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This blog was provided by PICPA sponsor St. Joseph’s University.

By Joseph M. Ragan, CPA  

William Ford, executive chair of the Ford Motor Company, said, “Creating a strong business and building a better world are not conflicting goals — they are both essential ingredients for long-term success.” Should more in industry embrace this philosophy, the accounting profession’s challenge will be appreciating the need to blend financial and nonfinancial information so that the comprehensive costs of managing an enterprise can be measured.

Future accountants need to be aware of the continuing growth of sustainability accounting and reporting. The combined environmental, social, and governance (ESG) measures continue to evolve as a strategic business imperative. To date, 80% of Fortune 500 firms provide some form of nonfinancial disclosure regarding their ESG landscape. ESG investing trends are creating opportunities for companies to better integrate social responsibility initiatives into their reporting structure. The Global Reporting Initiative provides a framework for sustainability reporting to help determine the content and ensure the quality of the information.

Sustainability Accounting Standards

In 2011, the Sustainability Accounting Standards Board (SASB) was created and charged with the task of providing criteria for reporting information regarding sustainability. The challenge is that this information differs significantly from the critical measures used in financial reporting.

The standards used in sustainability reporting measure outputs differently than financial reporting. For example, gallons of wastewater produced per production line as opposed to cost per batch. Sustainability information — more of a qualitative measure — is not typically generated in the same way as quantitative-based financial information. Presenting qualitative data is equally challenging since it is not clearly defined. Additionally, some information is difficult to measure or cannot be measured, requiring management to provide their own descriptions.

Educating Future Accountants

In the accounting classroom, we tend to stress the importance of global reporting requirements and to underscore that the profession should, at a minimum, provide information that is complete, accurate, reliable, and consistently comparative across companies within the same business sector. In the auditing classroom, we teach the importance of auditors obtaining evidence to evaluate the reliability of reported information. Auditing sustainability reports is a challenge. How can you truly verify information about ESG accomplishments given a lack of reliable quantitative measures and direct comparability? Does a sustainability report merely provide a statement of accomplishment? Does that verify that the achievements have had a positive impact on sustainability?

There is a growing need for accounting educators to expand, adapt, and revise the accounting curriculum to meet emerging topics such as sustainability reporting. Given the continuing reality of climate change, as well as the increasing call for more diversity, coverage in the university curriculum is imperative.

Many schools have simple and affordable ways to embed ESG into the academic experience. Examples of good first steps include extracurricular club activities and presentations by outside experts. These options provide information about corporate practice and enable dialogue while helping to grow familiarity with sustainability issues. Recent efforts by the United Nations in promoting sustainable development goals also have been helpful in the classroom. There are many online resources, too, including applied cases, that would be useful in the classroom to educate students on this rising topic.

The road is not clear for either the practitioner or the educator, but the subject is growing in importance, particularly in light of what is commonly referred to as the three P’s: planet, people, and profit. As efforts in this area grow and key performance indicators become better established, more measurable, and verifiable, audit reliability will become less of an issue.

ESG in Strategic Planning, Education

Over the past 10 years, many firms have found ways to incorporate ESG into their strategic planning and policymaking. For example, BMW AG reports that it saves more than $1 million per year in disposal costs by recycling its waste into the company’s products. The Coca-Cola Co., too, has set a goal to more sustainably source its primary product ingredients. Educators have found ways to incorporate cases into their classrooms that demonstrate the reporting realities of ESG. In addition, they are becoming more willing to work with other academic departments to build integrated courses with a business policy orientation. In these courses, students explore real-world applications in policy analysis and reporting.

According to the Association to Advance Collegiate Schools of Business (AACSB), all schools should be demonstrating a commitment to address, engage, and respond to current and emerging social responsibility issues through their policies, procedures, curricula, research, and outreach activities. Given the United Nations’ recent declaration of a code red for humanity with regard to the climate crisis, the call for ESG reporting could quicken. As companies look for ways to tackle their environmental challenges and diversity issues, more eclectic reporting will emerge, and the business classroom needs to prepare the next generation of leaders for these issues now.

Joseph M. Ragan, CPA, is the Sutula chair and professor of accounting at Saint Joseph’s University in Philadelphia. He is a life member of the PICPA and can be reached at jragan@sju.edu.

Don’t miss more on environmental, social, and governance issues at PICPA’s Insurance Conference Webcast on Dec. 2-3.

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