Midsized companies are not ready for ESG reporting, says PICPA

The Pennsylvania Institute of CPAs found that while executives and practitioners agree that environmental, social and governance reporting matters, they are not prepared for the impact ESG practices may have on their organizations.

Earlier this year, PICPA surveyed members working in public accounting, corporate finance, nonprofits, government and education about their perceptions of ESG. The report aims to identify knowledge gaps and sources of exposure in ESG reporting, as well as outline a plan of action for accounting firms and companies that wish to prepare for an effective transition. 

"PICPA wants to keep its members ahead of the curve and pull them into the future by providing knowledge that allows them to thrive in a rapidly changing profession," said Adam Batchelor, PICPA's chief strategy and innovation officer. "What came out in the report is that CPAs should expect their skills to be put to the test, especially in situations where the metrics are difficult to measure, and that small companies have the chance to position themselves differently compared to the competition."

The study revealed that exposure to ESG reporting standards exists for firms of all sizes, that professionals tend to underestimate the opportunities that come with ESG principles, and that change is happening right now. But the core finding of the study is that midsized accounting firms and companies are underprepared for the changes that come with ESG reporting: only 10% of those organizations indicated that they currently report on ESG factors. 

The survey found that 90% of respondents from firms with 100-500 employees indicated exposure risks related to public company supply chains, yet no respondent provided a definitive "yes" when asked if their firm plans to offer ESG services. Furthermore, companies with 100-500 employees reported the lowest familiarity with ESG standards but the highest exposure, especially in the value chain. 

According to Mallory Thomas, a Baker Tilly partner with risk advisory services, large organizations often push items from their vendor protocols down to smaller companies, and that's how smaller entities get exposed to ESG principles. However, this high exposure still doesn't encourage midsized companies to apply ESG reporting standards, and Thomas believes it comes from a lack of information. While smaller entities are given the ability to create a revenue stream via ESG concepts, many don't know how to implement them or the benefits that would come with them. 

"I think that a lot of it is just education and understanding what's in the landscape, which can be resolved by consulting the Task Force on Climate-Related Financial Disclosures or the Sustainability Accounting Standards Board's websites, which both offer very specific metrics," said Thomas. "I think people also forget that ESG principles often align with companies' priorities and strategic initiatives such as talent retention or environmental issues."

However, that's not the only reason why it's more difficult for midsized companies to implement ESG practices. Laura Berry, a transaction advisory principal for Windham Brannon, says that larger companies often have entire teams dedicated to a specific area of ESG reporting, which smaller firms can't afford. Legally required to report to the FCC, big firms often receive pressure from their board of directors and financial institutions to follow ESG reporting standards, and they have the immediate resources to do so. However, that's not the case for small and midsized companies. 

For John Eaves, who works at Windham Brannon as an advisory director, the success of midsized companies at applying ESG principles lays with the employees. Eaves has been leading ESG efforts at the firm and teamed up with other CPA firms to discuss how these principles affect their clients and keep track of new developments. Since the pandemic, Windham Brannon has strived to reduce its carbon footprint, allowed its workforce to switch to a hybrid model, reduced its office space and continued to invest in its DEI advisory council while continuing to report on their initiatives to its shareholders. 

Based in Atlanta, Windham Brannon has been named a Top 3 Midsized Firm to Work For by Accounting Today and regularly educates its clients and partners about ESG benefits via webinars and articles. Eaves believes that it's Windham Brannon's work culture that allowed the firm to win multiple recognitions and follow ESG reporting standards despite its small 180-employee personnel. In fact, Eaves believes that being a midsized company can become an advantage, should employees be allowed to have a healthy work-life balance and make an impact on their communities. 

"Large companies have guidelines that allow them to implement policies immediately, but there is so much bureaucracy that they are not always agile," said Eaves. "Midsized firms like ours can adopt and implement those policies more quickly, and with less disruption. They exhaust fewer resources doing so because their organization is less complex and they can do a more effective assessment of their company."

Experts say that companies shouldn't see ESG reporting as an obligation, but as a possible driver for growth. Berry says that following these standards provides improved risk management and reputation, while increasing employee engagement and performance. She also observed that ESG can bring financial gain, such as solar panels, which can offer significant cuts in energy costs. According to Batchelor, positioning oneself as an early adopter can also be a real differentiator against the competition, as customers care more and more about sustainability. 

An Accenture study found that the pandemic caused people to review their priorities around the globe. The paper revealed that consumers are ready to invest more in companies that align with their values and leave those that don't. A PwC survey also found that customers are more likely to purchase from brands that are dedicated to environmental (80%), social (76%) and governance (80%) issues, and this shift seems to be here to stay. 

Two years ago, Nasdaq predicted that global spending on ESG reporting would grow by $4.5 billion between 2020 and 2025, and Batchelor believes it will continue to evolve with the development of new technologies and frameworks.  

"ESG is new and developing, and there will be lots of opportunities to learn and get involved in this space," said Batchelor. "We should watch those developments and expect to encounter them at some point in our lives. And if so, your preparation would have been worthwhile!"