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ESG Impacts On Financial Reporting

Fractional CFO, Tax Strategist, 10X Coach & Speaker. Rood Financial Services

The changing environment in the economy has been a massive influence on the business and political world. In particular, constant change has had an impact on where companies and people choose to put their money. In recent years, there has been an increasing focus on environmental, social and governance (ESG) criteria when handling financial reporting. I have seen many changes in my years in tax and accounting all pointing to putting sustainability front and center. This is changing how businesses manage their finances as they begin to look at the economic benefits of every move they make and the possible impacts that could harm society or damage the environment.

Suppose a company fails to keep up with these changes. In that case, while the future cannot be told, it is possible to face consequences such as losing clients and risking business health. These consequences would be a result of public scrutiny of its actions as a corporation. The ways this has changed traditional finance can be seen as three separate categories: accounting for ESG issues, shaping business decisions and communicating financial information.

Accounting For ESG Issues

Many of the significant accounting standards bodies, such as the U.S. Financial Accounting Standards Board (FASB), International Accounting Standards Board (IASB) and Public Interest Research Group (PIRG), have begun to add new guidelines that encourage companies to consider their impact on society when they report on finances. The FASB’s guidance encourages businesses to report in a way that will include environmental items, reclassifications and changes in accounting policy.

Another example is IASB’s efforts with “Equity Method in Separate Financial Statements,” a standard where companies use the equity method of accounting for investments, which must provide additional disclosures about any ESG issues that could have a material effect on their financial performance. These changes ensure that not only are companies more accountable to society, but they are also forced to be more transparent with the public.

Shaping Business Decisions 

Many of the top executives of corporations all around the world now see themselves as having responsibilities toward their stakeholders, which include employees, suppliers, customers and investors, as well as society in general. This has caused many other business leaders to consider every decision they make. If an activity does not meet specific environmental criteria, it may no longer be worth doing because of its negative impact on people or nature and the potential for social backlash that might accompany it.

Thus, a conflict arises within these organizations between delivering solid profits and managing responsibly; one way to solve this is by putting a price on the environmental impact. This, however, does not necessarily solve the problem but presents the opportunity for common ground and a meeting of the minds. Accounting standards have begun to take notice of these issues and are also starting to consider how sustainability accounting standards will influence business decision-making processes.

Communicating Financial Information 

A new source of information has been created where historically there was little or none whatsoever available to the public. These sources are known as environmental profit and loss accounts (EP&Ls). These EP&Ls were created out of the same framework used for profit and loss financial statements but add in social and environmental factors such as human rights violations, lawsuits and fines that could hurt the company’s profits along with greenhouse gas emissions, water usage and energy use.

These extra factors that are now being included in some financial statements have been developed in an effort to make it more clear to investors how much a company is impacting society and the environment, which could provide a clearer picture of its future financial prospects. However, this information is typically not known by most mainstream consumers because many companies do not release this data to the public unless required by law, which makes it difficult for any one person to learn about these impacts on their own.

In conclusion, not only are corporations being nudged to be considerate of the positive impacts they have on society, but they are also feeling pressure to be cognizant of the negative ones. Businesses will likely need to continually find ways to improve their practices so as to limit the harm to society, including the environment. This simultaneous effect on business operations and social concerns provides an opportunity for leaders to scrutinize how all aspects of a company can benefit from this change in focus.

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