ESG: Finding Opportunities Amid Uncertainty

BY NATALIE ROONEY

Investors’ attention to environmental, social, and governance (ESG) considerations continues to grow. COCPA members share how they’re helping clients prepare for the new opportuni ties while regulations are still in the works.

ESG reporting is an organization’s public disclosure of its environmental, social, and corporate governance data (ESG). The purpose of an ESG report is to ensure transparency into the organization’s ESG activities and measure its sustainability performance, allowing stakeholders such as investors and consumers to make better-informed decisions.

There are an increasing number of mandatory ESG regulations around the world. More are on the horizon, including here in the United States, where the Securities and Exchange Commission (SEC) says it will enact several new regulations before May, including disclosure requirements focused on climate risk.

Many of the proposed rules reflect the often-stated concern of SEC Chair Gary Gensler that publicly traded companies do not provide investors with enough information for determining the range and degree of risks to business operations. “Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation,” Gensler said in a statement.

ESG extends far beyond the “E,” although environmental issues typically spring to mind when the topic of ESG comes up:

The E in ESG, environmental criteria, includes the energy that your company takes in and the waste it discharges, the resources it needs, and the consequences for living beings as a result. E also encompasses carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment. “E” is where the SEC is currently focusing its regulatory efforts.

S, social criteria, addresses the relationships that your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion, and recognizes that every company operates within a broader, diverse society.

G, governance, is the internal system of practices, controls, and procedures that your company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders.

Helping Clients Find Opportunities

Jim Burton, CPA, ESG and sustainability partner for Grant Thornton (GT) in Denver and a member of the COCPA ESG Working Group, says when GT leaders were going through their business planning process for 2020, they noticed that ESG kept presenting itself.

“We decided it was time to approach ESG in a more organized fashion,” he says, explaining that for several years prior, the firm had been offering ad hoc ESG solutions and services in advisory, audit, and tax. Burton himself left his chief auditor role and moved to the ESG group in spring 2021. “It has been going nonstop ever since,” he says. “It has been a great opportunity to tie all of our skill sets together and look for common needs that relate to very common and historic business opportunities and challenges that haven’t been perceived through an ESG lens. Now we’re coordinating everything.”

Burton says clients are turning to the firm for insight and help with defining risks and strategies for approaching opportunities. “One of the things we have to help clients understand is that notwithstanding today’s emotional, political, or geographic attention, the vast majority of ESG issues are actually business problems they’ve already dealt with for years,” he says. “Changes in consumer demand, regulations, the supply chain – these are all challenges they’ve faced for a long time.”

The differences come in what Burton calls “the next evolution of concern and opportunity,” which is being driven by stakeholders, many of whom have become far more active and interested in an organization’s approach, considerations, and strategies around these topics. “We’re actively involved in trying to understand what they want to know about these matters so companies can make their own assessment with respect to what’s occurring. When you think about it through an investment lens, more corporate organizations have focused on improved revenue growth, creating value from an organizational perspective. Today, many of these issues in question are more indirect contributions to that traditional organizational value,” Burton says. “People talk about these as non-financial items, but they all manifest themselves in enterprise economic value at some point.”

One of the challenges of ESG reporting comes from changing the mindset from

Burton says when the firm is called in, they want to ask questions and develop an understanding of needs rather than going out and simply telling a client what they should be doing from an ESG perspective. “Clients need help deciphering and understanding what’s important to them. They want to know how to deal with expectations from stakeholders, investors, customers, and employees who continually ask questions about various elements of an organization’s operations.” He describes a strategy as stakeholders ask questions: “The first time, we’ll answer it. The second time, we start wondering if this is a trend. By the third time, it’s probably time to deal with it.”

Burton emphasizes that even when companies are under pressure from stakeholders to address various ESG issues, it’s important to consider how an action impacts an organization’s strategy.

Anticipating Regulations

Greg Pfahl, CPA, partner in the Moss Adams Assurance Services division in Denver, works closely with the separate group providing ESG services. As an audit partner, he says he can see how significantly ESG impacts all clients. The SEC’s proposed rule to publicly held companies. Even private companies need to be paying attention to what the SEC is doing so they understand what information they may be asked to provide to their customers.”

Those conversations include discussions about what elements to measure, how to measure them, and how to report. “There are myriad standards. We’re helping them determine what applies to them, and then how to design and implement a process to move forward,” Pfahl says. Pfahl says organizations might also be contractually required to report ESG issues by a lender or a customer. “From a regulatory perspective, companies might not need to deal with ESG disclosures for themselves,” he says. “But the trickle down from the companies they sell to may push the requirement forward for them.”

Finding The Balance

What should a company’s leaders do when they can’t see the imminent business case for addressing ESG issues? This is where controversy can surround the issue, especially when stakeholders are applying pressure and potentially generating controversy in the press and via social media.

looking beyond the here and now and taking a longer-term view with groups who are used to taking a qualitative, financially motivated approach. “If I enter a purchase order for a lower product cost, I can see the impact immediately,” Burton explains. “But investing in different distribution channels or supplies, the benefit may come way down the road. ESG is a different element for entities to deal with. We’re using a different time horizon lens.” release in March 2022 has public companies on their toes. “They’re keenly aware of the issue and the cost to comply with those rules depending on how they come out,” Pfahl says.

It's also important for companies to look beyond what they may read in the press every day as ESG becomes an increasingly politically charged term. “Really looking at how ESG affects the organization’s short-, mid-, and long-term objectives and outcomes is where we spend a lot of time on these projects,” Burton says.

In November, the Federal Acquisition Regulatory Council proposed its own set of ESG rules that are like those in the SEC proposal but would impact companies doing business with the government. “Those rules will impact many aerospace companies and other sectors with governmental contracts,” Pfahl says.

Whether a company is public or private, conversations around ESG must still happen, Pfahl says. “We’re communicating with our private clients about the SEC’s proposed rules because those clients might be selling

Burton says it’s important for management and boards to be actively involved in understanding ESG decisions and the effect on the company today and in the future. “If there are things that are completely contrary to the company’s business strategy, you’re not going to change your business that much in order to simply appease or make a stakeholder group feel like they’ve had something done on their behalf,” Burton says. “Continue to focus on developing and implementing your strategy. Addressing ESG isn’t about reacting and making individual decisions just because someone asked.”

In the publicly held world, raters and data aggregators are reporting on companies’ ESG profiles. Burton counsels clients not to chase ratings but to understand what goes into the ratings and why the ratings are what they are. Then they can assess what they might do to remain consistent with their strategy while improving their ratings.

Pfahl suggests focusing on the genesis of ESG as a business issue and the elements