ESG Reporting and the Role of Business Schools

• Many European countries already require ESG reporting, and the U.S. is poised to require companies to disclose environmental information as part of their financial statements.
• Corporate leaders will look to business schools—particularly those accredited by AACSB—for help finding workers who can manage ESG requirements.
• Tomorrow’s ESG specialists will need to be comfortable working on interdisciplinary teams, fluent in new technologies, and committed to having a positive impact on all stakeholders.

 
Today’s businesses are paying increased attention to environmental, social, and governance (ESG) issues, in part because investors are demanding more accountability and in part because more governments are requiring it. This shift could have a seismic effect on how companies prepare their financial and auditing reports—which means that business schools must prepare their students to be the accountants and auditors of the future.

I recently participated in a panel that examined how new ESG regulations will impact the workplace. The Moral Money Americas Summit was organized by the Financial Times and moderated by Stephen Foley, the publication’s U.S. Accounting Editor. I was joined by Wes Bricker, U.S. Trust Solutions Co-Leader at PwC; Allison Herren Lee, Former Acting Chair and Commissioner of the Securities and Exchange Commission (SEC) and senior research fellow at the New York University School of Law; and Tom Seidenstein, chair of the International Auditing and Assurance Standards Board (IAASB).

At the event, I shared my thoughts about how business schools are helping companies meet the upcoming ESG challenges, but I wanted to expand on some of my observations here.

Where Are We Now?

It’s important to first understand the current situation in terms of environmental reporting. In Europe, where there is a particular focus on the social part of ESG, those who set accounting standards are preparing to publish new climate reporting guidelines.

In the U.S., the SEC is poised to finalize rules that will require companies to include environmental information in their audited financial statements. Under the new rules, a company would have to disclose information about its governance of climate-related risks; how its climate-related risks could have an impact on its consolidated financial statements, both in the short term and the long term; how these risks might affect its strategy, business model, and outlook; and how climate-related events such as severe weather could affect its financial statements.

Not everyone welcomes the changes. An analysis from Forbes notes that, “Concerns are rising that the new rule could be outside the SEC’s authority and unable to sustain a legal challenge before the Supreme Court.” The proposed rule “would require three levels of reporting from publicly traded companies. Scope 1 addresses direct greenhouse gas emissions of the company. Scope 2 addresses indirect GHG emissions from purchased energy. Scope 3, the most controversial, addresses GHG emissions from suppliers and end users of the product.”

Expected to be announced by April 2024, the SEC ruling is likely to come with a number of headaches. For instance, company leaders will have to deal with inconsistency in ESG-focused terms, higher reporting burdens, and potential friction among various company departments. In addition, they might face polarization within companies and between countries, because ESG has become highly politicized.

Global organizations will have the added challenge of trying to operate under regulations that vary among nations, particularly because ESG is more advanced in some parts of the world. My fellow Moral Money panelist, IAASB’s Seidenstein, noted that his organization is in the process of creating a common standard that works with government requirements around the globe, and this should be in place by the end of next year.

Who Will Do the Work?

Questions remain, including two that are critical: Who will be preparing these audited ESG reports? And how much assurance will investors be able to take from them?

Regarding the first question, the “who” is still uncertain. Whether the reports are completed by in-house staff or contracted third parties, whoever prepares them is responsible for their accuracy. Some companies are handing ESG reporting over to their sustainability officers. Others believe the task should be managed by accountants, who understand how to utilize operational and financial data, draw connections between the different areas, and translate data into nonfinancial disclosures. For these reasons, some companies are giving this work to newly appointed “ESG controllers” who come from accounting backgrounds.

Only 16 percent of professionals said that their organizations already have a full-time professional acting as ESG controller, and only 7 percent said their firms plan to hire such a person.

Even so, it seems that few companies have the right teams in place. According to a recent poll from Deloitte, only 16 percent of professionals who responded said that their organizations already have a full-time professional acting as ESG controller, and only 7 percent said their firms plan to hire such a person.

I believe that finance and sustainability departments should work together to ensure the accuracy and transparency of ESG reporting. While the sustainability departments should continue to make their own voluntary disclosures, they can cooperate with the ESG department and provide supporting data. Such collaboration “beyond the walls of the enterprise” will allow companies to be more agile and responsive.

The answer to the second question—whether investors will be able to trust the disclosed information—remains a moving target. My fellow panelists noted that, even before mandatory disclosures go into effect, some companies are voluntarily releasing ESG information, and investors are using this information to make business decisions. Therefore, as PwC’s Bricker pointed out, there is already an expectation that the information companies disclose will be of high quality.

Seidenstein concurred. “If the information is being put in the marketplace for decision usefulness, we should expect it to be appropriately accurate and have a high level of assurance. But we should be realistic about where we are on the journey. We should expect continuous improvement.” He said that he expects that ESG reporting eventually will rise to the level of where financial reporting is now.

What Do Business Schools Offer?

There is yet another key question to consider: As companies move from voluntary to mandatory ESG disclosures, where will they find the talent to handle the work? Where will they find the people who can calculate the cost of greenhouse gas emissions and gather the data for other disclosures?

I firmly believe that they can look to business schools to train tomorrow’s ESG specialists with a blend of foundational and durable skills. Business schools can help students become agile problem-solvers who can continually innovate in a VUCA world marked by volatility, uncertainty, complexity, and ambiguity. In addition to having interdisciplinary mindsets, future leaders must know how to measure both financial and nonfinancial success, how to assess the impact of company actions on the environment, how to mitigate risks, and how to exercise quality assurance in a changing world. At the same time, they will need to be principled and ethical leaders who understand how to have a positive impact on all stakeholders.

How can schools turn out graduates with these traits and abilities? Here are some suggestions:

• Embed societal impact topics across the curriculum and consider creating specialized programs in ESG. Emphasize the role that stakeholders play in the sustainability of a firm.
• Make certain that students understand the next-generation technologies that will be critical for ESG reporting. These include advanced robotics, robotic process automation, the internet of things, artificial intelligence, quantum computing, 3-D printing, virtual and augmented reality, and blockchain.
• Participate in interdisciplinary programs that bring together fields such as accounting, finance, data analytics, environmental engineering, computer science, legal studies, climate science, and the humanities. Draw on each college’s unique strengths to create sustainable solutions to the world’s problems.

Business schools can train tomorrow’s ESG specialists with a blend of foundational and durable skills and help them become agile problem-solvers who can innovate in a VUCA world.

• Work with local companies to provide students with team-oriented experiential learning opportunities.
• Develop strong relationships with industry partners. Through these relationships, academics and corporate leaders can collaborate to develop ESG-oriented mindsets and produce new research about practices that will help organizations make their ESG efforts successful and sustainable. And business schools will be able to show their business partners that “doing good is good for business.”

The Strengths of AACSB Schools

I believe that it will be particularly valuable for businesses to partner with AACSB-accredited schools, because AACSB is dedicated to creating socially conscious leaders. The association demonstrates this dedication in the following ways:

• We encourage positive societal impact through our advocacy work, which includes spotlighting groundbreaking membership programs and producing content for the media.
• We cover the topic of societal impact in monthly learning and development opportunities that range from webinars to in-person conferences held in locations around the globe. We also organize an annual societal impact conference that draws academics and industry leaders from all over the world.
• Through our Innovation Committee, we bring together members of industry and academia to generate thought leadership on best practices in societal impact.
• We encourage our members to focus on ESG issues, in part because four of our nine accreditation standards require schools to make a positive impact on society. During the last academic year, among our accredited schools who had accreditation visits, 592 societal impact initiatives were reported; 24 percent of these were focused on environmental issues. And these activities were taking place all over the world: 50 percent in Europe, the Middle East, and Africa; 42 percent in the Americas; and 8 percent in the Asia Pacific region.

A Better World

It is clear to us that AACSB-member schools are working hard to prepare the leaders of tomorrow. Yes, to educate students about ESG issues, schools must make some adjustments to their curricula. But as it is often said, “We should not be afraid of changing. We should be afraid of not changing.”

Businesses will need to adapt, too, so they are ready to embrace the new requirements of ESG disclosures. In the end, the purpose of these disclosures is to make the world a better place. Working together, business schools, business graduates, and corporate leaders should be able to answer the question: What impact are we making on the world?