The Rise of Environmental, Social and Governance Reporting by Public Companies by Brent Leslie, CPA
Posted on August 11, 2020
by
Brent Leslie
Environmental sustainability, social responsibility, and corporate governance (ESG) are becoming more than mere buzzwords companies use in their marketing materials. Increasingly, consumers and businesses are basing their investment and purchasing decisions on the specific actions companies take (or fail to take) as socially responsible corporate citizens. It is no longer sufficient for businesses to make profits and have written policies extolling their values and positions on a growing list of global issues. Rather, today’s stakeholders demand assurances that companies are following through on their commitments to contribute to society through well-thought-out ESG strategies.
Companies are used to operating in highly regulated environments in which they must meet specific safety standards and timely financial disclosures. However, the explosion of social media has given way to a higher level of social consciousness, self-expression and transparency that opens these businesses to even greater public scrutiny and the risk of losing consumer’s hearts, minds and spending dollars. Consumers and employees want to know more about what these brands stand for and how these companies are impacting issues that are important to them, including those relating to the environment, diversity and equality, education and giving back to the community. After all, these issues can be considered risks that can ultimately impact a company’s ongoing operations, financial performance and shareholder value.
While there is no formal regulatory policy requiring businesses to report their ESG practices beyond industry-specific regulations, it behooves business to find appropriate and reliable measures to demonstrate their awareness and activism on behalf of these environmental, social and governance issues. In many instances, businesses seeking national or international recognition for their efforts will be required by the sponsoring agency to provide professional assurances from an independent auditor that their claims are true and valid.
The Attestation and Review Process
The performance of an ESG examination or review by an independent auditor is a form of due diligence. The information a company reports must be reliable and verifiable to maintain the trust of consumers and investors and to protect the integrity of company management reporting ESG information. Third-party assurances by an audit firm that documents the processes and controls a company uses to gather the information, tests the validity of that evidence and reviews the reporting process will enhance the perceived value by third-party users and assist the company in generating long-term shareholder value.
Environmental Factors
Has the business addressed its impact on climate change and how climate change may affect its future operations? What is the business doing to reduce its carbon footprint? How is it preserving natural resources and minimizing risks of damage to the environment?
Social Factors
How diverse is the company’s management team and board of directors? Does the business pay fair and competitive wages regardless of race or gender? What is it doing to maintain a safe work environment and keep workers physically and mentally healthy? Does it provide equal opportunities for workers to improve their skills and advance within the organization? What is it doing to support the local communities where it operates?
Governance
Is the company responsive to stakeholders and their evolving needs? How does it manage risks and opportunities? Does it have policies in place to prevent fraud and corruption? Does the company voluntarily make disclosures about internal and external risk? How does it measure and demonstrate its commitment to ethical business practices?
The Role of Auditors
Just as businesses rely on professionals to audit their financial statements, they should rely on independent and unbiased third parties to provide stakeholders with assurances that their claims relating to ESG issues are true and accurate. To help build a satisfactory level of trust and credibility among consumers, business partners and their own employees, companies should consider engaging independent professional auditors whose work follows the review, audit and attestation standards set by the American Institute of CPAS (AICPA). These professionals have the experience working within an orderly and well-defined framework to gather relevant information, evaluate policies against systems and processes, and provide easy-to-understand reports that attest to the validity of management’s assertions. Moreover, they have the knowledge and ability to customize reviews and attestations based on a combination of existing standards, including those established by the U.S. Sustainability Accounting Standards Board (SASB) and the European Global Reporting Initiative (GRI).
About the Author: Brent Leslie, CPA, is a director of Audit and Attest Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with domestic and international clients on a broad range of transactions and helps them navigate a complex accounting compliance environment. He can be reached at the firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbcpa.com.
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