients with ESG financial reporting - gathering data, analysing data and producing reports is our bread and butter, but we can take this one step further by understanding the fundamentals of ESG reporting and what to include.
From an environmental perspective, reports should cover things like carbon emissions, waste management, biodiversity, energy use and renewables; from a social perspective, consider elements such as community initiatives, corporate culture, human rights and modern slavery; and governance should cover executive pay, board diversity, business ethics and anti-corruption.
When it comes to building and structuring an ESG financial report, there are a number of frameworks and standards which can be combined to compile a comprehensive report. The most commonly used framework is the Task Force on Climate-Related Financial Disclosures (TCFD), which many large companies in the UK are required to follow, focusing on governance, strategy, risk management, metrics and targets.
There are also a range of standards, with some of the common ones being the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) IFRS 1 and IFRS 2, and the Sustainability Accounting Standards Board (SASB). It’s important to note that certain standards are more applicable to particular industries or business types, so it’s beneficial to consider the relevant regulatory requirements and sector variances.
The principles of accountancy and ESG really do go hand in hand, because they both improve the cost-efficiency of a business. Whilst there’s no denying the wider importance of ESG in making a positive change to people and the planet, implementing ESG practices will also lead to cost savings and better performance for the wider business, with a recent study showing that many companies globally are leveraging ESG regulations to strengthen business performance.
It’s because of this that the accountancy profession is so well placed to support businesses with their ESG reporting. Risk management, cost reduction and more strategic decision-making are all benefits of ESG reporting, which accountants consider on a daily basis when supporting our clients.
Accountants can help clients gather and compile expense data for carbon footprint calculations; generate reports and forecasts detailing their expenditure to eliminate less sustainable spending; track cash flow and advise on sustainable suppliers and investments; and advise on government schemes that subsidise green investments.
It all comes together as part of the process of assessing the impact of a business’ operations on its balance sheet and the planet.
Duncan & Toplis helps clients to implement ESG initiatives, anticipate changes in the regulatory landscape and integrate sustainability into their reporting. To find out more, contact us today.
