Central banks and financial regulators worldwide are coming together with the shared goal to “counter greenwashing” (the practice of claiming ESG performance in excess of actual performance) and to ensure that ESG data is meaningful.

As part of this effort, more than 40 jurisdictions have already committed to adopting new accounting standards being issued by the IFRS’s International Sustainability Standards Board (ISSB). The first of these new standards are expected in the next few months. They are designed to measure ESG or non-financial data in a way that is material for investors and is comparable with financial reporting standards as laid down by the International Accounting Standards Board (IASB).

In a nutshell, ESG or non-financial reporting is set to become the new accounting normal.

The forgotten side

Think of ESG as an invitation to identify and value ‘the forgotten side’ of companies and organisations. Over the past 50 years (since the 1970s) we have almost exclusively focused on the financial value that companies create. In short, accounting has focused on money and taken very little account of companies’ impact on people and the planet. ESG is an opportunity to change that and to measure the impact of the whole enterprise.

The E in ESG is an invitation to identify and value things like CO2e emissions, water usage and recycling. The S invites us to measure the social impact the company has on employees and customers through a better understanding of diversity, inclusivity and product life cycles. The G invites us to be accountable to investors, partners and society-at-large for all of the company’s impacts - financial and non-financial.

According to Sue Lloyd, Vice-Chair, International Sustainability Standards Board (ISSB), “ISSB standards will become accepted as a global baseline for sustainability reporting, for use alongside any financial reporting model such as IFRS or US GAAP”.

A £3 billion opportunity

Research company Fact.MR values the global accounting & auditing market at £177 billion in 2022. The report anticipates this will grow to £310 billion by the end of 2032 - a compound annual growth rate (CAGR) of 5.7%. That means the UK accounting and audit market is set to grow from £4.7 billion to an estimated £8 billion in the next ten years. Much of this growth hinges on limited assurance of ESG and non-financial data in line with International Accounting Standards like ISAE 3000. It’s true that big firms will claim a disproportionate share but that still leaves plenty of value on the table for the 5,000 accounting firms looking after the UK’s 1.7m SMEs. Is your firm ready?

Linking ESG impacts to the P&L

The huge benefit of ensuring that ESG data meets accounting grade standards is that it can be linked to the P&L. That enables accountants to deliver deeper insights and add more value to their SME clients. Not only will you be able to calculate and assure your client's ESG impacts but you’ll be able to translate ESG impacts into value created or value at risk.

For example, you’ll be able to advise your client on how much money they can save by reducing their CO2e emissions, or their water consumption. You’ll be able to help them assess wage increases against the real costs of losing staff, including lost productivity and revenue. Only by combining financial and non financial data can you give your clients a view of their whole business. And because it’s assured ESG data will be decision-useful and decision-ready.

The new accounting normal?

Integrating financial and non-financial data has been the goal of Integrated Reporting since 2012. Integrated Reporting is now part of the IFRS and is a methodology favoured by the EU. Integrated reporting analyses a business's assets in what it terms six ‘capitals’ - human capital, natural capital, social & relationship capital, intellectual capital, manufactured capital and financial capital. At year end an integrated report describes how the business model has utilised these capitals and evaluates whether the stock of each has risen or fallen during that FY. The idea is to give investors and all stakeholders a richer view of the whole enterprise, not just a financial view.

Whether or not the IFRS adopts integrated reporting more widely in the future remains to be seen. What is certain is that the first of the new ISSB accounting standards are being published in the next few months. It’s the start of the new accounting normal. Welcome. And welcome to the new advisory opportunity it offers.