The concept of sustainability has risen in prominence over recent years and often topics such as CO2 emissions and net zero targets are given more airtime in the financial results than some more traditional highlights. Sustainability is often used as shorthand for the concept of ESG (environmental, social, and corporate governance) but ultimately these concepts come down to the idea that responsible management of a company needs to take more than financial elements into account.
For large companies, this has become not negotiable as shareholders and governments are increasingly demanding that this be considered. But what about small and medium enterprises, how do they incorporate ESG into their business strategy, especially when many of them are struggling to survive in a challenging economy? And how can the accounting profession play a part in enabling a greater focus on ESG in this vital sector of the economy?
Speaking at the recent SAIPA Accounting iNdaba, Dr Nurmazilah Mahzan, Authority Member at the Sustainable Energy Development Authority (SEDA) commented that it wasn’t that long ago that the focus of companies was on profit maximisation, but over time accounting standards have evolved to take a more holistic view.
SUSTAINABILITY PART OF THE NATURAL EVOLUTION OF BUSINESS
“We, as an industry, are evolving together with the market, market forces, and economic theory,” says Dr Nurmazilah Mahzan, Authority Member at the Sustainable Energy Development Authority (SEDA). “Integrated reporting started its journey in 2011 and the first framework came out in 2012. We’re evolving and we have to be willing to take centre stage alongside other professionals.”
Fikile Zwane, Assurance Director at SNG Grant Thornton adds that the daily struggle of SMEs can make it challenging for them to give ESG the attention it deserves. However, this fight for survival is not that far removed from the issues that underlie the sustainability discussion. “If you’re an SME you’re already saying ‘I want to be there tomorrow. It’s difficult, but I’m fighting to be there.’” To achieve this, SMEs need to be resilient. Brett Reimers, Senior Manager, Risk Advisory Services at BDO concurs, adding that the concept of resilience and sustainability are intrinsically linked. He explains that if a company manufactures a product and they can’t find the raw materials because the underlying natural resource has been exhausted, then that affects the long-term resilience of the company. The only way to avoid this is to take a sustainable approach from the start. “We can’t solve the biggest problems in the world without getting everyone involved,” he says. “Collaboration is critical and not just in the climate change space.”
With there being a lot of jargon in the ESG field SMEs need access to someone who can ‘translate’ ideas between fields. “You’ve got to have people that speak that non-financial data language, who can build the bridges into the financial language, speak and then take it beyond that into communicating that to the wider society,” he adds. Mahzan points out that even though people may not have spoken about sustainability 20 or 30 years ago, they’ve always referred to the foreseeable future. The need to ensure that a business could continue operating has always been part of the discussion.
REPORTING LIKELY TO DRIVE INCREASED IMPORTANCE OF SUSTAINABILITY
While there are good business reasons for companies to take sustainability seriously, Reimers says that, ultimately, reporting will be a key driver in making ESG as important to SMEs as it is to large corporates. “We’re going to get to a point where we have sustainability standards for SMEs like we had IFRS for SMEs,” he says. “This will lessen the burden for the SMEs because there’s no way that any economy can ignore SMEs because they’re the ones carrying a lot of people. As accountants, we need to push for this reporting and we need to hold hands with the SMEs, helping them on this journey.”
Much of the pressure on SMEs to focus on ESG is driven by the requirements of larger companies to comprehensively report on sustainability across their entire value chain. Reimers adds that with the new IFRS standards for sustainability, this level of reporting isn’t going to be voluntary for very long and those companies who wait until the deadline is looming are going to find themselves in a difficult position. He says that South African companies are in a stronger position than those in other countries when it comes to governance because of the work done by the King reports. These reports raised awareness around governance and triple-bottom-line reporting, encouraging companies to think beyond merely financial elements.
Zwane adds that it’s significant that the JSE encourages companies to report based on the King 4 report and when they don’t, they are questioned on that. “It’s not just that the JSE is pushing that, but companies are encouraged to generate integrated reports. In South Africa we already have a landscape that’s changed and where the adoption of best practice is part of the corporate culture.” So even if SMEs aren’t required to produce these kinds of integrated reports, they can look at what the listed companies are producing and follow their guide. “So, I think that’s the encouragement that if you don’t take it seriously, regulators in the UK have already issued sustainability standards and there’s a requirement for people to adhere to that and that’s going to make you take it seriously,” adds Reimers.
THE LINK BETWEEN FINANCIAL AND SUSTAINABILITY REPORTING
Mahzan comments the one challenge the companies face is linking sustainability reporting with financial reporting. “There was a report issued in 2022 by the Climate Board Initiative (CBI) where they analysed 107 annual reports, looking at the financial statements and sustainability reports. While they reported on matters related to the environment such as carbon emissions, GHG emissions, water and risk management as well as social and other risk matters, they didn’t find a clear connection between financial reporting and sustainability reporting.
He explains that if there is a potential impact on a company’s assets there’s a risk of creating stranded assets. However, the report didn’t find the kind of disclosure with regard to the associated risks. “What will be interesting is to see the evolution. We have sustainability reporting, and we have the data, but how do we know if the data is reliable? Can they then go to the auditors and ask them to give assurance on that? This is already in play as the International Auditing Assurance Standard Board has already issued a consultation paper on the sustainability assurance standard.”
WHERE DO ACCOUNTANTS FIT IN?
If you accept that ESG is going to become increasingly important for SMEs, then the role of the accountant comes into focus. Zwane explains that in terms of reporting accountants need to assist SMEs to make sure that whatever reports that they take out there tell the full story. “Our training enables us to have a good conversation with the investors, taking a stewardship role within an organization,” he says.
Mahzan comments that accountants have always been trusted with a stewardship function. People come to accountants to ask about assurance and can’t come to anyone else for that. “But some people have asked why accountants would give assurance on climate data. What do they know about climate data? The answer is because we accountants are ingrained with our policies,
the structure that we have, and the standards that we always look at.” He adds that while accountants are always trusted with the stewardship function the issue of assurance does raise questions about why accountants should give assurance on climate data.
That doesn’t mean that the accounting profession doesn’t have work to do. Reimers comments that there still needs to be a mindset change among the accounting community to ensure that they can fulfill an expanded stewardship role. “It is not an easy road to walk as an accountant because we have to change our mindset. We’ve been thinking about money, profit-making, net profit. We’ve been looking at the balance sheet, we’ve been looking at the statement of financial position, the income statement. That’s what has driven us and that’s what we studied,” Mahzan says.
He adds that it’s the core skill set that accountants have that gives them an advantage in this regard. “Our strong code of ethics, which is necessary to carry out the work, is part of the principle of due competence. “So, when a business is having the challenge of environmental crisis, environmental risk, social risk, which impacts their sustainability, the finance function is equipped to serve the organisation with a strong principle of due competence.”
WHERE TO NEXT?
Zwane comments that ethics need to remain a core tenet for accountants when it comes to ESG and sustainability. To accomplish this Mahzan says that accountants need to expand their knowledge around the issue of sustainability and ESG and how the reporting requirements are evolving in this area. “We’ve learned about technology and how that impacted reporting and we have to do something similar with ESG. We’re always evolving so we need to put in the effort but also collaborate with the other fields so that we, as accountants, can take a leadership role around this.” The importance of leadership is reinforced by Reimers “We need to encourage people to take up leadership roles in this space,” he says.
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