Leveraging global developments in ESG reporting to innovate your practice
In November 2021, The International Federation of Accountants (IFAC) released a guide titled The Opportunity for Practitioners, promoting the value of capturing and reporting sustainability information in the SME sector. Global developments in Environmental, Social and Governance (ESG) Reporting are moving quickly.
The progress thus far is headlined by the announcement of the International Sustainability Standards Board (ISSB) by the IFRS Foundation at COP 26. However, as these developments primarily target external disclosures to aid investor decision-making, the benefits of adoption within small businesses are often left unspoken. While ESG matters were formally viewed as going above and beyond, the rapidly changing regulatory environment and shifting consumer expectations present a genuine threat to all organisations of being left behind. Thus, this article will summarise some discussion points from IFAC’s publication, as well as recommend other ways that sustainability can drive innovation within small-to-medium practices (SMPs).
Creating value through better quality information and Integrated Thinking
According to IFAC, integrating sustainability within organisational strategy and an enhanced awareness of risks, such as climate change and biodiversity loss, lead SMEs to make better-informed decisions. Although the ISSB presents some uncertainty to future external reporting requirements, processes such as Integrated Thinking remain relevant for all organisations to obtain higher quality information and make better decisions. Integrated Thinking is developed through the continued consideration of the interdependencies between an organisation’s various capitals (financial, manufactured, natural, human, social and relationship, and intellectual) and how this influences the creation, maintenance, and erosion of value over the short, medium, and long term. Integrated Thinking is an innovative approach to operations, consisting of increased flexibility and the breaking down of silos. This holistic approach to operations aims to improve the flow of information throughout an organisation, minimising duplication and other inefficiencies.
Unlike Integrated Thinking, SMEs and SMPs alike are perhaps more sceptical of the case for capturing environmental information, viewing it as an unnecessary consumption of time and money. However, IFAC reports that for many SMEs, the potential benefits of environmental information include improved financial performance and avoided costs that would have been incurred in dealing with the future outcomes of unassessed environmental risks. Some clients may be directly exposed to environmental risks if their operations are dependent on water supply, the growth of crops, the availability of scarce resources and so forth. If there are no direct and obvious risks in the client’s manufacturing or service provision, it is almost certain that somewhere in their supply chain, there is an environmental risk at play. Identifying, measuring, monitoring, and accounting for these risks may at first seem unnecessary, although it is a critical activity to assess the continued viability of organisations of all sizes.
The opportunity to innovate your services
With appropriate knowledge of sustainability, the ethics, skills, and judgement of qualified accountants perfectly position them to integrate ESG advisory services within their offerings. While financial information is the comfort zone for most, non-financial information is not a novel concept to accountants. In particular, it is the ability to combine financial and non-financial metrics to assess and forecast performance that is highly valuable. It is just the same with sustainability information, as measures such as waste produced, energy consumption, and employee satisfaction ratings can be linked back and compared with financial indicators and individual revenue or expense account variances.
To begin or continue your acquirement of knowledge in this space, the Task force on Climate-related Financial Disclosures (TCFD) offer free modules on their online knowledge hub, taking you on a deep dive into the framework. The TCFD is the basis for the ISSB’s first standards, focusing on the theme of climate disclosures. Therefore, becoming familiar with the four core elements and eleven overall disclosures while they remain voluntary across the board in Australia presents an opportunity for your practice to be considered early adopters.
SDGs and Strategy
While the Sustainable Development Goals (SDGs) are a global initiative focused on leaving nobody behind, their recognisability and scope make them compatible with organisational strategy. SMPs can encourage clients to become familiar with the SDGs and use relevant goals to measure strategic performance. The accountant may wish to design their own metrics to serve as performance measures. However, the existing targets attached to the goals and tools such as SDG Action Manager provide a strong foundation for their implementation.
Knowing your clientele
With so many options to start your ESG services, the best place to start is to assess your current and desired clientele. For example, resource-intensive clients, such as a soap factory, could benefit from implementing circular economics principles to reduce wastage and maximise value. By contrast, a local micro-brewery would perhaps benefit more from disclosing climate risks posed by the increased threat of drought, causing potential water and barley shortages.
As the tide continues to shift, it is as clear as ever that the costs of inaction exceed the costs of action. Businesses of all sizes will be subject to increasing regulation and pressure across ESG performance, creating an unmissable opportunity for small practitioners to innovate and capitalise on this cultural change.