Environmental, Social, and Governance (ESG) reporting: What accountants need to know

Environmental, Social, and Governance (ESG) reporting is becoming a fundamental part of accounting, as businesses face more pressure to show they operate sustainably and ethically.

ESG reporting involves collecting, monitoring, and reporting on an organisation’s environmental, social, and governance impact. Businesses measure and report on areas like their energy use, carbon footprint, gender diversity and pay, community projects, and social initiatives.

Accountants and bookkeepers play a vital role in helping clients prepare ESG reports. Sustainability reporting draws on many similar skills as traditional accounting, which means you can be a crucial partner for clients’ ESG reporting and accounting projects.

In this guide, we explore the impact of ESG reporting for accounting and bookkeeping practices. Learn about ESG reporting requirements UK businesses need to follow, and ESG accounting best practices you can apply to support clients and provide valuable services.

Why is ESG reporting important?

In the same way that businesses measure their financial performance, many are now required to measure their sustainability performance and impact on the world.

Embracing sustainability is no longer optional – it’s essential for businesses that want to comply with regulations, meet stakeholder requirements, grow their business, and attract talent.

Many modern investors are keen to fund companies that operate sustainably, while the next generation of talent wants their employers to do more for sustainability.

As we explore further on, there are existing ESG reporting requirements for large companies. But, as climate change intensifies so does the need to operate sustainably. And, many more companies are likely to begin sustainability reporting practices to get a handle on their own operations.

Most accountants and bookkeepers will be familiar with good data gathering practices, producing reports, and developing financial strategies based on them. Just as you support clients with their financial growth, you can provide similar support for sustainable development and ESG compliance. The same skills and processes you use for financial accounting can be applied to sustainability accounting, too.

What ESG and sustainability reporting requirements are there in the UK?

Since 2022, certain large companies and LLPs have been required by law to make climate-related financial disclosures. Specifically, public listed companies, and those earning above £500 million with over 500 employees. In the coming years, it’s likely these requirements will be extended to smaller companies.

Sustainability reporting isn’t a new concept – in fact, large companies, LLPs, and publicly trading companies in the UK have been required to report on annual energy use, greenhouse gas emissions, and energy efficiency actions taken since 2019, under the Streamlined Energy and Carbon Reporting requirements (SECR).

UK ESG reporting requirements currently align with the EU’s Corporate Sustainability Reporting Directive (CSRD). The UK is set to introduce its own sustainability reporting standards (SRS) based on the International Sustainability Standards Board’s IFRS S1 and IFRS S2 at a later date.

Why is ESG reporting and sustainability accounting needed?

Businesses need to be profitable to survive, but financial success isn’t the only important metric. The changing climate demands that businesses operate sustainably and in harmony with people and the planet.

But, this can also present opportunities for businesses that open up to new ways of doing things. For example, opting for renewable energy, reducing waste, or using less harmful materials can be cost effective – so not only can a business limit its impact, it can save on expenses.

Making ad-hoc sustainable changes is one approach, but without a clear strategy, it’s hard to make and measure the impact. This is where accounting skills come into play – your practice has the knowledge to collect, track, and report on data. All vital skills required in ESG reporting.

Businesses can then use their ESG reports to power their sustainability strategy going forward, and make better, evidence-backed decisions. Investors, shareholders, and other stakeholders are keen to see companies green credentials. The ESG reporting format provides vital sustainability information, alongside financial disclosures, in a single document.

There’s also much to gain for practices supporting clients with ESG accounting standards. Integrating ESG reporting allows your practice to offer additional services, which more and more companies require. These services can help you differentiate from other practices, and attract clients focused on sustainability.

ESG accounting standards and frameworks

One of the biggest challenges for businesses and practices involved with ESG reporting is the number of frameworks and standards to follow.

Frameworks are your roadmap – they provide guiding principles for ESG reporting, topics to cover, and recommendations on structuring information. Standards are more specific, giving you detailed requirements for each ESG area and key metrics to measure.

Some frameworks and standards are more relevant to some specific industries, so encourage your clients to do their research or speak with an ESG consultancy to get it right.

Currently, the UK doesn’t have a single set of ESG standards. So, companies draw on EU and global ESG reporting frameworks and standards – sometimes, a combination of them. Here are some of the main ESG reporting standards and frameworks:

• TCFD: The Task Force on Climate-Related Financial Disclosures is a framework that focuses on businesses assessing climate risks and opportunities. It’s been adopted by several countries and industries, including the UK, where it’s mandated for large private companies.
• SASB: The Sustainability Accounting Standards Board provides industry-specific reporting standards for sustainability-related risks and opportunities that could impact financial health and performance. These standards are used by over 3,200 companies across over 80 jurisdictions.
• ISSB: The International Sustainability Standards board aims to set a baseline for global climate-related financial disclosures. Standards like IFRS S1 and IFRS S2 are intended to help investors assess sustainability-related risks and opportunities and bring about financial market transparency.
• GRI: The Global Reporting Initiative (GRI) standards offer sector-specific guidance for various pillars. They cover international best practices for sustainability, with standards for economy, environment, and people pillars, which are split into universal, sector, and topic standards.

Challenges in ESG reporting and accounting

Getting ahead of the challenges your clients could face with ESG reporting helps the process run smoothly. Look out for obstacles such as:

• Data gathering: Your clients will need to compile data points from across their business. This information is likely to be received in all kinds of formats – raw data points for energy usage, and case studies on social initiatives. A system for collecting and managing information here is essential.
• Understanding the ESG reporting frameworks and standards: To produce a complete ESG report, your clients may need to use several frameworks and standards. Understanding requirements is a task in itself, so you’ll all need to spend some time reading up on the specific standards and frameworks. You might find it useful to take an ESG reporting certification – many of these are available online.
• Compliance complexity: Even after you’ve got to grips with the standards and frameworks, you and your clients will need to revisit them to check ESG reports align with the requirements. And, with UK and global regulations evolving, what’s compliant is likely to change.
• Time-consuming processes: Gathering and analysing data then presenting it in an ESG report format is a time and resource-intensive process. ESG reports are expansive documents, and your clients will need all the help they can get putting them together. Manual data gathering processes are slow, so the ability to automate data collection can speed things up significantly.

Transforming ESG reporting through software and automation

To create an ESG report, your clients need access to reliable data about how their business operates. This is something accounting software can help with, and means you don’t need to track data manually.

Software can help you with:

• Automated data aggregation: Businesses gather data in lots of different ways, with lots of different tools. Modern software can bring all of these data points together in one place, reducing the manual effort it takes to aggregate data.
• Automated calculations: An essential part of ESG, carbon accounting requirements mean clients will need to calculate their carbon footprint. Modern software can calculate this for them, using energy expenditure data in accounting software. No complex maths required.
• Data visualisations and reports: Beautiful, clear accounting reports and data visualisations are only a few clicks away with modern software. These reports and visualisations make it easier to spot patterns and trends, and interpret sustainability information.
• Scalability and efficiency: If ESG reporting becomes a regular service for your practice, automated processes are more easily scalable than manual ones. You can apply the same set of tools and processes for all of your clients, with a single system for gathering and tracking data.

Simplify ESG accounting with Xero

The future of ESG is accounting-dependent. Your clients need access to quality data and the tools to interpret and present it. This is something accountants and bookkeepers are more than capable of providing. You just need the tools for the job.

With accounting software like Xero, you can support clients with financial and sustainable disclosures in line with ESG reporting requirements. UK large companies are required to make ESG disclosures by law, and as sustainability becomes an increasingly valued quality, more clients will need your help with reporting.

Xero’s inbuilt reporting features draw on financial information already in the software – so you can generate accurate reports for clients in a few clicks. But, you can also add ESG reporting software tools to gather environmental, social, and governance data for your clients.

Take Zero Carbon, which uses your client’s expenditure data in Xero to create an accurate carbon footprint calculation. Or, Spotlight Sustain, which lets you measure all kinds of ESG metrics, such as energy use, gender diversity, and employee Net Promoter Scores (NPS), and presents them in beautiful data visualisations and reports.

If you’re ready to start supporting clients with ESG reporting, why not take a look at what we’re doing on sustainability at Xero.