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One topic investors agree is critical to decision making

Water leafCape Town’s Day Zero has been postponed—for now. That’s the term being used to describe the impending extreme water crisis in my native South Africa. I’ve seen how it affects the people who live there, as they scramble to hold off what seems inevitable. My friends in Cape Town only shower twice a week and save their shower water to water their gardens. Local pools around the city are empty, hotels can’t wash linens as often as in the past and the agriculture sector has been hit.  The severe water shortage threatens employment, tax revenues and municipal credit ratings. The trickle down (a term that has never been so literal) reaches business owners and investors as they consider the rising costs of a resource they once took for granted.

 

Both a concern and an opportunity for investors

Cape Town’s experience is just one example of the ways that economies and individual organizations are affected by environmental, social and governance (ESG) issues. And it’s increasingly of interest to investors— they want to know more about how companies are managing ESG issues or capitalizing on related opportunities.

About three-quarters of investment professionals worldwide consider these factors in their analysis and decision making, according to CFA Institute study. A total of 61% of investment professionals also believe public companies should have to report at least annually on sustainability indicators. When asked why they included ESG concerns in investment decisions, the investment professionals cited risk management, client or investor demand, their fiduciary duty and the identification of investment opportunities as some of their reasons.

CPAs can play a critical role in helping organizations convey the ESG information investors want.

A role for accountants within organizations

ESG information can provide an indication of how well a business is run and how well it manages its risks, factors that can help investors make relevant investment decisions.  Accountants within an organization can contribute to ESG efforts to help satisfy and address investor concerns. Here are two ways:

  1. Sustainability reporting can show how companies are managing or innovating around their sustainability risks and opportunities. The CFA Institute study showed the main reason investors didn’t use nonfinancial information when they made investment decisions was due to a lack of appropriate quantitative ESG information. Not because they didn’t want to include the information. Accountants, however, have the skills to help gather, analyze, measure and report on ESG efforts, and can thus help provide investors with the information they need.
  2. Risk management. Investors want to see that companies are considering all relevant risks. Accountants can help identify risks and develop strategies to address them. One tool they can use is new draft guidance from COSO (The Committee of Sponsoring Organizations of the Treadway Commission) and the World Business Council for Sustainable Development. Applying Enterprise Risk Management to Environmental, Social and Governance-related Risks helps companies leverage their existing enterprise risk management processes to identify, assess and mitigate ESG-related risks.

A role for CPAs in public practice

In addition to various advisory services, CPAs in public practice can also help clients' efforts to enhance the reliability of their reported ESG information by providing assurance services. A total of 69% of investment professionals say it is important for ESG disclosures to be subject to some level of independent verification. The AICPA guide, Attestation Engagements on Sustainability Information (Including Greenhouse Gas Emissions Information), offers comprehensive guidance on applying the clarified attestation standard when performing examination or review engagements on sustainability information.

You may be interested in registering for the Sustainability Investment Leadership Conference, taking place on May 2 online and in-person in New York. Attendees will discover how good governance, environmental sustainability and social stewardship can drive profit. AICPA member can get #100 off registration using the code aicpa100. 

Desire Carroll, Senior Manager, Assurance and Advisory Innovation, Association of International Certified Professional Accountants

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