ESG reporting: Ready or not, here it comes

It's a big year for ESG initiatives, and Jeremy Osborn, FCMA, CGMA, wants to make sure finance professionals are prepared for all that's coming their way. Osborn, AICPA & CIMA's global head of ESG, joined the FM podcast for a discussion on the business reasons to pay attention to ESG, how he became interested in the topic about 15 years ago, and why he was excited to be part of a niche practice area that is today becoming mainstream.

This is part one of a two-part interview with Osborn. The second part will publish on 19 April.

What you'll learn from this episode:

• The difference between ESG and sustainability.
• Why Osborn considers the governance part of ESG to sometimes be forgotten.
• The reasons auditing and assurance opportunities are on the rise.
• The ESG-related word that Osborn says he still has trouble spelling.
• A look ahead to the second part of the conversation.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Neil Amato: Welcome to the FM podcast. This is Neil Amato. Jeremy Osborn, AICPA & CIMA's global head of ESG, is joining me for this episode. Jeremy is a fellow of CIMA; he holds the CGMA designation. Jeremy, we're glad to have you on the FM podcast, so welcome.

Jeremy Osborn: Thanks, Neil, for having me. I'm delighted to be with you.

Amato: I've asked this question in the past on other podcasts with other guests, so maybe the answer has changed over the years, but I think people know what we mean when we talk about ESG, especially maybe the E, but do they know what the S and the G mean? Also, is ESG different from sustainability?

Osborn: It's a great question, Neil, and I think always helpful to agree around how we understand the terms. The E stands for environmental, S for social, and the G for governance, so taking each of those in turn and thinking about these from a business perspective. The environmental is really an understanding of how your organisation interacts with the physical, the natural environment around it, the impacts and dependencies it may have on that. The social is really to do with all of the social interactions that an organisation has, the human capital that it draws on as part of its business model, its customers and suppliers, and all the stakeholders who are essential to the business being able to function. Then the G is the forgotten youngest child in a way, so G is for governance, and I think this area is the least well understood.

In the context of ESG, the G is actually referring to the governance across the entire entity, so not only the governance of sustainability-related matters but how the business is structured as a whole, particularly in terms of the upper echelons of leadership; so the interactions between the executive management team and the board, for example. Is it the same as sustainability? This is a moot point, and it is hotly debated. Sustainability tends to forget about the governance, so I think it is helpful to have that explicit reminder in E, S, and G. The other thing that's often forgotten in the context of sustainability is things like intellectual capital, which is hugely important, particularly for any organisation that relies on the know-how, the goodwill, the generation of ideas and innovation amongst its people.

That is a sustainability-related issue, but it sometimes gets forgotten. Again, using ESG can help remind us of that aspect of value creation.

Amato: ESG has been in the news a lot lately, I think — UN Climate Summits, the investment industry taking a greater interest, upcoming regulations, and more. So for finance professionals or others who may be listening, why should they care about ESG?

Osborn: Well, that's a very pertinent question. There's a whole host of drivers behind why ESG is becoming a mainstream issue for businesses. I think if we think first of all about the urgency of how we as individuals, how we as organisations and as society respond to climate change is a good starting point because that's in the news pretty much every day. As you said, there's the annual gathering of COP, and that's really where the world comes together to work out a collective response to climate change. The urgency comes from climate change, and then regulation really is following hot on the heels of those physical impacts that climate change is having on society and on our businesses.

Regulation I think is a secondary consideration, but the regulation has really gathered momentum, particularly since the COP that was held in Glasgow in November of 2021, because that's when the International Sustainability Standards Board [ISSB] was launched. We've got urgency of climate change, the regulatory driver coming hot on the heels of that, but the other thing, which I think is really worth drawing attention to, is the size of the prize in terms of the transition to net zero. It's been estimated that the incremental investment that's required to support organisations and entire economies as they transition towards a net-zero economy over, I think it's the next 20 to 30 years, is $50 trillion.

There's also a massive business imperative at play here as well. Each of those is important in its own right. I think as individual finance professionals, the response may be different to each of those, but hopefully amongst those three drivers, there's something of interest to the finance professional community.

Amato: Last summer, you were hired to be AICPA & CIMA's first global head of ESG. What does that on its own signal to you just regarding the organisation creating this position, and what have you set about to accomplish in your role?

Osborn: I think it's a really strong signal of the importance of the professional accountant, and from our perspective that, of course, is the public accountant, the auditor, but also the management accountant working within businesses. The role that they have to play in supporting their organisations and how they respond to all of the things that I've spoken about. I've spent the last few years of my career really working at a systemic level with how to effect change. I was one of the directors of the International Integrated Reporting Council that created the Integrated Reporting Framework, and they merged with SASB, the Sustainability Accounting Standards Board, to create the Value Reporting Foundation.

The VRF, as it's called, was like a mayfly. It burnt brightly for a year and then disappeared, but it hasn't disappeared completely. It's actually been absorbed into the IFRS Foundation and supplies the management team for the International Sustainability Standards Board. There's been a huge amount of change. When one looks systemically at how we can effectively respond to the growing importance of the issues we've been discussing around ESG, the finance professional has a really important role to play in that.

I would argue that without engagement of accountants of one form or another, this transition is really going to struggle to be successful because it needs commitment and it needs capability and capacity right across the system from those who worked within businesses creating information and communicating that externally, from those who audit and assure the information, and ultimately the main uses of that information in the context of what we're talking about today, which is the investment management professional and how that's applied to portfolio management.

It's a really important signal, I think, to that system as a whole, to our stakeholders that AICPA & CIMA understand how important it is to have the position, which I've been very lucky to have been able to step into, and there's a ton of work to do. We are, as I'm sure our listeners will know, we are the world's largest accountancy institute by market share. We really have to take that responsibility seriously in how we support our members and all of those stakeholders with whom we work so that they have the skills, the knowledge, the capability to support the transition that we're talking about.

Amato: You mentioned some about your career, and we're going to get into that a little bit more next. First, what drew you to this line of work? I guess you started your career in commercial management at Unilever, where you qualified as a member of CIMA.

Osborn: That's right. I've been working in sustainability consultancy for about the last 15 years, and I was very lucky just really to have been in the right place at the right time. I was working for Accenture at the time as a strategy consultant, and Accenture set up its first sustainability practice. I remember calling a friend who works for the UK government to say, "What is sustainability?" She said, "Well, I haven't really heard of it either, but I know what sustainable development is." It was really that basic. I still struggle with spelling the word. It's very frustrating to work in an area where I have to use this word in practically every email, and I still can't quite get it right each time I try. It was very exciting, though, to be there really right from the beginning.

What was interesting was that the colleagues I worked with at the time, nobody had a professional background in sustainability. We'd all come from different walks of business life. I happened to be, by happenstance, the only accountant, and so as I scratch my head and thought about what skills, experience do I bring to this team? I thought about the performance management aspects of management accountancy and whether one could apply that to sustainability and start bringing some rigour and professionalism to how one accounts for sustainability performance. Really, it was my professional interest in, I think the fulcrum where accountancy and strategy consultancy and this newly emerging discipline of sustainability consultancy met. That for me was the attraction 15 years ago.

An awful lot has changed since then, and the profession has become more professionalised. Typically, a younger entrant to the sustainability profession probably comes with a master's degree in climate change or some aspects of climate science or water use or hydrology, something like that, but it was great fun to be part of a business startup 15 years ago. Amazing to see how the industry has expanded hugely, and I think what I've been really struck by over the last few weeks, in particular, is just how mainstream this slightly, I tend to think of as the hippie end of strategy consultancy when I started in this area 15 years ago. It's become absolutely mainstream now, and that's happened in a relatively short period of time, and I think that speaks volumes for why this is important.

Amato: For our listeners to know, we are recording in early February 2023. In many jurisdictions around the world and certainly in the US, this year, 2023, is setting up to be an important one in the realm of ESG reporting with the US Securities and Exchange Commission's [SEC's] first rule on climate-related disclosures expected. Obviously, we don't know exactly what the final rule will require. But what would you say is the readiness level for both companies and the accounting profession for what's to come?

Osborn: Let me just start with what's going on internationally, and then I'll come back to your question, Neil. Internationally, we have the formation of the International Sustainability Standards Board. Which, as I said, that was launched at the COP in Glasgow in November 2021. They've issued their first two exposure drafts for sustainability standards. The first it's referred to or abbreviated to IFRS S1, and that's the general conceptual framework. That lays the groundwork for all of the future topic-related standards that the ISSB will publish.

Then the second exposure draft they have is IFRS S2. That's for climate-related sustainability disclosures. Now the reason this matters is that the work of the ISSB sets the what's referred to colloquially as the international global baseline. If adoption of the work of the ISSB follows the pattern of the IFRS Foundation, we're likely to see the majority of countries in the world require companies to use these standards. Then we have stuff going on at a regional or a supranational level. The primary activity here is the EU.

The EU Parliament agreed in November of 2022 to 13 sustainability reporting standards. They're referred to as the CSRSs, the corporate sustainability reporting standards. Those are expected to become a requirement for reporting year 2024, so companies got a little bit of time to prepare for that. They're very extensive. It's been estimated about 50,000 companies within the EU will have to comply with these rules, and towards the end of this decade, companies that trade with the EU and that are not EU-listed will also have to comply.

Then we have, as you've mentioned, national rules. The most important here is, as you said, it's a proposed reporting rule at the moment that comes from the SEC that relates to climate. We don't yet know where the land will lie with that. Everybody is on tenterhooks with what the SEC will actually propose, but we don't know yet. There's an awful lot going on. To your question of how ready are organisations, I think there's a lot of activity going on.

I think what I hear is going on, for example, within the big international audit firms, is that they're gearing up their financial auditors to be able to work with their clients and support them with this transition, because in many cases, the information will need to be audited and assured as well. You have a lot of people who haven't really done any work in this field today who suddenly find themselves in a position where they've got to become pretty knowledgeable about some fairly detailed stuff.

One can see that those who need to know the information to support their organisations and their clients for this are beginning to step up to the mark. My hunch is that there's probably still quite a large gap between what's required and the capability and capacity currently within the system.

Again, to take it back to the role we can play within that, we have 700,000 members and students and engaged professionals. We can support them through learning products, through conferences and webinars, et cetera, with helping them get up to speed with the information they need. But it needs all of the bits of the system to support that.

Amato: Again, that's Jeremy Osborn. He just mentioned how AICPA & CIMA are helping accounting professionals tackle the ever-evolving landscape of ESG.

Coming up on the second part of this conversation, which we'll publish later this month, you'll hear Osborn's perspective on how those charged with ESG reporting and assurance, even those who are skeptical about ESG, can apply the skills they already have to provide value to their clients and companies.

Thanks for listening to the FM podcast.