Do the right thing for the planet
Updated: Sep 7, 2022
Showing you care about climate change and human rights is good for business
Pressure is mounting on companies to operate in a responsible, sustainable way. This means showing stakeholders you are seriously committed to a better world by developing a robust strategy that covers issues such as carbon emissions, human rights, employee wellbeing and corruption.
Global consultancy firm Korn Ferry says failing to embrace ESG (Environmental, Social & Governance) and sustainability will be costly. The firm states: “Doing nothing may feel like you’re saving in the short term. But longer-term it will cost you big. Investors. Partners. Customers. Employees. They’re all turning their backs on businesses that won’t commit to building a sustainable future. And demand for companies to act will only grow in 2022.”
Strong business case
There is a strong business case for incorporating ESG into long-term strategy, according to leading accounting professionals.
In an article on social responsibility first published by the ICAEW, William Hughes, Sustainability Service Lead at international accounting firm Mazars says: “The business case is emerging that active ESG management is directly linked to superior financial performance. We now have the ingredients for an incentivisation strategy that demonstrates that purpose and profit aren’t mutually exclusive.”
It is imperative companies understand how their business activities can potentially have a negative and severe impact on the environment and people, William says, adding: “A company that is more committed to the sustainability journey and has embedded ESG into its wider business strategy will be more efficient and more resilient to change.”
His comments are echoed by James Kallman, CEO of Moores Rowland Indonesia, and a leading campaigner for the protection of human rights in business. James says: “Companies must make their ESG performance an essential aspect of their business model to identify various opportunities and risks.”
He adds: “According to an analysis by Bloomberg, global ESG assets under management amounted to US$35.3 trillion in 2020. These holdings will likely reach 53 trillion by 2025. As a result, companies that understand their financial risks and can produce strong ESG results will have increased access to capital from a more diverse investor base that considers ESG factors. Businesses with weak ESG performance, on the other hand, will have limited access to capital markets. They also risk divestment as investors cleanse high-risk ESG assets from their portfolios.”
Growing appetite for ESG
Mazars and Moores Rowland Indonesia are members of Praxity, the world’s leading alliance of independent accounting and consulting firms. Praxity member firms around the world, many of whom provide specialist ESG expertise, are seeing a rapid rise in interest among clients looking for support in this fast-growing area of business.
William reveals Mazars has witnessed “a significant wave of interest from organisations in all sectors” over the last 18 months. This interest is motivated by three key factors:
Shared value creation
Access to capital
“I find leaders are getting savvier about articulating a clear ESG business case to their stakeholders. As well as having altruistic benefits for the environment and wider society, a sustained focus on ESG can bring significant added shared value. For example, ESG initiatives provide opportunities for organisations to position themselves as employers of choice, to improve staff retention and engagement, to reduce costs, and to enhance their risk management, among many other benefits,” William says.
“Additionally, as more financial services organisations look to allocate capital to ESG-related projects to demonstrate their own ESG commitment, the cost of capital can be significantly reduced. We see this through preferential interest rates or other borrowing terms in return for ESG-aligned performance,” the Mazars sustainability chief adds.
Regulation is an important driver behind ESG adoption. New guidance and directives have been issued in certain regions and momentum is growing for higher quality, more standardized ESG and sustainability reporting globally.
In September 2021, five independent standard-setting institutions launched a statement of intent to work together towards a comprehensive corporate ESG reporting system. The International Auditing and Assurance Standards Board (IAASB) is also consulting on moves to enhance its ‘umbrella’ ISAE 3000 standard. Tom Seidenstein, IAASB Chairman, says in an article on ESG reporting published by IFAC in December 2021: “We see the trend moving from voluntary reporting commitments to requirements mandated by jurisdictions throughout the world.”
In Europe, the EU Taxonomy, a classification system establishing a list of environmentally sustainable economic activities, was made effective on 12 July 2020. This classification system was followed by the issuance of the Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers, pension funds and insurers to disclose how they consider ESG risks in their investment decisions, applicable from 10 March 2021. In addition, the European Commission issued its Corporate Sustainability Reporting Directive (CSRD) proposal on 2 April 2021, which extends the scope of the Non-financial Reporting Directive (NFRD) requirements to include all large companies without the previous 500-employee threshold.
The UK, Japan, New Zealand and Singapore have mandated climate disclosure for publicly listed companies based on the Task Force for Climate-Related Disclosures (TCFD) framework. Governments in Asia are also stepping up regulation. The Government of Indonesia (GOI) has introduced a new carbon tax that follows a cap and tax scheme, which imposes a tax for carbon emissions beyond a stipulated cap. The GOI is set to pilot the coal-fired power generation sector tax beginning April 2022.
While regulation is growing, William Hughes argues “compliance should be a by-product of taking ESG seriously, not the main motivation for pursuing change”. He explains: “If you approach ESG solely with a compliance mindset, it inevitably means that you miss out on the added-value or financial benefits that ESG can offer.”
Pressure from investors
Investors are also a driving force. The 2021 Global Investor Study, an annual survey of more than 23,000 global investors produced by global investment specialist Shroder, reported substantial growth in investors’ understanding of, and appetite for, ESG-aligned investment opportunities.
Ella Reilly, Shroders’ Investment Director, Sustainability, says ESG and sustainable investing is being driven by:
Greater focus on climate change, driven by the COP26 climate summit
Greater focus on social issues such as building more resilient communities and reducing inequality
The trend for investors and businesses to work together to demonstrate and improve their ESG performance
How independent accounting firms are helping clients
With pressure mounting on companies to take positive action, many business leaders are not fully up to speed with what they need to do and how best to incorporate ESG into their strategies for growth.
Moreover, while more and more companies are keen to demonstrate a commitment to ESG, there is a danger of over-promising and being exposed as ‘talking the talk’ and not ‘walking the walk’. Each business has different needs and it’s important to get it right.
Praxity member firms play an important role in helping organisations understand ESG and embed it into a strategy to achieve positive outcomes to benefit people and the planet.Mazars, for example, has developed a step-by-step process through which organisations can develop a robust and credible ESG strategy adapted to their unique circumstances. This approach guides businesses through five key stages:
Materiality assessment – what are the risks and opportunities?
Business model and strategy – what needs to be adapted to become more sustainable?
Governance and organisation – what changes are needed to internal organisation?
Implementation – how to build policies, action plans and targets
Performance measurement – how to track progress and follow indicators
The global accounting firm has also developed bespoke ESG services relating to net zero, human rights and responsible procurement to assist organisations in embedding ESG strategically into their operations.
William Hughes explains: “We always encourage organisations, especially those tackling ESG from scratch, to take the Mazars ESG digital health check. Our self-assessment tool highlights gaps in current ESG provision and compliance against regulatory standards. The results of this diagnostic provide a useful springboard from which to engage an organisation’s stakeholders in developing an ESG strategy using our five-step approach.”
Moores Rowland Indonesia (MRI) is also leading on ESG, providing independent and high-quality assurance on the sustainability reports of companies in various sectors including mining, telecommunications, fast-moving consumer goods, energy and banking. This work extends to writing sustainability reports and ensuring these are in accordance with national regulations and Global Reporting Initiative (GRI) standards, updating companies with the latest ESG standards and regulations, and providing opportunities for them to share their best practices in ESG implementation and reporting.
To gauge local compliance, MRI carried out a study of Indonesian public companies’ 2020 sustainability reports. The study assessed whether or not the companies complied with national sustainability reporting regulations and GRI standards. The objective was to encourage companies to improve their ESG performance and reporting.
The study found that only 16% of public companies in Indonesia published sustainability reports in 2020. Of the 121 sustainability reports published in 2020, only 28% demonstrated high compliance with the criteria for sustainability reports contained in Indonesia’s sustainability reporting regulation. Furthermore, the analysis found that only 21% of sustainability reports disclosed information on the company’s sustainability policy. An even smaller percentage of sustainability reports (2%) disclosed information on the company’s human rights policy. However, a positive finding is that 83% of sustainability reports were prepared according to the Global Reporting Initiative Standards (GRI Standards).
MRI is particularly focused on the social, or ‘S’ component of ESG, which it regards as a unique capability. In this regard, the firm developed a standard that covers social issues and which won the Audit Innovation of the Year IAB 2012 award. MRI used the audit standard as the foundation for developing the Business and Human Rights International Standard for Certification (BHRISC 2011), a corporate human rights management system certification.
Praxity collaborations drive positive action
ESG-focused accounting firms are collaborating through Praxity to improve global practices and benefit companies in different jurisdictions and with different needs.
Mazars is working with UK firm Albert Goodman to assist them with introducing ESG-related services into their service offering. Sophie Parkhouse, technical and training partner at Albert Goodman, says: “I am pleased to be working with William and the team at Mazars in order to explore how we can widen the ESG support available to businesses of all sizes across the UK and in doing so further meet the UN’s global sustainable development goals.”
Similarly, MRI is working with fellow Praxity member firm PT AJA Sertifikasi Indonesia on BHRISC 2011. Moores Rowland helps companies meet the BHRISC 2011 standard criteria, while PT AJA Sertifikasi Indonesia is accredited to conduct the BHRISC 2011 certification.
As a leading light in business and human rights, MRI works with the Foundation for International Human Rights Reporting Standards (FIHRRST), an international association dedicated to respecting, protecting and fulfilling human rights, to host ESG discussions and sustainability reporting studies. The Indonesian firm also works with FIHRRST in conducting Human Rights Due Diligence (HRDD) across their operations. HRDD is an essential process that companies must perform to ensure they respect human rights and better manage their human rights and social risks.
James Kallman says: “We understand that human rights is one of the most important aspects of the social component of ESG. Therefore, we have consistently encouraged companies to demonstrate their commitment to respect human rights. Thus far, we have only worked with one Praxity member firm, PT AJA Sertifikasi Indonesia, on business and human rights and ESG. We look forward to working with other firms within the Praxity Alliance in the future.”
To encourage further collaboration, Praxity has set up a new ESG Working Group comprising of experts from firms with a strong ESG pedigree and professionals from firms looking to expand their ESG operations. The group has been created to help firms share expertise, grow their knowledge and work together on global ESG initiatives.
Safeguarding the planet
Companies take a massive gamble when they fail to make ESG a priority. They risk compliance issues, damage to reputation and loss of customers and investors. They risk being left behind by more forward-thinking, sustainable competitors. And they put the sustainability planet at greater risk.
Accounting firms within Praxity provide a clear path forward, both independently and collectively, to help businesses do the right thing.
William Hughes concludes: “It is important that we all start taking these matters seriously today, not only to safeguard the planet and our society for future generations, but so that organisations can safeguard their own futures too. In a more ESG-focused culture, the organisations that don’t embrace these changes will increasingly find themselves irrelevant.”
This is an updated version of an article I wrote for my client Praxity Global Alliance, the world’s largest alliance of independent accounting and consulting firms.