Sustainability Reporting: A Modern Finance Imperative

ESG reporting is rapidly becoming a key focus area for finance teams around the world. ESG stands for “environmental, social, and governance.” It’s a set of standards through which companies can report metrics that indicate how well their activities align with issues of environmental stewardship and social issues.

In late 2021, the International Accounting Standards Board (IASB) announced the creation of a new ESG reporting standard. In May of 2022, the US-based Financial Accounting Standards Board (FASB) also voted to add ESG reporting to its agenda.

Although sustainability reporting is ostensibly voluntary, it is required for participation in many of the programs that award environmental credits to companies whose activities align with environmental responsibility. Such programs include cap and trade and baseline allowance programs, as well as renewable energy credits and certificates, renewable identification numbers, and carbon offset credits.

ESG reporting will likely become far more important in the near future; for practical purposes, it could soon be a necessity for most organizations. These recent decisions from IASB and FASB represent a significant shift in financial reporting, and they validate the assertion that sustainability reporting is here to stay.

What Is ESG Reporting?

Similar to financial reporting (and very closely related), ESG reporting is intended to summarize many of the qualitative and quantitative impacts that a company has over the three sectors of environment, social responsibility, and governance.

ESG reporting is important because it helps organizations to track and communicate their performance in areas that many stakeholders find increasingly important. Large institutional investors have stated their intentions to use this information in their asset allocation decisions. Firms that can demonstrate favorable ESG metrics will be more likely to receive funding. A number of large companies have indicated that ESG reporting will eventually factor into their purchasing decisions.

Consumers also want to know that the companies with whom they do business are performing well with respect to environmental stewardship and social responsibility. As a result, sustainability reporting has gained visibility among the public at large. For many companies, ESG reporting makes for better public relations.

So what exactly is meant by environmental, social, and governance scores? Let’s look at each of these in turn:

Environmental metrics focus on the use of natural resources, including the proportion of fossil fuels versus renewable energy sources. Carbon emissions, waste management, and biodiversity impact are also important factors in the “E” element of ESG.

Social scores focus on the societal impact that a company has on the broader community. Companies that offer good wages and working conditions, contribute to social programs, and enforce good labor standards as part of their sourcing practices will achieve higher scores in the “S” factor of ESG.

Governance involves an organization’s internal controls, practices, and processes with respect to legal and regulatory compliance. Companies that exhibit accuracy and transparency in their accounting methodologies, for example, and are careful to observe privacy and security standards will do well on the “G” score in ESG.

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Why Is ESG Reporting So Important?

Currently, ESG reporting is mostly a voluntary undertaking. It is rapidly gaining momentum, however. According to a 2021 report issued by the Governance and Accountability Institute, 92% of S&P 500 companies already provide sustainability reporting of one kind or another. Combine that with the recent stamp of approval from FASB and last year’s formation of a special working group by IASB, and it’s clear that momentum is building for ESG to become a standard element of corporate disclosures alongside traditional financial reporting.

Alongside voluntary ESG reporting, we see sustainability reporting being mandated in some parts of the world. Formal requirements are beginning to emerge, as the Paris Climate Accords codified the concept of sustainability reporting as a means of providing greater transparency and accountability into the impact of human activities on the environment.

The European Commission has proposed a Corporate Sustainability Reporting Directive (CSRD) that could come into force in 2024. It would require all large European companies and all publicly listed companies to routinely provide reports on their sustainability metrics.

Don’t Wait to Get Started With Sustainability Reporting

Although the ESG standards are still a work in progress, companies should begin to put systems in place to provide sustainability reports. This is a good practice for several reasons. First, it will prepare finance teams for a situation that many see as inevitable. Most experts agree that it’s simply a matter of time before some form of ESG reporting becomes mandatory. Companies that begin the process now will be well-prepared to comply with those requirements when the time comes.

The second reason to consider voluntary sustainability reporting is that it will prompt people throughout your organization to think about the impact they are having on the world. There is an old saying that “you get what you measure.” When you report on energy usage, for example, and especially if you make that information widely available to employees, then it’s likely that your energy usage will go down. As people see the impact that small actions have on the world, they may be motivated to change their behavior.

Finally, sustainability reporting communicates to your customers, employees, and other stakeholders that your company cares about the world we live in and wants to do its part to make it better.

IDL Financial Performance Management (FPM) from insightsoftware offers a powerful solution for companies that understand the value of information and want flexibility in collecting and delivering meaningful metrics to their stakeholders.

More than just a financial reporting platform, IDL FPM is ideally suited for companies that want to get started with sustainability reporting and ESG reporting. It’s a flexible and robust platform, designed to make access to information fast, fully automated, and highly flexible. The IDL Designer is built for operational planning, reporting, and analytics, giving end users a wide range of capabilities, all in a single platform that can combine financial reporting with environmental, social, and governance metrics.

IDL helps you to increase the accuracy of your reports, reduce risk, and collaborate more effectively, giving you a single source of truth that integrates data from existing systems for fast, automated planning, financial consolidation, disclosure, reporting, and analysis in group enterprises.

To learn more about IDL, contact us for a free, no-obligation demo.

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The post Sustainability Reporting: A Modern Finance Imperative appeared first on insightsoftware.

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