Having environmental, social and governance (ESG) standards embedded in an organisation’s strategy implies that these non-financial matters also translate to financial reporting.
Therefore, through the financial statements, stakeholders appreciate how these non-financial ESG matters impact the assets and liabilities on the organisation’s balance sheet and performance.
By considering ESG impacts on financial reporting, organisations ensure consistency and connectivity between their ESG strategy and the financial statements they prepare.
To achieve this, ensure that the teams responsible for sustainability and ESG collaborate with those involved with financial reporting.
In addition, ensure continuous monitoring of ESG and financial reporting rather than making it a one-time year-end event, leading to a silo approach and gaps in financial reporting.
Some of the impacts ESG matters could have on the financial statements include the following:
Accounting for carbon credits is one aspect that is gaining momentum through the voluntary carbon markets.
While regulation in this area is nascent, develop an accounting policy that is bespoke in the absence of an accounting standard for carbon credits.
As organisations engage in activities that generate and trade these carbon credits, they must recognise their impact in the financial statements based on this accounting policy applied.
The increase in sustainable finance products such as green equity, green bonds, and other sustainability-linked financial instruments will affect the financial statements.
For example, the impact on Financial Instruments: Recognition and Measurement (IFRS 9) classification.
Going concern assessments should incorporate similar assumptions consistent with the organisation’s ESG strategy.
In addition, ESG commitments organisations make, such as net-zero ambitions and other climate transition risk plans, should be translated into financial reporting.
It ensures that the financial impact of such plans is taken into account when preparing the financial statements.
Many countries are beginning to provide tax incentives that promote ESG and sustainability.
Organisations must consider the financial reporting impact of tax laws on their financial statements.
Organisations must consider the financial reporting impact of these tax legislations on their financial statements.
The IASB (International Accounting Standards Board) and ISSB (International Sustainability Standards Board) shared an article recently on the benefits of connectivity between ESG/sustainability reporting and financial reporting, and this is no different for organisations as well.
The writer is a partner at Deloitte East Africa. He writes and speaks on corporate reporting.
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