What information should be included in the ESG reports of the average accountancy firm?
Well done for spotting the trick question. Having analysed the top 100 accountancy firms in the UK – and their ESG-related disclosures – we know there are a lot of differences between them, and very little that is ‘average’.
‘Should’ is also misleading. Today, there are few if any mandatory obligations for accountants, meaning they have a fairly free hand in disclosing environmental, social or governance-related information (allowing room for much that likely fits better under the heading of corporate social responsibility).
Perhaps a more useful question for accountancy partners is: what ESG information is relevant to our performance and strategy as a business? Also, what do we want our clients – and other stakeholders – to know about our long-term plans?
This is where the diversity in the UK accountancy market becomes material. The precise answer will differ from firm to firm – but silence is not an option.
At The Disruption House, we believe that ESG disclosures can tell external stakeholders a lot about the kind of firm they’re dealing with. Yes, they are likely to reference carbon emissions, including plans to reduce them. But they can also be a strategic tool that can communicate a firm’s direction and vision for the future. Just as importantly, they can inform insiders about the processes and resources that they are relying on to deliver services and revenues.
This holds true whether the firm in question currently regards ESG or sustainability as critical to their business strategy or not.
Big opportunities
There are undoubtedly big opportunities for accountancy arising from growing expectations for accurate and verified ESG-related company information from regulators, investors, lenders, customers and employees (to name a few). Many of the new reporting requirements explicitly demand independent third-party assurance of ESG disclosures. Activity is likely to accelerate with the imminent delivery by the International Audit and Assurance Standards Board of its ISSA 5000 global standard for sustainability assurance.
Even if accounting firms are not setting out their stall to look for ESG-related business, it is likely that they will need to be ready when ESG-related business comes to them. If you’re servicing many clients in a sector impacted by the clean energy transition – for example property developers or house builders getting to grips with ever-tightening energy-efficiency rules – you will need to understand their sustainability challenges in order to keep their business. As their business models and supply chain relationships evolve, they will inevitably look to their accountants as trusted partners and advisors.
And even if few of your clients are explicitly impacted, as yet, by sustainability-related changes to their business models, ESG reporting can still play a valuable role in communicating the values and practices of your particular organisation. It’s fair to say that the reputation of accountants and auditors has taken a knock in the UK over the past decade or so, with fines and warnings being dished out regularly by the Financial Reporting Council. An ESG report could play a critical role in providing prospects – and the industry’s planned new regulator – with detailed information on the controls and governance that support high quality and rigorously independent audit services.
Early stages
What counts as good practice in ESG reporting today among large UK accounting firms? As you might expect, given the range of firms represented in the top 100, our analysis uncovered a lot of variety, with some accounting practices using their own sustainability credentials explicitly to win business, and others leveraging their ESG reporting as a driver for change, often digging into specific metrics to drive change within the organisation.
But it’s still clear that the industry as a whole is in the early stages, meaning there is a lot of opportunity for individual firms to shift from a ‘tick box’ approach to a more integrated strategy.
TDH’s ESG index uses publicly available information to populate 22 environmental, social and governance topics in order to assess the relevance and quality of firms’ ESG disclosures, with the aim of benchmarking and improving performance. Importantly, the object of the exercise is to achieve better results over time in those areas that will make the most difference to business success.
Taken as a group, the UK’s top 100 accounting firms are neither inspiring sustainability leaders nor conspicuous laggards compared to other sectors. In fact, they most closely resemble technology and financial services firms in that they’re solidly ‘mid-table’ and display median performance across all three pillars.
It will come as no surprise that the ‘big four’ firms by revenue are generally achieving high scores. But a more interesting story emerges beyond those household names, with firms in the middle of the pack – and even at the tail – achieving much higher scores than one might expect for their size.
This shows that it is possible to stand out from the field, in terms of displaying strong performance on material factors, independent of revenues. Equally, there are many firms below our Sustainability Reporting Curve – which indicates minimum expected scores by revenue – suggesting that a lot of firms are either not sharing basic information – or are disclosing data that just don’t move the dial.
Materiality matters
This begs another question: what information does matter? As we have noted, it depends on the bigger picture. A firm that is seeking to win business in the expanding market for verifying compliance with ESG disclosure frameworks – such as standards set out under the Corporate Sustainability Reporting Directive or the International Sustainability Standards Board – are going to need to ‘walk the walk’ convincingly.
In the environmental space, that means using internationally aligned frameworks to report progress on the firm’s climate and ecological footprint, demonstrating progress not only on reducing emissions but also with regard to energy efficiency and resource management more broadly, ideally encompassing supply chains. Benchmarking such metrics against peers – or even against the ‘big four’ – might also position accountancy firms well with clients in those sectors soon or already racing regulatory pressure.
For those rather looking to retain business, it may be that investment in staff is more important, which may be reflected in metrics relating to tenure, career progression or training provision. Similarly, a practice might seek to reassure customers and other stakeholders about its commitment to the highest business and professional standards, reflected in high-quality disclosures relating to business ethics, data security or tax policy.
In essence, effective ESG reporting can deliver comparable and quantifiable information, pertinent to culture, strategy and long-term value drivers, beyond that which traditional financial metrics can provide. Perhaps this is what a speaker had in mind when she told the 2024 annual conference of the Institute of Chartered Accountants in England and Wales: “Ignore ESG at your peril”.
Join our Free Webinar
To find out more, join our experts to dive deeper into TDH’s ESG Index for accountants at our upcoming free webinar at 11am on Thursday, October 3rd.
In the webinar, we will provide further valuable insights from the index, highlighting some of the steps that accounting firms can take to improve their reporting processes. This will also be an exclusive opportunity to put questions to the industry-leading experts that designed our index.
Sign up today by following the link: https://quiz.thedisruptionhouse.com/esg-index-webinar
