Investment opportunities in Latin America have developed rapidly over the last few years, with private financing opportunities in the sustainable energy sector becoming a focus over the next few years. This opportunity was highlighted in the 2023 World Investment Report, published by the United Nations Conference on Trade and Development (UNCTAD).
Foreign Direct Investment analysis
• The flow of foreign direct investment (FDI) in Latin America and the Caribbean increased in 2022 by 51%, representing a total of $208 billion USD, largely due to the existence of greater demand for commodities and minerals called “critical” (lithium, nickel, cobalt, graphite, manganese, among others). • In Mexico, the second largest recipient of FDI in Latin America, only behind Brazil, the FDI increased 12% in 2022, representing $35 billion USD, with new investments in equity instruments and reinvested earnings.
Cross-border M&A activity peak
• Net worth in cross-border mergers and acquisitions (M&A) in Mexico increased to $8.2 billion USD (in the year 2021 it represented less than one billion). • In the last five years, there has been an increase due to trade agreements between countries such as the Asociación Latinoamericana de Integración (ALADI, of which Mexico is a member) and the Mercado Común del Sur (MERCOSUR). • Cross-border M&A activity increased by 80% ($15 billion USD) The manufacturing sector recorded the highest increase in net sales, particularly in food, beverage and tobacco, chemicals, paper, and paper products.
Investment in Latin America trends
The indicators are of interest when taking into consideration that, in the same year, 2022, the FDI reported a worldwide decrease of 12% (1.3 trillion USD) generated mainly by geopolitical tensions (war in Ukraine) that had an impact on the financial sector, which generated a lower volume of FDI in developed countries (the volume of negotiations fell by 25%, where the volume in M&A worldwide decreased by 9%).
There is a trend of increase in FDI in developing countries, including countries in Latin America where there is still a deficit in annual investment concerning their activity to achieve the Sustainable Development Goals (SDGs) related to renewable energies, as agreed in the 2015 Paris Agreement to which Mexico is a party (agreement to reduce global warming), revealing the 2023 World Investment Report that international investment in renewable energies has almost tripled since 2015, with three countries being the most benefit in 2022: Brazil, Chile and Mexico, attracted three-quarters of all renewable energy projects announced in the Latin American region in 2022.
Renewable energy investment opportunity
This report also reveals that in developing countries there is no direct and significant domestic investment in renewable energies, which means that these countries turn abroad to look for financing up to three-quarters of the cost of projects in this type of energy.
The report points out that developing countries require annual investments in renewable energy for amounts close to $1.7 trillion USD to achieve the SDG targets, although in 2022 FDIs were reported for only $544 billion USD, therefore the UNCTAD makes an urgent appeal to support developing countries, so they can attract significantly more foreign direct investment for their transition to renewable energy.
Sustainable Development Goals 2030
It is expected that in the coming years there will be an increase in financing in developing countries to invest in the transition to renewable energy and thus achieve the SDG goals for 2030, where, for example, Banks shall have to transform their business models and risk approach to take advantage of their funds to attract a greater volume of private financing for the transition in developing countries.
At Kreston BSG we understand the impact these trends will have on our clients within the green energy sector that will be impacted by the Sustainable Development Goals (SDGs) by 2030.
Tatiana Andrade, Director at Kreston KBW Brazil, is a seasoned professional with expertise in advanced English, accounting, tax management, and consultancy. With a strong background in auditing, she excels in leading teams, supported by an MBA in human development for managers. Tatiana’s commitment to excellence ensures top-tier service delivery in the complex financial landscape.
Investing in Brazil: Beating analyst’s expectations
March 13, 2024
Sector:ESG
Tatiana Andrade, Partner of Kreston KBW Auditores, shares that investing in Brazil will see economic growth, driven by market reform and ESG, attracting international and local business optimism.
Brazil’s economic growth outlook
Brazil’s economic activity expanded by 2.45% in 2023, surpassing initial forecasts that growth would be tepid in the face of high interest rates. At the beginning of last year, private economists estimated that the economy would grow by less than 1%, whereas current forecasts indicate an expansion of 2.9%, according to a weekly survey conducted by the Brazilian central bank.
Investing in Brazil opportunities
This makes Brazil the most successful Latin American economy. With a new government focus on market and tax reform and a strong emphasis on ESG, local firms are predicting a boom year, as international clients flock to its shores.
“Particularly in the second half of 2023 and in the first two months of 2024, we saw a significant increase in the demand for foreign companies wanting some type of assistance to set up or increase their business volumes in Brazil,” said Tatiana Andrade, Partner of Kreston KBW Auditores. “This shows an excellent medium and long-term scenario. As an example, the search for new international clients in our office increased by around 40% compared to the same period of the previous year, a significant increase for our international area.”
Within Kreston KBW Auditores, Andrade has noticed that the services sector is the one with the most demand for consultancy skills, particularly technology and digital marketing.
Complexities of Brazilian tax reform
The Brazilian tax system has long been complicated and frustrating, and while reform has been promised, it is still a long way away. In 2023, the Brazilian congress approved a major tax reform that had been held up for voting for many years. However, the approved proposal will take around 10 years to be fully implemented and divides opinion among tax experts as to how much benefit it will bring to businesses.
Andrade believes that when reform does come, it will not bring much in the way of simplification and that the increase in the tax burden will go from the current 20% to approximately 28%. But that is good news for the local office.
“We have been fielding a lot of enquiries, from national and especially international clients, who are very eager to see how much this will impact their operations,” said Andrade.
The international market is an important one for Kreston KBW Auditores, as this is where it can add the most value. International clients count on complete assistance from the opening of the company and the geographic location strategy, to assistance with tax planning. The founding partners have extensive experience in the national and international market and all came from auditing multinationals, including the Big Four.
Consulting services and ESG focus
With a new left-wing government in power that is keen to work with foreign investors, a maturing business environment and an aggressive push for corporate transparency to aid ESG reporting, Andrade is expecting 2024 to be a successful year.
“Our strategy is to grow by 20% in relation to revenue,” she said. “We have been strengthening our team with some major hires in 2023 and now we are feeling the effects of these new hires. An interesting moment for our office is the increase in demand for ESG, our partner in the sustainability area will have a great challenge ahead. We believe that the ESG area will grow by more than 100% compared to previous years.”
ESG is an important driver for Brazilian companies as they seek corporate transparency. It means skills such as auditing will become even more important, as auditors will be key to ensuring the quality of ESG information from audited companies to investors, stakeholders and regulators.
“In Brazil, companies listed on the stock exchange must disclose in their financial statements the effects of ESG on their operations,” said Andrade. “Although it is not mandatory for all Brazilian companies, many funds only invest in those who have a well-defined ESG policy, so companies, even if they are not obliged, have sought us out to help implement ESG in Brazil.”
Technology and R&D investment
Technology has had a huge impact on the way accountancy firms do business and the Brazilian office now sets aside a portion of revenue to be spent keeping abreast of new development.
“A minimum of 3% of revenue must be for investment in technology and R&D,” said Andrade. “In previous years we have surpassed the 5% mark of our revenue, but I think that has had a direct result on our annual growth, which always exceeds two digits.”
As Brazil blossoms under a new government, there is no reason why new entrants to the market cannot ride this wave of optimsim.
For more information on doing business in Brazil, click here.
News
ESG in Brazil: Carbon market to transfer pricing challenges
Sector:ESG
Discussions about ESG strategies have been becoming increasingly common on a global scale, with ESG in Brazil actively developing its own initiatives. A complex and strategic move that is shifting dynamics in the global economy, the culture of environmental, social, and corporate governance brings a myriad of issues that warrant careful analysis.
ESG in Brazil legislation
On the legislative front, the House of Representatives in Brazil passed PL 2148/15, which proposes the regulation of the carbon market in the country and the establishment of the Brazilian System of Greenhouse Gas Emissions Trading (SBCE), which sets emission caps and establishes a market for the sale of credits. For now, we are waiting for the proposal to undergo analysis and approval by the Senate.
Besides establishing unprecedented regulations in Brazil, initiatives like this significantly influence the national business environment, not only concerning domestic aspects.
Reporting ESG in Brazil
In this scenario, there is optimism for Brazil and for Latin America. According to information from the UNCTAD‘s World Investment Report 2023 – United Nations Conference on Trade and Development – foreign direct investments in Latin America and the Caribbean increased by 51%, reaching $208 billion in 2022. In Brazil, the increase was 70% ($86 billion).
According to the report, international investments in SDG sectors and activities – which relate to the Sustainable Development Goals established by the UN – also increased in 2022, resulting in the growth of projects in infrastructure, energy, water, sanitation, agricultural systems, health, and education.
The carbon offset market’s structure
Firstly, PL No. 2,148/2015 establishes a limit for greenhouse gas emissions within the corporate scope. Thus, it proposes that companies surpassing pollution levels must offset their emissions by buying credits, while those falling short of emission caps receive quotas that are tradable in the market.
The purpose is to create incentives in a way that can curb emissions and consequently the climate impacts caused by companies.
In a second stage, the regulated market of offset credits and generation of credits based on the level of greenhouse gas emissions, linked to the SBCE, comes into play. The proposal suggests a system in which Brazilian emission quotas (CBE) and certificates for verified emission reduction or removal (CRVE) can be traded.
Regarding regulation, studies already indicate that it could lead to positive economic shifts: according to research from Banco BV (BV Bank), the regulated carbon market could generate R$ 48 billion annually for the country.
Challenges
In addition to encouraging new practices in business operations, the implementation of a market guided by an ESG vision brings forth debates and initiatives in the tax aspect of organisations as well. In recent years, there has been discussion about the adoption of carbon taxes in Brazil and their potential consequences in terms of economic, financial, and social aspects.
However, a point that is not always recalled and brings with it particular challenges involves transfer pricing within the context of globalised markets or even in the transfer of goods and services between companies of the same group but headquartered in different countries.
On top of the requirement that the arbitrated price complies with RFB regulations in the case of Brazilian companies–responding to the pillars of corporate and tax governance–the new adoption of ESG indicators influences the macroeconomic dynamics between countries/multinationals themselves.
Therefore, the challenging aspects related to transfer pricing from an ESG perspective encompass everything from the costs of the value chain to a more detailed analysis of a company’s risks and its transfer assets concerning sustainable practices from an organisational standpoint.
Sustainable investments
Finally, in Brazil, the investment sector is one of the drivers of ESG practices in the market. Recent studies indicate, for example, that investors in Brazil also base their decisions on ESG disclosures from companies.
Thus, paying attention to the new economic paradigms that are moving towards sustainability has become imperative for companies, not just in terms of rhetoric, but especially to remain attractive and competitive in markets where sustainability is no longer a distant goal.
For more information on doing business in Brazil, click here.
News
Ganesh Ramaswamy
Partner at Kreston Rangamani and Associates LLP, Global Tax Group Regional Director, Asia Pacific
Ganesh has extensive experience of more than 30 years in providing specialist tax services, particularly to large privately owned groups, with particular strengths in the property, retail, healthcare and hospitality industries. He has supported various entities with specialist advice on tax-effective structures and restructures, cross-border transactions on account of outbound and inbound India investments, mergers, acquisitions and divestments. Ganesh has also worked with stakeholders across businesses to deliver solutions such as tax due diligence, tax consolidation and restructuring of large family businesses in the Middle East, Asia, and Singapore.
Biodiversity standard of GRI gets an update
March 11, 2024
Sector:ESG
The Global Reporting Initiative (GRI) has published a biodiversity standard update which will help Corporates to provide information and analysis on the biodiversity impacts.
Overview of GRI’s biodiversity standard update
The standard GRI 101 – “Biodiversity 2024” has been updated to support Corporates around the world to disclose their significant impacts on biodiversity which comes out of their business operations and supply chain management.
GRI has agreed to support the use of the above standard over the next two years, with Corporates expected to mandatorily follow it from 2026. This revised standard builds on key global developments in the biodiversity field such as UNFCCC Kunming Montreal Global Biodiversity Framework, The Science Based Target Network (SBTN) and The Taskforce on Nature Related Financial Disclosures.
Key features and requirements of GRI 101
The updated GRI standard sets new rules for reporting through transparency on biodiversity impacts. The standard suggests location specific reporting, both within the organisations’ operations and its supply chain functions. This is aimed at enabling the stakeholders to correctly assess the organisation’s impact on biodiversity.
In detail, the biodiversity standard focuses on achieving the following objectives:
Covering the areas where significant impacts on biodiversity gets poorly reported especially in supply chain management.
Location specific reporting on impacts including all places where impacts are felt with detailed information of the place and site where the impact has been felt.
Disclosure norms on biodiversity loss covering the areas of land misuse, climate change, pollution and over exploitation.
Reporting the impacts on society including those on communities and indigenous people.
Corporate responsibilities in addressing biodiversity loss
The Intergovernmental Science Policy Platform on Biodiversity and Ecosystem Services has come out with an assessment report which sends a warning that 50% of the global economy is under threat due to biodiversity loss. The GRI update on Biodiversity standards has come up against this background.
Corporates need to take immediate steps to reverse the biodiversity loss, restore nature to its glory, respect the rights, roles and contributions to sustain biodiversity along the supply chain. When these actions of the Corporates are validated and communicated in the form of a report brought out by GRI, all the stakeholders in the system will definitely end up benefitting from this transparency.
For more information on Kreston Global’s sustainability hub, click here.
News
ESG update in the United States
February 6, 2024
Sector:ESG
Experts in our ESG committee assess the development of ESG in North America, examining the effects of new legislation and how it is changing doing business in the region during the early months of 2024.
SEC proposed rule–The enhancement and standardisation of climate-related disclosures for investors
In March 2022, the SEC proposed rules to enhance and standardise climate-related disclosures for investors that would apply to all SEC registrants. Issuance of the final rule has been delayed multiple times due to the large amount of critical feedback received during the comment period, and is now expected by April, 2024.
Climate-related disclosure
Disclosures included in this new section on Form 10-K would address:
Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions (based on the Greenhouse Gas Protocol).
Climate-related risks and opportunities.
Climate risk management processes.
Climate targets and goals.
Governance and oversight of climate-related risks.
Footnotes to the audited Financial Statements
Disclosures in the in a footnote to the financial statement would provide financial statement metrics for climate-related events (e.g., severe weather) and transition activities (e.g., efforts to reduce GHG emissions). Such disclosures would also be subject to a registrant’s internal control over financial reporting (ICFR) and external audit.
SEC proposed rule–Human capital management disclosures
Included on the SEC’s Rule Agenda for October 2023 is a proposed rule to enhance registrant disclosure regarding human capital management and is expected to explain what information companies need to include in Form-10K when discussing topics such as safety and diversity.
SEC–Corporate Board diversity proposed rule
Included on the SEC’s Rule Agenda for April 2024 is a proposed rule to enhance registrant disclosure about the diversity of board members and nominees.
Proposed climate disclosure rule for federal contractors
Under the proposed rule by the Federal Acquisition Regulation, federal contractors would be required to disclose their greenhouse gas (“GHG”) emission levels and set science-based reduction targets. There is no set date for the final rule; it could potentially be late 2023 or early 2024.
Contractors receiving between $7.5MM and $50MM in federal contracts (significant contractors) will be required to disclose their Scope 1 and 2 GHG emissions. Compliance timeline for reporting is one year from the final rule effective date.
Contractors receiving more than $50MM in federal contracts (major contractors) will be required to disclose their Scope 1 and 2 emissions and “relevant” Scope 3 emissions. Compliance timeline for reporting Scope 1 and Scope 2 emissions is one year from the final rule effective date and for Scope 3 emissions, two years from the final rule effective date. Additionally, major contractors will be required to disclose its climate-related financial risk factors and to develop science-based emissions targets. Compliance timeline is two years from the final rule effective date.
California climate disclosure bills
California issued three pieces of legislation into law in October 2023 that imposes climate-related disclosure obligations on companies with certain ties to California.
Voluntary Carbon Market Disclosures Act (AB 1305)
AB 1305 is focused on voluntary carbons offsets (“VCOs”) and related net zero claims. AB 1305 applies to entities that operate and make emissions claims within California or buy/sell VCOs within California, regardless of size or revenues.
Companies making claims regarding net zero emissions or carbon neutral status will be required to disclose how it determined the accuracy of such claims.
Companies making emissions claims and buying or using VCOs will be required to disclose detailed information about the VCOs.
Companies marketing or selling VCOs will be required to disclose details regarding the carbon offset project.
The effective date of AB 1305 is January 1, 2024, with information updated at least annually.
Climate Corporate Data Accountability Act (SB 253)
SB 253 is focused on greenhouse gas (“GHG”) emissions reporting in compliance with the Greenhouse Gas Protocol (“GHG Protocol”). SB 253 applies to public and private U.S. companies with total annual revenue, regardless of where the revenue was generated (including revenue generated outside the United States) greater than $1 billion that “do business in California”.
Scope 1 and Scope 2 emissions
Companies will be required to publicly disclose its annual Scope 1 and Scope 2 GHG emissions in 2026 (on prior fiscal year information, i.e., 2025). Limited assurance is required initially, and reasonable assurance is required for 2029 information (filed in 2030).
Scope 3 emissions
Companies will be required to publicly disclose its annual Scope 3 GHG in 2027 (on prior fiscal year information, i.e., 2026).
Scope 3 emissions reporting will not be due until 180 days after Scope 1 and Scope 2 information is publicly disclosed. Limited assurance on Scope 3 emissions will be required beginning in 2030 (on 2029 information) but is subject to change pending further guidance.
SB 261 is focused on climate-related financial risk reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures. SB 261 applies to public and private U.S. companies with total annual revenue, regardless of where the revenue was generated (including revenue generated outside the United States) greater than $500 million that “do business in California”.
Companies meeting the reporting requirements of SB 261 are required to biennially prepare and publicly disclose a report detailing climate-related financial risks and measures adopted to mitigate climate-related financial risk.
There are no assurance requirements for SB 261. A company must make its report publicly available on its website by January 1, 2026, and biennially thereafter.
Julius Cincala is a partner at Kreston Slovakia, leading risk advisory and management consulting practices.
Zuzana Siderova
Tax Manager, Tax Advisor and Transfer pricing specialist, Kreston Slovakia
Zuzana, a Slovak accounting specialist, manages tax advisory and compliance projects, has expertise in financial audits, corporate and personal taxation, international taxation, value-added taxation, and transfer pricing across diverse business domains.
EU Sustainability Regulations
January 12, 2024
Sector:Energy, ESG, Finance
Central Europe’s manufacturing sector is being reshaped by EU Sustainability regulations, impacting countries like Slovakia, Romania, and Hungary. The aftermath of the Ukraine war and Germany’s reevaluation of its reliance on China have disrupted supply chains, driving up power costs and prompting a shift towards cleaner energy sources.
EU sustainability regulations impact on Central European manufacturing
Central Europe has traditionally played a smaller role in global manufacturing figures than other European neighbours. However, since the outbreak of the Ukraine war and Germany’s pre-Covid reliance on China, broken supply chains have driven up power costs.
Higher prices and new carbon reduction regulations favourably reposition countries like Slovakia, Romania and Hungary who have some of the highest shares of electricity from clean sources well above the West European average.
As the European Union grapples with balancing new environmental standards and maintaining its competitive edge on the global market, ambitious countries like Slovakia are becoming test beds for the new sustainability-focused landscape. With the advent of carbon emissions reporting within the EU, will listed and large companies relocate in droves to save money and carbon?
Driving carbon emissions down and costs up
The EU’s commitment to environmental sustainability is not without its challenges. Činčala believes that it will be easier to relocate manufacturing outside of Europe, rather than deal with the complexity of carbon emission reporting, while the process is being established,
“Slovakia has always been an industrial country. However, the higher power costs have seen companies seek to relocate manufacturing operations to China. We see this with our clients now. They are freezing operations as transforming their business to meet carbon emissions far outweighs any cost saving or carbon saving they receive from being in Slovakia.
Tax on imports
Although alarming, Činčala has been advising the Slovak government on dealing with these challenges for over 25 years, so has a clear view on the options available to the EU.
“If we want higher investments in green energy and business transformation we have to invest more in education, people, and transformation models. Currently, products that are manufactured outside of the European Union are cheaper because they’re not subject to the same level of regulation and transformation costs we face in the EU. This is why we need to find a way to fortify ourselves and our market. For example, by introducing new tax regulations on products made in third countries and imported into the EU.”
Transfer pricing compliance
With some unrest in the region, Činčala’s colleague, tax expert Zuzana Sidorová, has advice for any businesses moving operations around Europe, specifically into Slovakia,
“In recent months, a number of companies have approached us to transfer their business from Ukraine territory to Slovakia or to another European country.”
In Slovakia, any company that does transactions within its group, either locally or across borders, must follow transfer pricing rules, in line with the OECD (Organization for Economic Co-operation and Development) guidelines.
Common Transfer Pricing challenges in Slovakia
In Slovakia, many international companies are considered “limited risk,” like manufacturers, distributors, or service providers. These companies often report losses despite having little decision-making power. Sidorová has clear advice for companies with limited risk businesses in satellite European countries;
“From a transfer pricing perspective, they shouldn’t be reporting losses. Tax authorities often investigate these loss-reporting, internationally-owned companies, leading to lengthy and difficult tax audits. These audits can result in extra corporate taxes and can be extended to cover multiple tax periods.”
Transfer Pricing benchmarks
Sidorová advises her clients making cross-border or local (Slovak) intra-group transactions needs to review and update its transfer pricing file on a yearly basis. The benchmarking analysis must be prepared every three years, with annual financial updates of comparables (compliance with OECD transfer pricing guidelines).
Staying competitive
As the EU intensifies its sustainability focus, companies in Slovakia must adapt quickly. Success hinges on embracing green technology and understanding local tax and transfer pricing rules. It’s essential for businesses to align their operations with EU environmental goals, not just to comply with regulations, but to stay competitive and sustainable in the long run. Keeping up to date with any rapid tax updates in response to competitive markets is vital to maintain the viability of companies based in Slovakia. This strategic alignment by Slovakian companies is not only crucial for their own sustainability but also serves as a model for the wider European Union, demonstrating how economic resilience and environmental responsibility can coexist and drive progress across the continent.
Investing in Romania is attracting budget-focused businesses eyeing expansion in Eastern Europe. Eduard Pavel from Kreston Romania sheds light on the current economic trends, investment climate, and the opportunities that Romania presents to the global business community.
2022 FDI Surge
In 2022, Romania witnessed a rise in foreign direct investment (FDI), marking a phase of steady economic growth. Despite this progress, Pavel points out a significant gap when compared to Germany’s FDI inflows. He states, “Romania did experience growth in 2022, but the amount is still significantly less than that of Germany.” This observation highlights Romania’s growing, yet comparatively modest, position in the European investment landscape.
A Cautious Perspective on Investment Trends
After a shift in investment patterns, Pavel provides a cautious assessment of the general trend towards diversifying supply chains, a direct pivot from China to Europe, specifically Romania, isn’t definitively established.
“We cannot confirm that [clients] have shifted away from China and towards European suppliers.”
The Role of Green Energy
Romania’s green energy initiatives, while not the primary attractor, are influencing business decisions. According to Pavel, these initiatives are a contributing factor, albeit not the main reason behind multinational corporations’ interest in Romania. “The country’s green initiatives do play a role in attracting businesses,” he notes, indicating that Romania’s environmental commitments are resonating with the global business ethos. “Despite the emphasis on green energy, there hasn’t been a significant increase in inquiries from multinationals looking to relocate or start businesses in Romania due to these initiatives.”
Digitalisation and automation
One of the most pronounced trends observed in the past year is the shift towards automation and digitalisation. Pavel attributes this change to the pandemic, which has altered business practices globally. “Clients are paying more attention to automation and digitalisation,” he remarks, highlighting a broader trend that is influencing business strategies in Romania and beyond.
Outlook for 2024
Looking ahead to 2024, Eduard Pavel offers practical advice for international businesses considering expansion into Romania. He emphasises the importance of understanding local market dynamics and the regulatory environment. “Make sure to research the market, understand the legislation, and pay attention even to the nuances,” Eduard advises, underlining the need for a well-informed approach. He also stresses the significance of building long-term relationships in Romania’s relationship-driven business culture.
Christina is an experienced consultant specialising in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organisations, including local municipalities, national government agencies, the Directorates-General of the European Commission, and the private sector across different industries.
Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
New International Standard on Sustainability Assurance (ISSA) 5000 proposed by IAASB
Introduction of ISSA 5000: The IAASB has proposed ISSA 5000 as an answer to the growing call for transparent and verifiable sustainability reporting. This proposition follows shortly after the release of initial standards on sustainability and climate disclosures by the International Sustainability Standards Board and the expected climate-related disclosure rule by the U.S. Securities and Exchange Commission.
The Essence of ISSA 5000: Tom Seidenstein, the chair of IAASB, highlighted the importance of ISSA 5000 as a mechanism to fortify trust in sustainability reporting. The proposed standard will be compatible with various other reporting frameworks including those issued by the European Union, ISSB, and more. Both professional accountants and non-accountant assurance practitioners can use the standard for sustainability assurance engagements.
Stakeholder engagement: Emphasizing the importance of inclusivity and holistic viewpoints, the IAASB has embarked on an outreach program to gain insights from diverse stakeholders. These insights will be crucial in refining the final standard, according to Josephine Jackson, IAASB vice-chair.
Current landscape & challenges: Christine Tsiarta from Kreston ITH in Cyprus explains that while there is an increasing awareness of climate-related risks, many audit firms lack the knowledge and skills to accurately address these concerns. As regulations intensify, audit firms will need to enhance their capacities to recognize, monitor, and manage such risks. Laurent Le Pajolec from Exco Poland elaborated on the potential hindrances for auditors, including the necessity for independence, proper education, and adequate support from companies.
The Need for a Comprehensive View: Christine and Laurent emphasise the significance of holistic sustainability reporting. It is vital for companies to capture the complete picture, considering all emissions, including Scope 2 and Scope 3, to present an accurate representation of their sustainability efforts.
The Road Ahead: The IAASB has called for comments on the proposed standard through its website, aiming to ensure it addresses all concerns and offers a robust structure for sustainability assurance.
However, the road to comprehensive sustainability reporting isn’t without challenges. Christine Tsiarta, head of advisory services for sustainability at Kreston ITH in Cyprus, shed light on the current state of affairs, remarking, “So far, there hasn’t been lots of regulation requiring audit firms to report or help clients manage climate-related risks. Now we’re slowly seeing that changing and evolving. But as a result, even auditors themselves don’t have sufficient knowledge, skills and understanding.” She further highlighted the imminent evolution in the landscape as auditors increasingly acknowledge these risks’ relevance.
Laurent Le Pajolec elaborated on the obstacles auditors face. He mentioned the “lack of independence” and added, “It is difficult to be an engineer to identify, for example, what are the sources of emissions of CO2 for a company.” Le Pajolec and Tsiarta both underscored the significance of holistic sustainability reporting. Tsiarta states, “If you’re ignoring part of the picture, then you’re essentially giving a false image of what your impacts are.”
As the world inches closer to a sustainability-centric approach, standards like the proposed ISSA 5000 are indispensable. However, for it to be effective, the collaborative efforts of stakeholders, equipped with the right knowledge and approach, are paramount.
To learn more about the impact of the proposed International Standard on Sustainability Assurance (ISSA) 5000 on your business, please get in touch.
Carmen Cojocaru is a highly qualified professional with extensive experience in the fields of accounting, audit, tax, and business process outsourcing. Additionally, Carmen’s involvement with the ESG committee and Kreston Global highlights her commitment to promoting ethical business practices and fostering sustainable growth within the industry.
EFRAG approves European Commission’s adoption of European Sustainability Reporting Standards
August 2, 2023
Sector:ESG
EFRAG has approved the European Commission’s adoption of European Sustainability Reporting Standards (ESRS). The European Commission adopted the first ESRS, set on July 31, 2023. This is mandated by the Corporate Sustainability Reporting Directive (CSRD) and covers environmental, social, and governance matters. The adoption represents a significant step towards relevant and comparable sustainability reporting and identifying sustainability-related financial risks and opportunities for companies.
The European Commission adopted the ESRS after a comprehensive process that began in September 2020. EFRAG played a significant role in this procedure, including submitting a preparatory work report to the European Commission in February 2021, launching a public consultation on Exposure Drafts of ESRS in April 2022, and providing Technical Advice to the European Commission on the final draft standards delivered in November 2022.
EFRAG is putting significant efforts into developing standards for small and medium-sized enterprises (SMEs). Additionally, they are actively preparing guidance to encourage the implementation and interoperability of ESRS with overlapping ISSB standards, contributing to the joint work with the ISSB and ensuring the interoperability of ESRS with other relevant international standards.
On August 23, the EFRAG SRB will have a public session to receive an update on the first draft of the EFRAG Implementation Guidance and FAQ regarding materiality assessment (MAIG) and value chain (VCIG). Papers related to this will be posted on or before August 16, 2023. The EFRAG SRB and EFRAG SR TEG will also review the responses to the European Commission’s consultation for feedback on the Have Your Say portal on the draft ESRS to identify priority areas for further guidance. Furthermore, EFRAG will soon establish a single access point on its website for stakeholders to ask questions about the ESRS application.
Since its inception, EFRAG has aimed to contribute to the progress of sustainability reporting worldwide while preventing EU preparers and users from having to report multiple times. During its public session on August 23, 2023, the EFRAG SRB will receive an update on interoperability with other major standard-setting initiatives. The SRB acknowledges the excellent progress made in interoperability between the ESRS adopted by the European Commission and the ISSB standards published in June (IFRS S 1 and S 2). Additionally, the SRB will receive an update on joint efforts to promote straightforward interoperability of ESRS and ISSB climate-related standards. EFRAG and the GRI have approved a joint statement acknowledging a high level of commonality and the possibility for ESRS reporting entities to report regarding GRI, which will also be submitted to the EFRAG SRB.
According to the SRB, there has been significant advancement in the development of SME standards(both for listed SMEs (LSME) and for voluntary use (VSME)). The progress on sector standards is ongoing, but the European Commission will provide updated information on the timeline in the fall.
To learn more about your ESG reporting obligations, visit our Sustainability pages.
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Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
Christina Tsiarta
Advisory services on sustainability, ESG & climate change
Christina is an experienced consultant specialising in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organisations, including local municipalities, national government agencies, the Directorates-General of the European Commission, and the private sector across different industries. Christina’s projects range from technical and operational support to policy reform, strategy development and implementation, due diligence and compliance, implementation of standards, stakeholder engagement, reporting, materiality assessment, and more.
Triple Capital Accounting (TCA) for environmental sustainability and corporate performance
July 13, 2023
Sector:ESG
Our experts and ESG Committee members, Laurent Le Pajolec and Christina Tsiarta, recently contributed an insightful article in Finance Digest, shedding light on the significance of Triple Capital Accounting, also known as TCA, in reshaping corporate performance with a focus on environmental sustainability. You can read the article in full here, or read a summary below.
Triple capital accounting is a method that aims to redefine corporate performance by incorporating environmentally sustainable practices. In response to the urgent need to address the climate emergency, TCA goes beyond traditional financial accounting by considering three dimensions of capital: financial, natural, and social. It challenges the notion that profitability is the sole measure of success and emphasises the importance of a company’s impact on the environment and society.
Strategic Assets
TCA introduces additional elements to the balance sheet to reflect the depreciation of natural and social capital alongside financial capital. It treats all three forms of capital as strategic assets that cannot be substituted for one another. By valuing and accounting for natural and social capital, TCA promotes the responsible management of ecosystems and social environments. This approach not only aligns with environmental, social, and governance (ESG) principles but also ensures that stakeholders properly recognise and assess the value of these assets.
While climate change receives significant attention, TCA recognises that other ecological factors should also be considered, such as biodiversity erosion, changing land use, global water use, and the introduction of new entities into the biosphere. Moreover, TCA acknowledges various social aspects, including human rights, anti-corruption measures in the supply chain, mental health and well-being in the workplace, and diversity and equality in company culture. TCA urges transparent and accountable corporate social responsibility practices.
What does TCA look like?
Different methodologies exist within the TCA framework, including the CARE model (Comprehensive Accounting in Respect of Ecology) and the LIFTS model (Limits of Foundations Towards Sustainability). The CARE model emphasises the obligation to preserve natural and human capital assets alongside financial assets on balance sheets, profit and loss statements, and other key performance indicators. It incorporates intangible assets, such as skills, which contribute to shareholder value. The LIFTS model focuses on ensuring the sustainability of a company’s activities by monitoring the integrated performance of social and environmental capital, aligning with planetary boundaries and social foundations.
As organisations face increasing expectations to incorporate environmental and social considerations into decision-making and financial disclosures, TCA has gained prominence. With the development of sustainability-related standards and frameworks, such as those by the International Financial Reporting Standards (IFRS) and the Taskforce on Nature-related Financial Disclosures (TFND), the integration of natural and social capital accounting alongside financial accounting is becoming more prevalent. Transitioning to a TCA system requires a shift in mindset and operational practices, presenting challenges but also opportunities for companies to enhance their sustainability, resilience, and brand value. TCA is not only the future of accounting but also crucial for the future of the planet.
Kreston Global announces ACCA certificate in sustainability for Finance Bursary Program
July 3, 2023
Sector:ESG
Kreston Global today announces a new partnership with the Association of Chartered Certified Accountants (ACCA) to provide subsidised bursaries to 40 member firms to undertake their Certificate in Sustainability for Finance.
ACCA’s Certificate in Sustainability for Finance course covers topics such as evaluating business value chains, models, and practices for sustainability; understanding climate change risks and financial implications; and explaining the UN SDGs and their significance for organizations. It also assesses ESG issues and information collection, analysis, and reporting processes, and emphasises the importance of sustainability analytics for organizations.
The new bursary partnership between Kreston Global and the ACCA is one pillar of Kreston’s Impact Strategy, established in 2022 to support the network in becoming more sustainable and to help member firms create ‘positive impact.’ It stands alongside a number of other sustainability initiatives including the launch of Kreston’s first Environmental, Social and Governance Advisory Committee, which is focused on helping firms begin their own journey to sustainability and carbon reduction, or – where they have already done so – helping them to accelerate their activities.
Liza Robbins, Chief Executive of Kreston Global, said:
“The finance and accountancy industry, as with many sectors, is undergoing an exciting period of transformation when it comes to ESG and sustainability. For our clients, as for ourselves, sustainability is not simply a buzzword but rather a critical aspect of responsible business practice that carries significant regulatory, reputational, and commercial weight. The ACCA has developed a number of initiatives internationally that we participate in – this partnership is a testimony to the value we place on our work together.”
“With investment decisions, contract tenders, and purchase behaviour increasingly filtered through ESG considerations, we are now seeing SMEs looking to stay ahead of the regulatory curve by incorporating sustainability reporting in line with the standards required of larger companies. Equipping our member firms with ESG analytical and advisory capabilities through ACCA’s Certificate in Sustainability for Finance is a significant opportunity to support our firms and our firms’ clients as they navigate to sustainable best practice. It also ensures that we, as a business network, continue to pursue our purpose of promoting positive impact around the world.”
Helen Brand, Chief Executive ACCA, said:
“At ACCA we’ve been working hard to help organisations across the world strive for a sustainable recovery from the pandemic, and meet the urgent challenges presented by climate change. Sustainability knowledge is increasingly crucial for finance professionals and organisations of all types, and we’re proud to have developed the Certificate in Sustainability for Finance to improve and widen this important skillset.
“We’re delighted to partner with Kreston Global in providing subsidised bursaries to help financial professionals and others take the certificate. Accountancy professionals play a crucial role in guiding organisations on adopting and reporting on sustainable practices to ensure long-term success, manage risks, and contribute to a more sustainable future. Undertaking this certificate will be an important step on the journey for many.”
News
Stuart Brown
Kreston Global ESG Committee member, Head of Technical and Compliance at Duncan & Toplis
Stuart is an FCA-qualified chartered accountant with more than 10 years of practical accounting and audit experience.
He leads the technical developments for Duncan & Toplis. This covers audit, financial reporting and maintaining quality of work.
He has recently been appointed to Duncan & Toplis’ operations board and become a member of the ICAEW’s influential Ethics Advisory Committee. Stuart also sits on the Kreston Global ESG Committee.
International Sustainability Standards Board issues first reporting standards
June 28, 2023
Sector:ESG
On 26 June 2023, The International Sustainability Standards Board (ISSB) issued its first two reporting standards, IFRS S1 and IFRS S2.
The need for global consistency: ISSB’s first reporting standards
The issuing of these inaugural standards signifies the “ushering in a new era of sustainability-related disclosures in capital markets worldwide”.
One of the most significant limiting factors to the effectiveness of climate reporting has been the number of different bases on which entities report on. There has been a desperate need for global consistency. It is hoped that the release of these standards will be a turning point for the disclosure of climate-related risks and opportunities specific to individual entities.
These first two standards build on the ISSB’s objectives to;
Develop standards for a global baseline of sustainability disclosures meeting the information needs of global investors.
Enable companies to provide comprehensive, decision-useful sustainability information to global capital markets.
Deliver a common language of sustainability disclosures, with the flexibility for regional ‘building blocks’ to be added by regulators when necessary to meet local and multi-stakeholder information needs.
IFRS S1: General requirements for disclosure of sustainability-related financial information
S1 covers the general requirements for disclosure of sustainability-related financial information.
S1 sets the scene for the specific requirements of S2 and for future sustainability standards covering areas other than climate.
S1 adopts the structure of the Task Force on Climate-Related Financial Disclosures (TCFD). S1 also refers to other standards and frameworks in the absence of a specific ISSB standard.
The standard’s main objective is to “require an entity to disclose information about its sustainability-related risks and opportunities that is useful to users of general-purpose financial reports in making decisions relating to providing resources to the entity.”
There is a requirement that an entity discloses information about all such risks and opportunities that could reasonably be expected to affect the entity’s prospects.
S1 prescribes how an entity prepares and reports such disclosures, setting out general requirements for the content and presentation of those disclosures so that the information is useful to the users of that information.
In particular, the standard requires that an entity provides disclosures about:
the governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
the entity’s strategy for managing sustainability-related risks and opportunities;
the processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
the entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.
IFRS S2: Climate-related disclosures to drive sustainable decision-making
S2 covers the specific requirements of climate-related disclosures.
The main objective of the standard is to “require an entity to disclose information about its climate-related risks and opportunities that is useful to users of general-purpose financial reports in making decisions relating to providing resources to the entity.”
S2 also incorporates the TCFD recommendations and guidance and includes a requirement to provide industry-specific disclosures. Industry-specific metrics are included as illustrative guidance, taken from SASB standards.
S2 specifically applies to:
climate-related risks to which the entity is exposed, which are:
climate-related physical risks; and
climate-related transition risks; and
climate-related opportunities available to the entity.
In particular, the standard requires that an entity provides disclosures about:
the governance processes, controls and procedures the entity uses to monitor, manage and oversee climate-related risks and opportunities;
the entity’s strategy for managing climate-related risks and opportunities;
the processes the entity uses to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and
the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.
Effective date and adoption: Understanding the timeline for implementing ISSB Standards
Both standards are effective for periods beginning on or after 1 January 2024, early adoption is permitted as long as both standards are applied.
Voluntary adoption and potential assurance requirements for entities
Adoption of the standards is voluntary. However, local jurisdictions may make their adoption mandatory for certain classes of entities.
At this stage there are no specific assurance requirements in place. However, analysis provided by IFAC would indicate that of the entities reviewed that did report some ESG information, over 50% have obtained some level of assurance on that information between 2019 – 2021.
Assurance has been gained from the entity’s auditor (who provides the majority) and other service providers.
Although there are no specific international ESG assurance standards currently set, the majority of assurance work was performed under ISAE 3000 (revised). The vast majority of reviews obtained limited assurance with c10% obtaining reasonable assurance.
Future plans: ISSB’s global promotion and consultation on additional reporting elements
The ISSB will be promoting the standards worldwide, working with local jurisdictions and focusing on the standard’s connectivity with financial statements. There is also currently a public consultation on four projects to further understand the standard-setting priorities covering ecosystems, human capital, human rights and integration in reporting. Further standards covering other elements of ESG are likely to follow.
European Sustainability Reporting Standards (ESRS) and Corporate Sustainability Reporting Directive (CSRD): Aligning with ISSB efforts
In addition to the ISSB standards, EFRAG has been developing the European Sustainability Reporting Standards (ESRS – 12).
These standards have a mandatory implementation for applicable entities with a progressive phase-in period over several years, with early adoption being encouraged.
The standards have a comprehensive coverage of ESG matters, not just focusing on climate to start with.
The standards have the concept of double materiality and the ESG reports must be made in the management report, at the same time as the financial statements.
The standards also have a mandatory assurance element, starting as limited but moving to reasonable over time.
EFRAG is working with the ISSB to promote interoperability.
The European standards certainly seem to have built on the international ones so far, and are mandatory with a mandatory assurance element.
Conclusion
The introduction of the two SS standards is a pivotal moment in the reporting of ESG matters.
They provide a basis for international comparability and help bring ESG matters to the forefront of investors’ decision-making.
More will follow but this is a vital moment in the battle towards net zero. Read more about global ESG developments on our sustainability hub.
News
Ganesh Ramaswamy
Partner at Kreston Rangamani and Associates LLP, Global Tax Group Regional Director, Asia Pacific
Ganesh has extensive experience of more than 30 years in providing specialist tax services, particularly to large privately owned groups, with particular strengths in the property, retail, healthcare and hospitality industries. He has supported various entities with specialist advice on tax-effective structures and restructures, cross-border transactions on account of outbound and inbound India investments, mergers, acquisitions and divestments. Ganesh has also worked with stakeholders across businesses to deliver solutions such as tax due diligence, tax consolidation and restructuring of large family businesses in the Middle East, Asia, and Singapore.
Tarek Zouari
President of EXCO Africa and Chair of Kreston's Africa regional committee
Founder and Managing Partner of Exco Tunisia, is an experienced professional with over 20 years of international expertise in assisting foreign investors, managing finance and audit functions, and providing legal, tax, and social advice for Tunisian and European companies expanding their business in Africa & Middle East.
Tarek is a Member of National Order of Chartered Accountants and Statutory Auditors of Tunisia. He is Chair of Kreston’s Africa steering committee and is Managing Director and President of Exco Africa network.
ESG Reporting in Africa
June 7, 2023
Sector:ESG
ESG reporting is becoming increasingly important for companies across Africa, as investors and other stakeholders look for more information about how companies are managing their environmental, social, and governance risks and opportunities.
South Africa is one of the leading countries in Africa when it comes to ESG reporting. The Johannesburg Stock Exchange (JSE) has a Sustainability Reporting Directive that requires all listed companies to report on their ESG performance. The directive is aligned with the Global Reporting Initiative (GRI) Standards, which are a set of international standards for sustainability reporting.
Tunisia is another country that is making progress in ESG reporting. The Tunisian Financial Market Authority (AMF) has issued a guide on ESG reporting for listed companies. The guide recommends that companies report on their ESG performance in line with the GRI Standards.
Mozambique is also taking steps to promote ESG reporting. The Mozambican Stock Exchange (BVM) has launched a sustainability reporting initiative for listed companies. The initiative aims to encourage companies to report on their ESG performance and to provide investors with more information about how companies are managing their ESG risks and opportunities.
Kenya is another country that is seeing an increase in ESG reporting. The Nairobi Securities Exchange (NSE) has launched a sustainability reporting initiative for listed companies. The initiative aims to encourage companies to report on their ESG performance and to provide investors with more information about how companies are managing their ESG risks and opportunities.
Challenges in Africa
There are a number of challenges that companies face when it comes to ESG reporting in Africa. One challenge is the lack of harmonized standards for ESG reporting. There are a number of different frameworks and standards that companies can use to report on their ESG performance, which can make it difficult for investors to compare the performance of different companies.
Another challenge is the lack of data. Many companies in Africa do not have the resources to collect and report on ESG data. This can make it difficult for companies to assess their ESG performance and to report on their progress to stakeholders.
Despite the challenges, ESG reporting is becoming increasingly important for companies across Africa. Investors and other stakeholders are looking for more information about how companies are managing their ESG risks and opportunities. Companies that can demonstrate good ESG performance are likely to be more attractive to investors and other stakeholders.
Benefits of ESG reporting
The following are some of the benefits of ESG reporting for companies:
Improved investor relations: ESG reporting can help companies to attract and retain investors by providing them with more information about the company’s ESG performance.
Reduced risk: ESG reporting can help companies to identify and manage their ESG risks. This can help to reduce the company’s overall risk profile and to protect its reputation.
Improved brand reputation: ESG reporting can help companies to improve their brand reputation by demonstrating their commitment to sustainability.
Increased sales: ESG reporting can help companies to increase sales by attracting more customers who are interested in supporting sustainable companies.
Reduced costs: ESG reporting can help companies to reduce their costs by identifying and eliminating inefficiencies.
Improved employee morale: ESG reporting can help to improve employee morale by demonstrating the company’s commitment to sustainability.
Challenges of ESG reporting
The following are some of the challenges of ESG reporting for companies:
Cost: ESG reporting can be expensive to implement. Companies need to invest in time and resources to collect and report on ESG data.
Time: ESG reporting can be time-consuming. Companies need to collect and analyze data, develop reports, and communicate their results to stakeholders.
Complexity: ESG reporting can be complex. There are a number of different frameworks and standards that companies can use to report on their ESG performance. This can make it difficult for companies to choose the right framework and to comply with the requirements of different stakeholders.
Lack of data: Many companies in Africa do not have the resources to collect and report on ESG data. This can make it difficult for companies to assess their ESG performance and to report on their progress to stakeholders.
Despite the challenges, ESG reporting is becoming increasingly important for companies across Africa. Investors and other stakeholders are looking for more information about how companies are managing their ESG risks and opportunities. Companies that can demonstrate good ESG performance are likely to be more attractive to investors and other stakeholders.
News
Stuart Brown
Kreston Global ESG Committee member, Head of Technical and Compliance at Duncan & Toplis
Stuart is an FCA-qualified chartered accountant with more than ten years of practical accounting and audit experience.
He leads the technical developments for Duncan & Toplis. This covers audit, financial reporting and maintaining the quality of work.
He has recently been appointed to Duncan & Toplis’ operations board and has become a member of the ICAEW’s influential Ethics Advisory Committee. Stuart also sits on the Kreston Global ESG Committee.
AI can play a critical role in ESG initiatives by helping companies analyse vast amounts of data, identify patterns and trends, and make more informed decisions about reducing their environmental impact, improving social outcomes, and enhancing corporate governance. Here are a few examples of how AI is being used in ESG initiatives:
Environmental: AI can be used to analyse satellite imagery and other data sources to track deforestation, identify pollution sources and monitor climate change’s impact on ecosystems. This information can help companies better understand their environmental impact and develop strategies for reducing their carbon footprint and other environmental harm. AI can also support gathering internal energy and carbon usage data to assist with reporting within financial statements and other publications.
Social: AI can analyse social media and other online data sources to monitor public sentiment and identify emerging social issues that may be relevant to a company’s business. This information can help companies to be more proactive in addressing social issues and improving their social outcomes. AI can also provide efficiencies in the day-to-day operation of businesses freeing up employees’ time to focus on other initiatives.
Governance: AI can analyse financial data and other information to identify potential risks and conflicts of interest that may impact a company’s governance practices. This information can help companies to strengthen their internal controls, improve transparency, and enhance their overall governance structure.
However, it is important to note that AI is not a panacea for ESG issues. While AI can provide valuable insights and help to automate specific tasks, it is not a substitute for human judgment and decision-making. Instead, companies must still ensure that they have strong governance structures, including robust policies and procedures, to ensure that their ESG initiatives are effective and aligned with their overall business objectives.
Moreover, there are also ethical concerns associated with the use of AI in ESG initiatives. For example, AI algorithms may inadvertently perpetuate bias or discrimination if not designed and implemented responsibly and ethically. Therefore, it is important for companies to be transparent about their use of AI and to ensure that their AI initiatives are consistent with their ethical and social responsibilities.
In conclusion, AI has the potential to play a valuable role in ESG initiatives by helping companies to understand better and address complex environmental, social, and governance challenges. However, it is important for companies to approach AI cautiously and ensure that their use of AI is aligned with their ethical and social responsibilities. Ultimately, the success of ESG initiatives will depend on integrating human judgment and decision-making with the insights and efficiencies that AI can provide.
News
Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
Christina Tsiarta
Advisory services on sustainability, ESG & climate change
Christina is an experienced consultant specialising in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organizations, including local municipalities, national government agencies, the Directorates-General of the European Commission, and the private sector across different industries.
Call for systemic change in DEI through TCA
May 9, 2023
Sector:ESG
Our experts and ESG Committee members Laurent Le Pajolec and Christina Tsiarta recently collaborated on an article where they shared insights on why a firm should engage in Trade Cooperation Agreement (TCA) and why existing accounting methodologies are no longer sufficient for modern-day businesses.
Progress in DEI stalls globally
The Netherlands has overtaken Canada to become home to the world’s most diverse, equitable, and inclusive workplaces, as per Kantar’s Inclusion Index 2022. The index measures progress in developing inclusive and diverse workplaces globally, with personal services, non-profit, and professional services being voted as the most inclusive industries, while the entertainment industry remains among the least inclusive. Despite a growing appetite for systemic change in diversity, equity, and inclusion, progress in developing diverse and inclusive workplaces has stalled globally, with countries such as Canada, the USA, and Italy seeing a significant drop in their scores. Failure to take meaningful action impacts recruitment and retention, with one in four employees likely to leave their organisation due to a lack of inclusion.
Inclusion progress
The research indicates that although DEI has become more prominent in businesses’ agendas, there has been a lack of progress. The global score for the index remains at 55, the same as in 2020. In contrast, eight out of twelve markets surveyed have experienced a decline in their Inclusion Index score from 2019 to 2022. However, Mexico and Australia have made significant strides in DEI progress, with 15% and 7% increases in the last three years.
Industries are making varied progress in their efforts towards inclusion. Personal services (such as beauty salons), professional services (like legal and accounting firms), and non-profit organizations are leading the way. Financial services, ranking in the middle, and IT and marketing companies, in the lower half of the ranking, are taking steps to improve inclusion. However, industries like fashion, hospitality, security, entertainment, media, sports, publishing, and agriculture, ranked at the bottom, still have a lot of work to do to improve their inclusivity.
Read more from Laurent Le Pajolec and Christina Tsiarta here.
News
Ganesh Ramaswamy
Partner at Kreston Rangamani and Associates LLP, Global Tax Group Regional Director, Asia Pacific
Ganesh has extensive experience of more than 30 years in providing specialist tax services, particularly to large privately owned groups, with particular strengths in the property, retail, healthcare and hospitality industries. He has supported various entities with specialist advice on tax-effective structures and restructures, cross-border transactions on account of outbound and inbound India investments, mergers, acquisitions and divestments. Ganesh has also worked with stakeholders across businesses to deliver solutions such as tax due diligence, tax consolidation and restructuring of large family businesses in the Middle East, Asia, and Singapore.
ESG Reporting in Asia Pacific
May 1, 2023
Sector:ESG
Experts in our ESG committee comment on the progress of ESG in Asia Pacific, exploring the implications of new legislation and how it is changing doing business in the region.
Hong Kong and China
The ESG regulatory environment in Hong Kong and China is evolving rapidly, with new regulations being introduced all the time. This is due to a number of factors, including the growing importance of ESG issues for investors and consumers, the increasing pressure on companies to reduce their environmental and social impact, and the growing global consensus on the need to address climate change.
In Hong Kong, the SFC (Securities and Futures Commission) is the main regulator for ESG issues. In 2019, the SFC issued a circular on ESG funds, which set out its expectations for the disclosure of ESG-related information by fund managers. In 2020, the SFC launched a consultation on proposals to enhance climate-related disclosures by Hong Kong SFC-licensed fund managers. The SFC is also working with other regulators, such as the HKMA (Hong Kong Monetary Authority) and the HKEX (Hong Kong Exchanges and Clearing), to develop a more comprehensive ESG regulatory framework.
In China, the CSRC (China Securities Regulatory Commission) is the main regulator for ESG issues. The CSRC has issued a number of guidelines and regulations on ESG issues, including the Code of Corporate Governance for Listed Companies and the Standards for the Contents and Formats of Information Disclosure by Companies Making Public Offering of Securities. The CSRC is also working with other regulators, such as the Ministry of Finance and the Ministry of Environmental Protection, to develop a more comprehensive ESG regulatory framework.
The ESG regulatory environment in Hong Kong and China is still in its early stages of development. However, the pace of change is accelerating, and it is clear that ESG issues will become increasingly important in the years to come. Companies that are able to effectively manage ESG risks and opportunities will be well-positioned to succeed in the future.
Here are some of the key challenges and opportunities for companies operating in the ESG regulatory environment in Hong Kong and China: Challenges: • The regulatory landscape is complex and evolving rapidly, making it difficult for companies to keep up with the latest requirements. • There is a lack of clarity on some ESG issues, which can lead to uncertainty and compliance risk. • There is a risk of greenwashing, where companies make misleading ESG claims in order to improve their reputation. Opportunities: • There is a growing demand for ESG products and services, which provides companies with the opportunity to develop new products and services. • There is a growing awareness of ESG issues, which can help companies to better understand their ESG risks and opportunities. • There is a growing focus on ESG by regulators, which can help to improve the quality of ESG reporting and disclosures. Companies that are able to effectively manage ESG risks and opportunities will be well-positioned to succeed in the future.
At present, the clear ESG policy regulation mainly comes from the financial regulators, focusing on the mandatory specification of enterprise ESG information disclosure and the policy guidance of ESG investment, and due to the ESG contains E (environment), S (society), G (corporate governance) in different aspects of many issues, different government departments also have different emphasis on its regulatory function related issues.
Specifically, for different objects, the current ESG regulatory measures can be roughly divided into two categories: one is mandatory for listed companies or some specific enterprises, and is forced to disclose ESG information meeting the minimum standards through administrative regulations; the other has incentive requirements and encourages enterprises to disclose ESG information through market means such as green investment.
As the regulatory authority for the information disclosure of listed companies, China Securities Regulatory Commission (hereinafter referred to as CSRC) continuously studies and improves the ESG information disclosure system of listed companies and standardizes the operation of listed companies according to China’s national conditions and the stage of market development.
In terms of ESG investments, Domestic regulation focuses on green finance and inclusive finance, The introduction of a series of policy guidance, promotes commercial banks, public funds and other financial institutions to develop more green loans, green bonds, green funds, carbon financial products and other financial products based on ESG investment concept, Guide funds to favour clean, low-carbon and environmentally friendly enterprises and projects, “To provide appropriate and effective financial services to all social strata and groups requiring financial services at affordable costs (Notice of The State Council on the Issuance and Issuance of the Development Plan of Inclusive Finance (2016-2020))”, China will promote green and sustainable economic and social development.
Malaysia
In Malaysia ESG is also evolving rapidly, as the country strives to become a more sustainable and socially responsible nation. In recent years, there has been a growing focus on ESG issues by both the government and the private sector, and a number of new regulations have been introduced.
One of the most significant developments in the ESG regulatory environment in Malaysia has been the introduction of the Sustainable Development Goals (SDGs). The SDGs are a set of 17 global goals that aim to achieve a more sustainable and equitable future for all. The Malaysian government has committed to achieving all 17 SDGs by 2030, and has put in place a number of policies and initiatives to support this goal.
Another significant development has been the introduction of the Malaysian ESG Reporting Framework. The framework is designed to help businesses disclose their ESG performance and comply with relevant regulations. The framework is based on the Global Reporting Initiative (GRI) Standards, and covers a range of ESG issues, including climate change, water management, and human rights.
The ESG regulatory environment in Malaysia is still in its early stages of development, but the country is making significant progress. The government is committed to sustainability and social responsibility, and businesses are increasingly taking steps to comply with ESG regulations.
Here are some of the key ESG regulations in Malaysia: • The Sustainable Development Goals (SDGs): The SDGs are a set of 17 global goals that aim to achieve a more sustainable and equitable future for all. The Malaysian government has committed to achieving all 17 SDGs by 2030, and has put in place a number of policies and initiatives to support this goal. • The Malaysian ESG Reporting Framework: The framework is designed to help businesses disclose their ESG performance and comply with relevant regulations. The framework is based on the Global Reporting Initiative (GRI) Standards, and covers a range of ESG issues, including climate change, water management, and human rights. • The Companies Act 2016: The Companies Act 2016 requires companies to disclose their ESG performance in their annual reports. The Companies Act 2016 also requires a director of a company to exercise his powers in good faith in the best interest of the company. Bursa Malaysia has required Malaysian public-listed companies to include sustainability reporting in their annual reports. Directors of large, listed companies are also required to apply the corporate governance and sustainability practices in the Malaysian Code on Corporate Governance. • The Environmental Quality Act 1974: The Environmental Quality Act 1974 sets out the environmental standards that businesses must comply with. • The Occupational Safety and Health Act 1994: The Occupational Safety and Health Act 1994 sets out the safety and health standards that businesses must comply with. • The Labour Act 1955: The Labour Act 1955 and Employment (Amendment) Act 2022 sets out the employment standards that businesses must comply with. The ESG regulatory environment in Malaysia is evolving rapidly, and businesses need to stay up-to-date with the latest developments. By complying with ESG regulations, businesses can help to ensure a more sustainable and equitable future for Malaysia.
Australia
In Australia, the Australian Securities and Investments Commission (ASIC) has been a leading regulator in the ESG space. ASIC has issued a number of guidance documents and infringement notices on ESG issues, and has also undertaken a number of enforcement actions. In 2021, ASIC fined a major Australian bank $10 million for misleading investors about its ESG credentials.
Additionally, the Australian Accounting Standards Board (AASB) has been empowered to issue guidance on the accounting treatment of ESG-related items, including disclosures for climate related risk and sustainability reporting standards.
The New Zealand Financial Markets Authority (FMA) has also taken a number of steps to promote ESG investing in New Zealand. The FMA has issued a number of guidance documents on ESG issues, and has also undertaken a number of enforcement actions. In 2021, the FMA fined a major New Zealand bank $5 million for misleading investors about its ESG credentials.
Both ASIC and the FMA have made it clear that they will take action against companies that mislead investors about their ESG credentials. This has led to a number of changes in the way that companies report on their ESG performance. Companies are now more likely to provide detailed information about their ESG risks and opportunities, and to undergo independent ESG audits.
The growing regulatory focus on ESG issues is likely to continue in the years to come. As ESG investing becomes more mainstream, regulators are likely to take a more active role in ensuring that companies are complying with their ESG obligations. This will lead to a more transparent and accountable ESG market, which will benefit investors and companies alike.
In addition to the regulatory environment, there are a number of other factors that are driving the growth of ESG investing in Australia and New Zealand. These include: • The increasing awareness of climate change and other environmental issues • The growing demand for socially responsible investments • The increasing availability of ESG data and information • The growing sophistication of ESG investment products • The increasing evidence to suggest financial outperformance of companies that rate well on ESG metrics • The increasing pressure for companies to improve ESG performance as they otherwise face reputational and brand risk
The growth of ESG investing in Australia and New Zealand is likely to continue in the years to come. As more and more investors become aware of the importance of ESG issues, and as more and more ESG investment products become available, ESG investing is likely to become the norm.
If you have an ESG question for one of our experts in the Asia Pacific region, please get in touch.
News
Laurent Le Pajolec
Member of Board EXCO A2A Polska, Kreston Global ESG Committee member
General Manager and shareholder of consulting companies with a Marketing/ business development and a Financial background with direct experience with several sectors (Real estate, Transport, Fintech, Legaltech, M&A, Import- Export, HR, Restructuring). Exco Polska Board Member.
Christina Tsiarta
Advisory services on sustainability, ESG & climate change
Christina is an experienced consultant who specializes in ESG, sustainability, and climate change. She has over 13 years of expertise and has worked with various organizations, including local municipalities, national government agencies, Directorates-General of the European Commission, and the private sector across different industries. Christina’s projects range from technical and operational support to policy reform, strategy development and implementation, due diligence and compliance, implementation of standards, stakeholder engagement, reporting, materiality assessment, and more. Christina provides a range of services, including waste and energy management, carbon accounting, reporting and offsetting, net-zero carbon and ESG strategy development and implementation, gap analysis and materiality assessment, reporting according to various standards, due diligence, governance, and compliance audits and support, implementing various standards, environmental impact assessments, stakeholder engagement and communication, project management and implementation, training and coaching, and ad hoc support. She is a certified project manager with strong technical and analytical skills, in-depth knowledge of her subject matter, and excellent organisational skills.
Triple Capital Accounting: Incorporating Environmental and Social Dimensions into Financial Reporting
April 21, 2023
Sector:ESG
Our experts and ESG Committee members Laurent Le Pajolec and Christina Tsiarta recently collaborated on an article on Triple Capital Accounting for International Accounting Bulletin. Subscribers can read the full article here, or the summary below.
The Importance of Triple Capital Accounting for Corporate Sustainability
Triple capital accounting (TCA) is a sustainability framework that considers three dimensions of capital – financial, natural, and social – when assessing a company’s performance. Incorporating environmental and social dimensions into corporate decision-making and financial disclosures is gaining traction, with many existing frameworks and standards in the sustainability space.
Evolution of the Concept of Triple Capital Accounting
The International Financial Reporting Standards (IFRS) is developing two disclosure standards on sustainability-related financial information and climate-related disclosures. These standards will incorporate industry-based disclosure requirements from the Sustainability Accounting Standards Board (SASB) standards and are expected to be launched in early 2023.
The newly formed Taskforce on Nature-Related Financial Disclosures (TNFD) is also developing a framework to enable companies and financial institutions to integrate nature and biodiversity into decision-making and reporting. This initiative is even more pertinent following the adoption of the Kumming-Montreal Global Biodiversity Framework (GBF) in December 2022.
TCA is a priority for the European Union and globally for the World Bank, which is focusing on economic, green, and socio-economic recovery, post-COVID-19, and is pushing for natural capital accounting and social capital accounting to become the norm for corporate reporting.
Benefits of TCA for Corporations
Moving to triple capital accounting will require a paradigm shift with major transformations for the corporate world. However, it will also create strong opportunities, including access to new markets, managing risks, adding value to the brand and image of organizations, compliance with upcoming legislation, and attracting new clients and talent.
Methodologies for TCA may vary, but they all aim to incorporate environmental and social dimensions into financial reporting. Organizations have a long way to go until this type of accounting becomes mainstream. However, those who want to survive and thrive in the corporate world and be active stakeholders must move beyond a focus on just financial capital and rethink how they can account for and preserve all three capitals.
Conclusion
Incorporating triple capital accounting into corporate decision-making and financial disclosures is a crucial step towards achieving sustainability. Companies must embrace this framework to address the urgent need to preserve natural resources, protect biodiversity, and improve social outcomes. By adopting TCA, organizations can benefit from new opportunities while mitigating risks and safeguarding the planet’s future.
If you would like to talk to our experts about triple capital accounting, please get in touch.
News
Earth Day 2023: Liza Robbins
Sector:ESG
As Earth Day 2023 approaches, it is important to acknowledge the importance of sustainability in the corporate world. Due to the increasing environmental difficulties, it is crucial for businesses to integrate sustainable methodologies into their activities. In this article, Liza Robbins, Chief Executive of Kreston Global, provides her perspective on how tax and accounting specialists can assist businesses in focussing on sustainable practices.
Earth Day 2023 theme is ‘Invest in our planet.’ Businesses can profit significantly from a sustainable transition if they invest early on. How do you think businesses will profit – or benefit?
Climate change has become a crucial topic in today’s business world, with various stakeholders such as staff, clients, suppliers, and investors expressing their concerns about the impact of businesses on the environment. As a result, they have high expectations for companies to engage in sustainable practices. Ignoring these issues will result in negative consequences for the reputation and profitability of the business, as sustainable companies are more attractive to stakeholders.
The recruitment and retention of top talent have become significant challenges for businesses globally. Individuals increasingly seek to work for companies that have a positive impact on the planet, and the focus on sustainability can be a key factor in attracting and retaining employees. Therefore, organisations that integrate sustainable practices into their operations will benefit in terms of attracting and retaining talent.
Governments and regulators worldwide are also introducing new policies and laws to combat climate change, and organisations that adopt carbon reduction strategies now will be better equipped to navigate these new requirements. Adopting sustainable practices not only ensures regulatory compliance but also enhances the organisation’s reputation and brand value, positioning the organisation as a trailblazer in sustainability, which is highly attractive to stakeholders. In summary, businesses must recognise that sustainability is not a peripheral issue but a core concern that can drive long-term success and stakeholder satisfaction.
What is the role of accounting networks like Kreston Global in the education and behaviour change that firms and their clients need to take us to net zero by 2050?
At Kreston Global, we recognise the significant role we play in driving positive change in the world. As representatives of the accounting profession, we take great pride in our network’s ability to create a lasting positive impact. With over 25,000 individuals across 115+ countries, we have the reach and the influence to shape the global business landscape.
Our connectivity allows us to leverage our position to educate and consult on sustainable business practices, showcasing good practices that positively influence firms and their clients. At Kreston Global, we firmly believe that sustainability is a critical aspect of modern business, and we actively promote this mindset to our network and beyond.
Kreston Global recently partnered with Treedom Agroforestry to mitigate the emissions generated by enabling our members to connect face-to-face. What actions have you taken in your firms or your personal life that you can share that will help mitigate or reduce emissions?
At our organisation, sustainability is a top priority, and we have taken significant steps to integrate it into our operations. As part of our Strategic Plan, we have made a commitment to ESG and positive impact, and have enlisted the help of our network experts in this area, establishing an ESG Committee to identify best practice that can be shared across the organisation. We strongly believe that sustainability is not just a buzzword but a critical aspect of responsible business practices.
On a personal level, I am deeply committed to the Reduce, Reuse, Recycle mantra. I believe that we should all be mindful of our consumption patterns and strive to reuse items whenever possible. For instance, I have significantly reduced my car usage and prefer to walk or cycle for short journeys. I am delighted that the pleasant weather has made this more feasible lately.
At Kreston Global, we are also committed to reducing our carbon footprint. We carefully consider our travel plans and aim to combine multiple uses for a single flight whenever possible, such as attending meetings or conferences. We are dedicated to doing our part in creating a more sustainable future, both at work and in our personal lives.
To read more about the sustaiblity and ESG reporting in Kreston Global, click here.
News
Earth Day 2023: Mahendra Rustagi
Sector:ESG
As we approach Earth Day 2023, it’s essential to recognise the significance of sustainability in the business world. With the growing environmental challenges we face, it’s crucial for businesses to incorporate sustainable practices into their operations. In this article, Mahendra Rustagi, CEO of Kreston SNR, shares his insights on how businesses can incorporate sustainability into their financial reporting and tax compliance, the benefits of investing in sustainable initiatives, available tax incentives, and how tax and accounting professionals can help businesses quantify the benefits of sustainable practices.
Mahendra pointed out that Indians have a deep respect and commitment towards the Earth, evident in their tradition of worshipping it as Mother and seeking forgiveness before any construction work. This respect for the environment is something that businesses can learn from and apply to their operations.
The business world is among the most significant emitters of greenhouse gases and other pollutants. How can businesses incorporate sustainability into their financial reporting and tax compliance?
The business/industry is responsible to the extent of about 30% of Total Green House Gases (GHG). So they have a huge responsibility to care for their environment and society in a governed manner.
The efforts of businesses in this direction of sustainability should be incorporated by way of a report which we should form as an integral part of reporting. Like in India, the top 1000 listed companies have been mandated to disclose their data related to sustainability efforts through a report called BRSR (Business Responsibility and Sustainability Report) which is attached to and forms part of financial reporting. This can help to build trust with stakeholders and demonstrate a commitment to sustainability.
Earth Day 2023 theme is ‘Invest in our planet.’ Businesses can profit significantly from a sustainable transition if they invest early on. How do you think businesses will profit – or benefit?
Early investment in sustainability would mean improved energy efficiency, lesser water consumption and less waste reduction resulting in efficient operations and reduced operating costs. All this means higher profitability. Also, improved reputation and brand image and higher valuations, motivated team of employees, loyal customers etc, so one can say the business will benefit hugely in long run.
Businesses which are better on the ESG front can stay ahead of potential future regulations, avoid the financial and reputational risks associated with non-compliance and bring long-term economic benefits. Overall, investing in sustainability early not only benefits the environment but can also bring long-term economic benefits to businesses.
What are some tax incentives available for companies that implement sustainable initiatives, and how can businesses take advantage of them?
In India, the government has not yet started any income tax incentives for sustainable initiatives, however, the government is seriously considering and granting some income tax incentives for use of renewable energy and higher directions on some social spending. The Government of India has introduced a scheme called –Production Linked Incentives (PLI ) where huge incentives are provided to a certain class of environment-friendly products manufacturing linked to production. For example, Producers of Electrolysers are being given huge incentives to manufacture Electrolysers for the production of Green Hydrogen. Also, there are incentives for Green Sustainable Buildings and Energy Efficiency through the Bureau of Energy Efficiency (BEE).
Globally, there are several tax incentives available for companies that implement sustainable initiatives. These include tax credits for investments in renewable energy, tax deductions for expenditures related to environmental protection, and accelerated depreciation for certain environmentally friendly assets. Some countries also offer tax incentives for green buildings or for companies that reduce their carbon emissions. To take advantage of these incentives, businesses can consult with tax experts to identify the specific incentives that apply to their sustainable initiatives and ensure that they comply with the applicable regulations. They can also ensure that their financial reporting accurately reflects the impact of their sustainable initiatives, which can further demonstrate their commitment to sustainability and potentially attract socially responsible investors.
How can sustainable practices positively impact a company’s bottom line, and how can tax and accounting professionals help businesses quantify these benefits in their financial statements?
Implementing sustainable practices can positively impact a company’s bottom line in several ways. For instance, it can help reduce operating costs by improving energy and resource efficiency, optimising supply chains, and reducing waste. Sustainable practices can also increase revenue by improving customer loyalty, attracting socially responsible investors, and accessing new markets. Sustainable business practices lead to an enhanced reputation, being more attractive to staff and business partners who value environmentally sustainable practices, and attracting new customers who are seeking environmentally friendly products and services. Relationship between sustainability management practices and business financial measures as higher return on investment (ROI) and sales growth have already been proven.
Tax and accounting professionals can help businesses quantify these benefits in their financial statements by identifying the relevant tax incentives and credits available for sustainable initiatives, accurately reflecting the impact of sustainable practices on the company’s financial performance, and guiding compliance with applicable regulations.
Tax and Accounting professionals can also make the businesses understand the return on investment (ROI)on their sustainable Investments by quantifying the benefits through categorisation and a scoring model for each SDG component which would help them to make informed decisions about future investments in sustainability.
In conclusion, Mahendra’s insights inform us that businesses have a significant role to play in addressing environmental challenges, and they can do so by incorporating sustainability into their financial reporting and tax compliance. By investing in sustainable initiatives early on, businesses can not only benefit financially but also enhance their reputation and attract socially responsible investors. Tax and accounting professionals can assist businesses in identifying tax incentives, accurately reflecting the impact of sustainable practices on financial performance, and guiding compliance with regulations. As we celebrate Earth Day 2023, let us all take a moment to reflect on the impact of our actions on the planet and work towards a sustainable future.
News
Earth Day 2023: Ganesh Ramaswamy
Sector:ESG
As Earth Day 2023 approaches, it’s important to consider the role that businesses can play in promoting sustainability and combating climate change. Ganesh Ramaswamy, Partner at Kreston Rangamani and Associates LLP, provides valuable insights into how businesses can incorporate sustainability into their financial reporting and tax compliance.
The business world is among the most significant emitters of greenhouse gases and other pollutants. How can businesses incorporate sustainability into their financial reporting and tax compliance?
In order to reach the Paris Climate goals businesses need sustainability reporting standards to measure their social and environmental impact more effectively. The business world expects the most significant innovations to happen soon in the corporate accounting and tax reporting standards due to the inclusion of ESG and sustainability reporting in financial statement reporting. Many businesses are embracing sustainability goals and seeking to reduce their carbon footprints. Most businesses have started sustainability reporting on a voluntary basis in their financial statements. ESG and sustainability reporting are part of the board agenda for many companies. To move forward the finance reporting function in businesses must be integrated with ESG and sustainability reporting. Moreover, the finance teams of businesses the world over should contribute to the process of setting standards in sustainability reporting.
Earth Day 2023 theme is ‘Invest in our planet.’ Businesses can profit significantly from a sustainable transition if they invest early on. How do you think businesses will profit – or benefit?
Investing in sustainable practices would definitely see businesses improving their ROI in the next decade. Building and growing a sustainable business has a lot of benefits like attracting a large pool of capital, building a stronger corporate brand, and promoting long-term growth which will definitely help the company and the investors benefit a lot. Individual and institutional investors are investing heavily in companies that proactively adopt ESG practices and have them integrated into the business strategy. Adoption of renewable energy like solar energy, wind energy and bioenergy automatically reduces costs.
Corporations that understand the importance of adapting to evolving socioeconomic and environmental conditions are better positioned to identify strategic opportunities and overcome competitive challenges. Proactive and integrated ESG policies can help companies gain a competitive advantage over other industry players. Employees generally care deeply about the companies they work for and the businesses they support, hence, they embrace values that are aligned towards social good, and environmental and social responsibility.
What are some tax incentives available for companies that implement sustainable initiatives, and how can businesses take advantage of them?
The tax incentives for businesses that implement sustainable initiatives are referred to as “green incentives” which comprise the following among various others:
Accelerated depreciation for investments in the sustainable energy sector.
Vehicle tax credit for electric motor vehicles
Grants for small businesses which take sustainable initiatives
Emission reduction credits which are encashable
Grants on salary payment to employees coming out of a green initiative.
These types of incentives can push many businesses would move in a more sustainable direction, or boost that allows these businesses to make the initial investment in green energy options or set up a new eco-friendly venture.
Sustainability reporting is a form of non-financial reporting that enables companies to convey their progress towards goals on various sustainability parameters, including environmental, social and governance metrics, and risks and impacts they may face. By disclosing the sustainability report, companies are able to communicate more transparently with the public about their business activities related to non-financial management and performance aspects. Though a number of different measurement and valuation methods exist, most of them are focused exclusively on ecological aspects, i.e. impact on climate, forest decline or water. Tax and accounting professionals can help businesses to quantify these benefits by valuing the following key dimensions for sustainable development:
Effects of economic activity on the environment e.g., resource use, pollutant discharges, waste.
Environmental services to the economy e.g., natural resources, sink functions, contributions to economic efficiency and employment.
Environmental services to society e.g., access to resources and amenities, contributions to health, living and working conditions
Effects of social variables on the environment e.g., demographic changes, consumption patterns, environmental education and information, institutional and legal frameworks.
Effects of social variables on the economy e.g., labour force, population and household structure, education and training, consumption levels, institutional and legal frameworks.
Effects of economic activity on society e.g., income levels, equity, employment.
What is the role of accounting networks like Kreston Global in the education and behaviour change that firms and their clients need to take us to net zero by 2050?
Networks like Kreston Global should act as strategic visionary which understands and guides the member firms on the trade-offs among people, the planet and profits. The networks can also function as a catalyst which can align the member firms’ strategy and culture so as to develop a sustainability agenda for the member firms. It is also quite easy for networks to provide an integrator role among member firms spread over various regions so as to uphold an overall commitment to the sustainability of the network.
Kreston Global recently partnered with Treedom Agroforestry to mitigate the emissions generated by enabling our members to connect face-to-face. What actions have you taken in your firms or your personal life that you can share that will help mitigate or reduce emissions?
The initiatives taken by our firm are the following:
Pooling of cars among staff while commuting to the office
Vegan food replaces fish and meat for lunch.
Water in glass bottles replaces PET bottles.
Use of natural light during daytime.
Focus on staff recreation facilities.
Increase in per diem for employees to travel by train instead of planes.
Floor carpets are made of natural fibre and not artificial fibre.
Employees are encouraged to use cotton clothing over synthetic clothing.
Natural jute bags replace plastic containers.
To conclude, Ganesh makes note of the importance of incorporating sustainability into financial reporting and tax compliance is a vital step for businesses in reducing their carbon footprint and achieving sustainability goals. Investing in sustainable practices benefits businesses in the long run, as it improves ROI, attracts capital, and strengthens the corporate brand. Tax incentives for implementing sustainable initiatives can help businesses to make the initial investment in green energy options or set up new eco-friendly ventures. On this Earth Day 2023, let’s pause and consider how our actions affect the planet and strive for a future that prioritises sustainability.
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