Sound accounting can counter growing skepticism on corporate ESG

E​​​​​​​nvironmental, social and governance (ESG) issues are increasingly influencing how business is conducted globally. According to GlobalData's ESG framework, environmental concerns include climate change, pollution, biodiversity, and natural resources. Social factors range from human rights and diversity to community impact, health, and safety, while corporate governance involves corporate structure, risk management, corruption and bribery, and ethics. These ESG themes are increasingly influencing business conduct in all sectors. 

The last two years have been a stark reminder of why ESG needs to be taken seriously. Numerous CEOs and boardrooms have come under financial, legal, and public pressure for failing to address key ESG issues properly. This trend will continue as stakeholders – including investors, regulators, suppliers, customers, and clients – demand greater transparency and action on a full spectrum of ESG issues.  

Every quarter GlobalData Strategic Intelligence conducts ESG sentiment polls across GlobalData's network of 28 B2B websites, which attracted 10 million unique visitors in Q2 2024. This latest sentiment analysis showed heightened skepticism towards corporate ESG initiatives, with many participants viewing them as superficial greenwashing attempts. The majority of respondents - 53% - agreed with the statement “For most companies, ESG is just a marketing exercise.” This proportion has increased significantly since Q1 2021.

With the influx of mandatory sustainability reporting requirements, accountants will have to get to grips with an array of ESG-related terminology and concepts. Sustainability reporting is becoming integrated into financial reporting, so accountants must ensure that sustainability data is as robust as its financial equivalent and that proper paper trails are maintained. Sustainability reporting was often conducted by marketing departments. It is now being taken over by finance departments that must ensure reporting stands up to auditor scrutiny.  

Reporting standards can be a major challenge due to the number of ESG-related standards and legislation. To illustrate how overly complicated this alphabet soup has now become, it now includes the Greenhouse Gas (GHG) Protocol, the standards of the International Sustainability Standards Board (ISSB), ISSB S1 and S2, the EU's Corporate Sustainability Reporting Directive (CSRD), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the EU’s Green Taxonomy, the EU’s Sustainable Finance Disclosure Regulation (SFRD), the UK’s Streamlined Energy and Carbon Reporting policy (SECR), the CDP (formerly the Carbon Disclosure Project), the Science-based Targets Initiative (SBTi), the Sustainability Accounting Standards Boards (SASB), and many others.  

Accountants must become familiar with these standards and rules and know to which companies and jurisdictions they apply. Some will become as familiar to accountants as UK GAAP or IFRS. Finance departments, more broadly, need to take over and keep tight control of sustainability reporting. Misleading reporting can lead to accusations of greenwashing, leading to fines. 

The largest challenge within sustainability reporting will be accurate Scope 3 emissions reporting. Scope 3 refers to emissions released by a company's entire value chain. The largest components of this for most companies are usually emissions from purchased goods and services, which are emissions suppliers generate, and from the use of sold products, which are emissions customers generate when they use a product or service. Many sustainability reporting regimes now require companies to disclose these Scope 3 emissions. Currently, most companies rely on standardised estimates but, over time, companies will seek more precise information from their suppliers and clients. This is so that they can track whether emissions are going up or down over time from individual suppliers, which is impossible when using standardised estimates. Accountants will be tasked with assembling and scrutinising this data and will likely need more advanced tools and technologies to allow data sharing over supply chains.  

Accountants need to be ready, if they are not already, for a new era of ESG where finance departments play a central role in corporate sustainability strategies. 

Aoife McGurk is an associate analyst at GlobalData Thematic focusing on sustainability and the impact of emerging technologies on agribusiness.