The purpose of this post is to overview the topic of ESG reporting for small businesses in simple, brief Q&A format.
What is ‘ESG’?
ESG stands for Environmental, Social and Governance.
What is ‘ESG Reporting’?
ESG Reporting is the preparation and communication of data about the organization’s environmental, social and governance actions, impact and plans.
Why would an organization engage in ESG Reporting?
Almost all organizational reporting is driven by one or more of these reasons: 1) legal requirement, 2) contractual obligation, 3) ethical obligation, 4) to attract investment, 5) to appease stakeholders, 6) management’s internal preferences or requirements. ESG reporting is driven by the same reasons.
Why am I reading about ESG Reporting now?
Some accountants, including the author, think this topic will be significantly more important in the future than it has been in the past. Governments, banks, grantors, and private investors are increasingly making ESG Reporting requests and requirements. The intent is to prepare for change and, when possible, benefit from being on the leading edge of this change.
Why would a small business adopt ESG Reporting?
The most common and most practical reason for ESG Reporting within a small business is to attract investment and grant funding. Eventually we expect that aspects of ESG Reporting will be part of an organization’s required tax filings
Will I be required to report on ESG performance?
Currently there is no requirement for most U.S. based small businesses to engage in ESG Reporting. Some businesses, especially those with direct environmental impact (like a marina and fisheries businesses), are already required to make substantial filings. We expect that more of these ESG Reporting requirements will be worked into required small business reporting slowly and almost without being noticed in the future.
What is involved in ESG reporting?
There are three steps to ESG Reporting:
First, identify the topics that will be the subject of the report. For example, this might be the organization’s carbon footprint or diversity of management as represented on the board of directors. For a nonprofit, it might be the number of volunteer hours or the change in observations of wildlife or plant species.
Second, measure it. This involves selecting the appropriate sampling and data collection procedures, accumulating and testing data, usually over time.
Third is presenting the data to the intended recipient. This is often the job of a Certified Public Accountant, although not all ESG reports must be attestations by a CPA.
How much does ESG Reporting cost?
Cost is entirely a function of the actions undertaken. As a general benchmark in small business budgeting, we tend to begin with an arbitrary 4% of gross grant or investor funding for the collective beginning cost estimate of all accounting and reporting systems as a starting point for budgeting of accounting discussions.
Why is Tony Novak CPA involved in ESG Reporting?
As a small business accountant, adviser and board member of multiple environmental nonprofit organizations for the past two decades, we were among the first to appreciate and anticipate the trend toward increased ESG Reporting in the small business field. Novak built a reputation as a though leader in this niche with several published models used by the management of other organizations. This year (2021) Novak began offering peer coaching to other accountants in this topic. ESG Reporting is currently a fast-growing area of our practice. We hope and expect to remain in a leadership position as ESG Reporting expands within the small business community.