Sustainability Reporting: The new era of business accountability

 

Imagine there’s no heaven

Imagine for a moment that financial accounting doesn’t exist, there are no qualified accountants and companies have never had to record or report on the financial aspects of their business. Overnight government decides to invent all the current accounting standards and brings in laws (with severe penalties) that makes it obligatory to account and report on all financial transactions. Just to make it a bit more difficult, let’s say this all has to be achieved from scratch in two years.

The above scenario seems ridiculous, especially when you think that accounting, as a set of concepts, a profession and a myriad of laws and regulations has evolved to what it is today over hundreds of years. Ridiculous, but that gives you an idea of the scale of the challenge facing businesses as they try to grapple with “sustainability reporting”. Sustainability is more complex, more comprehensive and more important than financial accounting, the regulations and laws are brand new, nobody is qualified, and nobody has done it before.

So, where do you start?

The starting point has to be education, and by education I don’t mean a seminar for a half-day or a day. The senior leadership team of an organisation, the executive and the board need to gain a good understanding of what this all means and the implications for the business. After 60 to 80 hours of structured study most senior leaders will be familiar with the basic language and vocabulary of sustainability, including ESG and its many comrades. It is not possible to lead a business on a sustainability journey if you don’t understand the topic in some depth. Universities, professional bodies and commercial organisations have produced thousands of courses, but you should focus on the more demanding ones that come with recognised qualifications. If you didn’t have any accountants, you wouldn’t send someone on a course for a day to understand the topic.
 

Leadership

The mind shift needed to become a truly sustainable business is profound, it is much more than compliance and reporting. For starters the timescale involved is not months, quarters or even years, its decades. That’s a difficult shift for businesses that are often more focused on monthly cash collection, quarterly revenue and annual profits.

The guiding light is now the EU’s Corporate Sustainability Reporting Directive (“CSRD”) which will shortly be transposed into Irish Law. The CSRD requires companies to carry out a double materiality assessment, evaluate the impact on your business model and engage with your stakeholders and value chain. These are completely new concepts for many businesses and to be effective they will need to be integrated into and be part of the strategy for the business. This transformation can only be achieved with committed leadership from the top. Businesses that are succeeding in coping with the sustainability challenge have one common denominator; their CEO is committed and is visibly leading the way.

It’s for everyone

One of the understandable mistakes is to appoint someone to take responsibility for sustainability and to except them to take care of it. They are usually expected to do it on top of their current role, with little or no resources, and without bothering the senior executives too much. This is obviously destined to fail but most companies that have started to think about sustainability have done exactly that.

The reality of the task is that it will involve large numbers of people across all aspects of the business. It requires dedicated available resources and investment. In the first year it is reasonable to think about at least 50% of the manpower and spend that goes into your accounting and finance function, for some businesses it might match the finance spend.
 

Light or an oncoming train?

The timescale of impending legislation in the next two years mean that a crash is inevitable for most businesses. The challenge is too big and there isn’t enough time or enough resources to address everything that’s needs to be done.

Don’t despair and forget about the problem, there is hope; You can get Skillnet grants to educate and upskill your team. The government has generous grants available through Enterprise Ireland and Local Enterprise Offices which can help you pay for the assistance and expertise that you’ll need. Industry bodies and trade associations like IBEC have lots of supports available.

In time the software industry will innovate and adapt solutions that will make gathering and reporting sustainability data much easier but for now most of the products don’t cut down on your workload.

The main message is you can’t afford to wait any longer, your customers, your employees and the government will demand that you either get with the programme or suffer the consequences. The time for questioning whether it is a passing fad has long since passed, if you are leading a business you have to be the leader of the sustainability movement in your business.

Author: Michael Costello,  Partner at BDO and alumni of the DCU Executive Education Leadership programme