W

hile it might be a painful transition in terms of recruitment and investment for accountancy firms as they focus on this area of reporting, it could prove to be a very lucrative new advisory line and market, especially for auditors.

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. Social criteria look at the company’s business relationships. Governance, which is where auditors can really add value, is when investors want to know that a company uses accurate and transparent accounting methods. According to Koh Wee Kwang, ESG partner at Kreston ACA PAC, auditors will have the ability to influence boards on their ESG strategy, putting them in a stronger position with clients.

"Assurance of ESG is on the cards for the Central Banks around the world who are looking at various measures (‘assurance’ being one factor) to ensure reliability and comparability of ESG data, to aid investment decisions and avoid green-washing," he said.

It is important that firms develop a strategy and integrate it into every aspect of their business. "ESG is a fairly broad-based subject," said Kwang. "Practitioners will have to have in-depth knowledge on a wide range of subject matters. Accountants and auditors will really need to be able to understand the risks of the underlying concerns and facilitate the ESG process together with the other specialists."

The problem with having to provide such a wide-ranging set of services to clients is that it is going to require skills and expertise that are currently outside the usual remit of accountancy firms. With firms in every region reporting that they are struggling to find new recruits, gearing up to add ESG reporting to the portfolio is going to add pressure.

"The increased scrutiny over ESG reporting is driving a need for a rapid increase in the quality of reporting and disclosure," says Stephen Farrell, head of ESG Assurance at Deloitte. "That requires a combination of skillsets, including specialist skills - for example, physical climate risk measurement - with the more traditional financial reporting skills, in assessing 'what good looks like'."

It is also going to require a technology upgrade. The advice in just about every ESG report is that companies should review their IT systems to see how efficiently they can collect the information needed for ESG reporting and analysis. KPMG advises that a lasting ESG approach should draw the same levels of investment as other core business workflows, including automation, blockchain, AI, and data analytics.

"ESG reporting services have been provided by professional services firms for some time so, for many, IT systems to support the execution of this work may already exist to some degree," says Farrell. "The development of global standards, and regional legislation and regulation, will inevitably lead to the need for further ongoing development of IT systems, to ensure reporting services can be delivered at the expected standard."

In terms of demand, the market is going to be huge. ESG issues can vary by industry and by company, but a KPMG international survey, 'Towards Net Zero: How the world’s largest companies report on climate risk and net zero transition' , found that 56% of the world’s 250 largest companies acknowledge in their corporate reporting that climate change is a financial risk to their business. In the oil and gas industry, 81% of the largest companies report climate-related financial risks, followed by retail (70%); technology, media, and telecommunications (60%); and financial services (57%).

The important thing to remember about ESG reporting is that it is not industry-led, it is a social pressure. People, whether they be consumers on an average wage or large-scale investors, increasingly want to know that the companies they choose to invest in or whose products they buy, share their core values and conduct their business in an ethical way. Auditors and accountants can play an important role in signalling the quality of the information to the market and give people more confidence in the quality and reliability of ESG information.

According to Kwang, becoming ESG-conscious will be as much of a survival strategy for accountancy firms as it will be for the clients.

"Accountancy firms without an ESG strategy will not be able to align themselves with aspirations of the younger generations of employees," he says. "They will gradually face increasing difficulty in attracting and retaining talent. Likewise, clients, who are increasingly becoming more ESG conscious, will not want to associate themselves with firms without an ESG strategy."

Farrell pointed out that ESG reporting is now being integrated alongside the existing financial reporting process, and the need to do so is being further fuelled by heighted scrutiny and an ever-increasing expectation on quality. "Society now has a clearer appreciation of ESG issues and this wider societal involvement will continue to change and drive how business performance is measured," he says. "This means taking it seriously is not optional for executive management."