January 21, 2022

ESG Is the Next ‘Hot Thing’ In Accounting, Say MIT Researchers

For years we’ve been hearing how blockchain and AI will transform accounting, and this recent article from MIT Sloan School of Management (aka MIT Sloan) about the five forces remaking accounting gives them both the obligatory nod. But we’re not here to talk about blockchain. We’re here to talk about ESG.

After a brief introductory paragraph about the “change bearing down on the accounting discipline,” they go directly into climate change and what that means for the bottom line:

“For the longest time, the purpose of a company was to provide returns for its equity investors and debt investors,” said Nemit Shroff, accounting professor at MIT Sloan. “ESG is saying that the purpose of a company is broader than just its investors — it’s society at large. That means that the measurement has to in some sense reflect that, and that’s a huge fundamental change.”

The one constant amid much change: Knowing exactly what to measure will be essential to making progress.

“Rewards [for companies] are going to be greater in instances where you can measure the company’s performance,” Shroff said.

Before we go any further, let’s zip over to Investopedia first to get a definition of ESG so we’re all clear what we’re talking about:

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.

We good? OK.

If you recall, Deloitte announced in August it was rolling out a climate learning program for its 330,000 people to “inform, challenge and inspire Deloitte people to learn about the impacts of climate change and empower them to confidently navigate their contribution to addressing climate change by making responsible choices at home and at work, and in advising our clients.” They claim this is the first program of its kind for a major worldwide organization. And KPMG has already planted its own flag, investing $1.5 billion into a three-year ESG initiative. So we know it’s a hot topic, the research from Sloan just confirms that.

Continuing with the article:

More than ever, investors care about a company’s ESG performance and companies are under pressure to show the positive impact they’re making. A report from Moody’s Investor Services showed global flow to environmental, social, and corporate governance concerns increased to $80.5 billion in the third quarter of 2020, up 14% from the previous quarter. And when BlackRock chief Larry Fink urged companies to eliminate greenhouse gas emissions by 2050, investors paid attention.

“Businesses are increasingly recognizing that maximizing shareholder value involves more than profits,” said Chloe Xie, assistant professor of accounting at MIT Sloan. But because ESG measurement and reporting aren’t currently standardized on a balance sheet the way that earnings are, this remains “a new frontier for accounting.”

Many companies measure their environmental impact by focusing on their carbon emissions and the specific actions they’re taking to reduce them, such as planting trees that will absorb carbon from the environment, Shroff said.

“Carbon emissions is a natural thing for people to think of, and I think partly it’s because we tend to focus on what we can measure, and we can measure carbon emissions,” Shroff said.

Collapse enthusiasts are no doubt intimately familiar with the looming threat of climate change but this is genuinely new territory for a profession “whose core responsibility is to help businesses maintain accurate and timely records of their finances” as Sloan said.

A December 2020 Harvard Business Review article punctuated the article’s title about the future of ESG with an incredulous question mark at the ridiculous idea that the future of ESG lies in the hands of the accounting profession and yet here we are. The IFRS Foundation is considering global sustainability standards and the SEC has declared an enhanced focus in climate-related disclosures.

It seems that unlike the robots that they’ve been saying for 10 years are coming for your jobs, this “revolution” may actually be upon us.

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2 Comments

  1. I see Blackrock’s CEO’s letters have made their rounds as you note. Don’t comply, no loans for you. Funny how they got all of the Millenial lackeys (I’m one of them) and Zoomers lapping this stuff up whilst blasting “Killing in the Name of” Sigh.

    “…by making responsible choices at home and at work, and in advising our clients.”

    Can someone please explain to me when did it become acceptable for a company to suggest what a person should do on their own time? No one finds this… odd? …Encroaching? A tad bit overreaching? Of course I personally don’t want to be a polluting pos in my off hours but this is a little too much.

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