Why financial reporting should be aligned with environmental, social and governance issues | New times
All United Nations Member States (2015) have adopted the 17 United Nations Sustainable Development Goals (SDGs) which are at the heart of the 2030 Agenda for Sustainable Development.
It is widely recognized that through public and private partnership, achievement is possible. The private sector is the main contributor to economic development in many economies around the world and banks, for example, are the financiers of various projects and enterprises that stimulate social economic development, hence the importance of the article .
Sustainability means meeting today’s needs, without compromising the ability of future generations to meet theirs.
In this regard, in this article, we look at environmental, social and governance (ESG) aspects as important issues to ensure sustainability and therefore need to be considered in decision making by CEOs and government leaders. and entities through policies and strategic plans – development while seeking to stimulate value creation and economic growth.
Stakeholders in various capacities are increasingly seeking sustainability positions in relationship building while examining ESG metrics as indicated by entity reports and economies around the world.
Aspects of climate change and the associated risks to the environment are increasingly coming into perspective while examining issues of sustainability.
Businesses and economies around the world are going “green”, with stakeholders aligning themselves with sustainable businesses while choosing where to invest or with whom to collaborate in long-term business relationships and partnerships.
For example, Rwanda’s mission to maintain a clean and healthy environment has continued since 2008, when it banned the use of plastic bags and non-biodegradable packaging materials in an attempt to preserve productive land for the agriculture, a major contributor to GDP.
Currently on a global scale, there is a desire to manufacture electric vehicles, which are perceived as preserving the environment, since they have no carbon dioxide emissions, and these have seen for example the Tesla’s share price hit 781.29 (NASDAQ: TSLA) recently, a price driven mainly by the environmental position – electric vehicles (zero greenhouse gas emissions).
This is a very good example of a role playing game of sustainability through innovation and technology.
In this regard, the private and public sectors should continue to put in place environmental strategies that ensure sustainability. Back in Rwanda, electric motorcycles are deployed on the market to fight against environmental pollution.
Socially, the questions asked are; how companies manage relationships with the workforce, the companies where operational activities take place and the political environment.
Governance, on the other hand, takes into account decision-making factors in terms of the distribution of roles, such as rights and responsibilities within the hierarchy of managers of companies / entities, including the board of directors, stakeholder commitments and company performance.
For example, according to S&P Global research on governance factors, results indicated that companies that score well below average on good governance characteristics are prone to mismanagement and risk their ability to capitalize on good governance. business opportunities over time.
It assesses the governance performance of companies on four factors: Structure and oversight; code and values, transparency and reporting and cyber risk and systems. Diversity and gender equity is another high profile aspect of governance, where institutional shareholders demand representation of women on boards of directors and in leadership positions, and equal pay for women seeking employment. greater diversity and inclusion.
Currently, various ESG reporting frameworks in place require measurement and disclosure of measures relating to environmental, social and governance performance and therefore confirm how entities establish policies that ensure sustainability.
Through various metrics / KPIs (key performance indicators), the impact on sustainability is measured and the results communicated to stakeholders.
Key performance indicators include the environment – energy consumption and greenhouse gas emissions; Social – human capital development, health and safety, Governance – business practices, responsible codes and programs and board structure.
ESG frameworks include, but are not limited to, Bloomberg Terminal ESG Analysis, Integrated Reporting (IR), Sustainability Accounting Standards Board (SASB) (Nareit) and GRI Standards (www.globalreporting.org).
These frameworks help demonstrate case compliance with ESG reports and effectively demonstrate the importance given to sustainability issues by market stakeholders around the world.
This can pose challenges in implementation due to factors such as lack of ability to analyze requirements, time and resource constraints. However, it is important to note that investors increasingly expect companies to disclose ESG matters.
For example, more than 73% of investors take into account environmental, social and governance (“ESG”) disclosure and performance measures when assessing risks and identifying opportunities (CFA Institute on public ESG Disclosure Trends. November 2017) and this has been on an increasing trend worldwide.
With Rwanda’s vision to become a financial hub and the current willingness to prepare the ground with the ongoing policy changes and legislative changes, foreign direct investment stakeholders should be eager to seek ESG reports and reviews. related information, as there is an increasing global demand. for durability.
Developing countries and their associated partners will continue to adopt this position while seeking the creation of value or rather the return on investment through sustainable investment.
While maximizing financial returns for shareholders of companies has traditionally been the goal of the management of entities, it is now imperative to understand that sustainable financial returns will be achieved by a change of perspective in the best interests of the company only. , but also to consider the public interest and other benefits for stakeholders which in turn ensure the creation of long-term value.
This therefore calls on the financers (Banks) of companies and projects to plan for the financing of sustainable investments both within the framework of private and public partnerships.
It can be concluded that policymakers and drivers of government entities and institutions should be prepared to establish policy frameworks that support sustainability reporting, given that value for money is at the heart of the future.
More and more money is flowing into “green” investments and entities are pursuing the implementation of ESG standards with the aim of obtaining funding from “green” investors.
The author is the director of financial accounting at the National Bank of Rwanda
The opinions expressed in this article are those of the author.