Robert Michlewicz, CEO, Visual Lease.
In the last few years, environmental, social and governance (ESG) planning has become ubiquitous. No matter the industry or company size, businesses have made tremendous investments to advance ESG policies—and for good reason, as we’ve seen firsthand that brand reputation, revenue, investor sentiment and employee retention can be impacted by a company’s approach to ESG.
In 2022, global ESG funds hit $2.5 trillion in investments, but despite the fervor, just under 46% of professionals are confident that their organization’s financial team is prepared to properly report ESG metrics. This uncertainty is alarming given that visibility into current performance is the only reasonable way that organizations can effectively plan for a more sustainable future.
For me, this is an all-too-familiar story. When the lease accounting standards (IFRS 16, ASC 842 and GASB 87) were introduced, organizations were required to gather and analyze their lease records to establish reporting benchmarks and maintain compliance. Unfortunately, many underestimated the challenges of executing those changes.
Dedicated technology, however, has proven to be critical in supporting organizations through this transition. Our 2022 research at the Visual Lease Data Institute shows that private companies saved about 600 hours and government entities saved approximately 765 hours with the use of lease accounting software. Similar practices and technology can provide businesses with insight into their current environmental impact and the ability to make changes for a more sustainable future.
Stay On Top Of Evolving Regulations
U.S. companies have typically self-regulated environmental advancement, but the widespread adoption of ESG policies prompted the SEC to propose regulations. By 2024, public companies are expected to disclose greenhouse gas emissions and climate risks, and the commission will release additional guidance on environmental impact reporting later this year. In addition, the International Sustainability Standards Board (ISSB) recently issued the first reporting guidelines for global public companies, private companies and government organizations.
There is also increasing pressure from the business community for transparent ESG disclosure. Investors, lenders, consumers and clients are requiring companies to provide environmental impact information. The standardized reporting required by the ISSB will help organizations establish trust and share easily comparable data points with these stakeholders who are now showing a marked preference for companies that can clearly illustrate sustainable practices.
Reporting requirements are just beginning to heat up, and business owners should expect regulations to continue to evolve as the world pushes toward conservation. Automated and cloud-based technologies are driving businesses to keep up with this transition. Dedicated systems should be built with these requirements in mind and have teams in place to account for any changes to the requirements to ensure that customers maintain compliance, even as regulations change and expand.
Assess Environmental And Climate Risk
The future regulatory environment will require that companies adopt ESG reporting policies, but the truth is that an ESG strategy is as much about preservation as it is about compliance. Results of a 2021 study found that businesses stand to lose nearly $1.3 trillion in revenue through 2026 as a result of climate risk, and corporate buyers are expected to be on the hook for $120 billion in higher environmental costs.
The increase in global natural disasters has already provided some insight into the financial impact of climate change. PG&E, for example, accrued $98 million in “various claims, lawsuits, and regulatory proceedings” after their operations were found to have caused wildfires in California in 2018.
Organizations that diligently manage their leases in a centralized system of record can help establish a foundation of trust in their reporting and greatly reduce the risk of errors. Furthermore, strong lease record management empowers businesses to implement adjustments needed to maintain compliance with the latest regulatory requirements.
Dedicated technology can also aid in the accounting team’s ability to assess current and future risks to provide a robust assessment of the impact on value, operational costs and revenue. This can serve ESG goals from the finance and accounting perspective, providing verifiable and auditable data that can allow companies to systemically respond to climate risk by shifting their portfolios to reduce carbon footprints.
Don’t Fall In The Noncompliance Trap
Risk exposure varies across industries, but results of a recent study from S&P Global found that 92% of large organizations had at least one asset with a high level of exposure to climate risk. But businesses of every size are at increased risk of noncompliance with regulations or internal risk assessments. Enterprises are navigating massive portfolios of leased and owned assets, and information is often housed in siloed departments, often leading to incomplete data and inefficient reporting. SMBs are working with smaller teams and may lack the resources to properly manage environmental data.
The SEC reported that climate-related disclosures could require two to 20 employees (download, see page 376) to complete, with one large cap company reporting that it took six months of nearly full-time effort from 20 employees to make these disclosures. Additionally, there’s a shortage of CPAs, with a Bloomberg Tax analysis showing a 17% decrease in new accountants between 2019 and 2021. To escape the noncompliance trap without overburdening finance teams, the office of finance should consider a digital transformation.
Companies should align ESG reporting with the company’s internal controls framework (ICFR). Technology-backed lease controls can help a company comply with ESG targets by creating safeguards that alert a company when there’s been a departure from procedures. A centralized system of record aids in ensuring compliance by creating access to critical information across departments and fostering a better understanding of how leased assets are adding to a company’s carbon footprint. Through the right technology investment, company leaders can help ensure compliance with ESG regulations.
Mandatory ESG reporting is inevitable—don’t wait until the deadline is imminent. By investing in the right tools, companies can be better prepared for a future in which ESG practices are standard.
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