5 compelling reasons the accounting profession must address sustainability

The significant shift from shareholder returns to stakeholder capitalism has brought sustainability and ESG management into every public or large private company boardroom. The strong linkages between an entity's sustainability management and financial performance elevate sustainability and ESG as core practice areas for accountants. Sustainability and ESG competencies are where the profession can take a lead: for preparers, including those reporting internally as finance business partners, and externally to shareholders and stakeholders; those managing business performance; and for auditors, verifying financially-material sustainability information.

There are five compelling reasons for the accounting and finance profession to address sustainability and ESG:

1. Sustainability and ESG management go beyond reporting.

The accounting and finance profession should stay abreast of sustainability and ESG. The connection between managing sustainability and financial performance is especially important for access to capital from global ESG investors. It has also become clear that managing sustainability deepens an understanding of the business operations of an enterprise and provides insights into the company’s performance. It is natural that CPAs and CGMAs are best positioned within an organization to manage and report sustainability performance with integrity, professional skepticism, accuracy, consistency, and faithful representation. Moreover, the fact that there is an interplay between sustainability issues and material financial performance should catalyze accountants to take an active part in sustainability management and not treat it only as a reporting requirement.

2. Sustainability and ESG performance impact enterprise value and the business model.

An organization's ability to create enterprise value over time depends on various capitals and stakeholder relationships. A resource extractives company, for example, may deplete the natural capital on which its business model depends; however, if it manages other capitals, such as its relationship with the communities hosting its operations, it may see increased employee morale, loyalty, and brand reputation – all factoring into its ability to create overall value. The raison d’être of any organization or enterprise is that it creates value for its customers through its products and services. Sustainability and ESG factors also have major implications on an organization’s business model and will force enterprises to rethink their strategy and operations. This has significant implications for an organization’s risk profile and risk management.

3. Sustainability and ESG regulations and standards are as important as accounting standards.

The creation of new standards for reporting financially-material sustainability information has gathered rapid momentum in recent years, including the SEC’s proposed rule for climate reporting, the International Sustainability Standards Board (ISSB) of the IFRS Foundation, and the EU’s Corporate Sustainability Reporting (CSR) Directive. The SEC is expected to announce its decision on its proposed climate reporting rule shortly, which would require listed companies to report on climate risks as well as greenhouse gas emissions, including Scopes 1, 2, and 3 carbon emissions. IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures), which will be published by the end of June 2023, have an effective date of Jan. 1, 2024. The European Sustainability Reporting Standards (ESRS) are also effective from Jan. 1, 2024, for all companies currently reporting under the Non-financial Reporting Directive, with a year’s grace for smaller companies that also must report against these standards, including an estimated 50,000 companies in the EU and 2,500 U.S. companies. The direction of travel is clear in terms of the breadth of information companies will now have to report, and this has significant implications on the systems and processes by which such information is collected, collated, and communicated, including on the underlying enterprise resource planning system, data controls, risk management, and materiality considerations, among others. It is also clear that audit committee chairs have increased oversight of this data, which elevates the purview of sustainability and ESG performance to the board.

4. Management and reporting of sustainability and ESG considerations require new professional competencies.

Accounting for the impact of issues such as climate risk, biodiversity, human rights, and social capital on an organization’s business model requires new competencies among finance professionals. For example, an accountant working in a food-producing company may need to develop an understanding of the impact of climate risk and biodiversity loss on projected earnings; and communicate internally and externally how this may impact the viability of the entity’s business model. Understanding how these types of issues also drive intangible value beyond the P&L and the balance sheet provides rich insights into the market value of an organization. These new competencies are essential in order to interpret, provide insights, and create impact through sustainability performance, and take a leadership position by translating the business implications of sustainability and ESG. The emergence of job titles such as the sustainability chief financial officer or the sustainability financial controller is a sign of changing times and creates new career pathways for accounting and finance professionals.

5. Accounting and finance professionals have a once-in-a-lifetime opportunity to redefine the process of value creation and prosperity.

With their professional training and experience, accountants are best situated to lead the integration of sustainability into enterprise strategy and operations and support the transformation of business models. They will also lead the process for delivering high-quality internal and external reporting that will position them as the architects of long-term value creation and sustainable prosperity. This will be achieved by accountants, having acknowledged the fact that they need to acquire new sustainability skills and expand their accountancy competencies, investing the time and energy to do so. The accountancy profession has a long and successful history of embracing change, and we have no doubt that it will rise to the challenge — and the opportunity — of sustainability and ESG.

Recognizing the importance of building and demonstrating capability in the emerging field of sustainability and ESG, AICPA & CIMA offer an array of resources, including reports, webcasts, conferences, and three new learning courses to help accelerate CPAs' and CGMA designation holders’ expertise in sustainability and ESG.