Environmental, Social, and Governance (ESG)
ESG refers to the practices, policies, procedures, and metrics that companies employ to limit their negative impact and/or enhance their positive contributions to the environment, society, and governance bodies.
Criticism of ESG Investments
Some critics assert that ESG investments allocate funds according to political agendas such as the fight against climate change, instead of striving to earn the best returns for savers. They view ESG as the latest manifestation of the world’s attempt to become “woke.”
ESG in South Africa
In South Africa, ESG reporting has emerged as a critical aspect of business, aiding in the development of performance and growth strategies for investments. Both opportunities and risks associated with ESG are becoming increasingly significant for financial institutions. However, ESG data collection and reporting alone do not necessarily lead to financial improvement. Strong ESG performance, though, has been linked with higher equity profits and a decrease in risk.
Accounting and ESG in 2023
In 2023, accountants are expected to incorporate ESG sustainability considerations into their reporting, including identifying and measuring social impacts, assessing risks, and providing sustainability metrics. ESG projects are vital for businesses in all industries, including the accounting sector. ESG accounting initiatives enable firms to understand and minimise their environmental impact while promoting better work practices. A decline in demand during the reporting period could influence future cash flow estimates used in asset or goodwill loss assessments.
ESG reporting components might encompass the following elements:
- Environmental Risks: These include climate change, energy conservation, use of renewable energy sources, greenhouse gas emissions, deforestation, biodiversity, water and air pollution, and waste management. Implementing measures to address these risks can bolster credibility with stakeholders, meet investors’ expectations, and create prime investment opportunities.
- Business Sustainability: This involves companies adopting sustainable, ethical practices such as ensuring workplace safety, fostering a positive culture, promoting diversity, equity, and inclusion, enhancing customer satisfaction, and protecting data privacy. The goal is to make informed decisions that benefit customers, employees, shareholders, supervisors, and the broader community.
- Corporate Social Responsibility (CSR): CSR policies aim to ensure that individuals, communities, and society at large benefit from corporate operations. The board of directors is responsible for establishing and enforcing these policies.
- Internal Governance Structure: This pertains to the company’s objectives, risk tolerance, procedures, responsibilities towards customers and employees, and delegation of authority. CFOs are required to assess the potential impact and likelihood of ESG risk events on financial performance and consider significant ESG priorities when making decisions regarding fund growth and innovation.
In conclusion, ESG initiatives are a critical component of modern business operations and strategies. They promote sustainable and ethical practices that benefit not just the company, but also the environment, employees, customers, and the broader community.