ESG: The Financial Reporting Implications
In a KPMG survey of three,three hundred economic gurus, far more than fifty percent of respondents indicated climate alter-relevant economic disclosures were being an prospect to exhibit their environmental, social, and governance (ESG) edge to staff members and traders though distancing on their own from rivals. On the other hand, only 32% observed these disclosures as typically a compliance physical exercise.
Still, just last calendar year, a KPMG world survey confirmed that only 40% of corporations acknowledged climate alter in economic disclosures, with just 1 in 5 reporting in line with the standards from the Fiscal Stability Board’s Activity Power on Local weather-relevant Fiscal Disclosures (TCFD).

Scott Flynn, KPMG
Why the hole? Firms wrestle to go from answering “why” they will embed ESG into their strategy to “how” they will make that take place and “what” they will report in telling their story.
For instance, another KPMG survey, of technological innovation leaders, uncovered that eighty two% needed to lock in sustainability gains, but far more than fifty percent explained they do not have a decarbonization strategy in place.
Going from aspiration to truth clarifies only portion of the problem. For reporting, and in certain ESG concerns inside economic reporting, the truth is elaborate. Liabilities may well not be acknowledged, belongings may well not be created down, and estimates may well not be adjusted until the business satisfies the requirements in the applicable standards. New disclosure prerequisites may well alter the amount of transparency about a company’s strategy and its steps relating to environmental aspects. Essential changes will be really demanding, and world standard setters and regulators are still reviewing new disclosure principles.
The Waiting around Method
The strategy some corporations may well default to is to wait for regulators to mandate disclosures. The European Union, for instance, proposed the Company Sustainability Reporting Directive to place the reporting of sustainability information and facts on par with standard economic information and facts. The Securities and Trade Commission, in the meantime, is navigating a historic exertion to have to have community firms to launch investor-struggling with climate-relevant disclosures.
But we feel this wait-and-see technique really should be replaced by a mindset of becoming well prepared for 3 reasons:

Maura Hodge, KPMG
- Traders may well be the idea of the spear when it arrives to demanding motion on climate alter. Nevertheless, environmental aspects are getting to be increasingly urgent for a broad variety of stakeholders, which includes creditors, suppliers, and consumers.
- Businesses need to have to get ready now — ahead of remaining rules — so they can convey to their possess story as an alternative of some others telling it for them.
- Engaging on ESG makes organization better because it has the energy to change. A effectively-created strategy that identifies dangers and options and is embedded into functions can mitigate threat, create stakeholder have faith in, and produce aggressive pros.
KPMG’s current “Climate threat in the economic statements” handbook focuses on the “E” in ESG, outlining critical issues CFOs have to talk to to (1) have an understanding of the landscape of climate dangers (two) evaluate the probable economic impacts of the organization’s decarbonization steps and (three) take into account which information and facts to disclose and how to disclose it.
Strain Factors
There are 3 sorts of climate dangers: actual physical, regulatory, and transition-relevant. Physical dangers contain the outcomes of climate alter in flooding, hurricanes, and other weather conditions sample changes that threaten business infrastructure and provide chains. Regulatory dangers contain becoming subject to new guidelines that restrict revenue options or raise publicity to litigation. Last but not least, transition-relevant dangers replicate probable troubles all through a shift to a very low-carbon financial system, which includes transforming customer choices, stranded belongings, and cash prices.
When all firms really should evaluate those 3 dangers, the TCFD has spotlighted five industries as large threat: finance power transportation materials and structures and agriculture, food stuff, and forestry goods.
As a starting up issue, CFOs of all industries and sectors really should strive for truthful insight into the multidimensional stress factors faced by their corporation. Beyond typical issues on investor sentiment, CFOs really should talk to:
- Will the business be afflicted by nation or jurisdictional options to cut down emissions? KPMG’s Internet Zero Readiness Index facts a country’s means to arrive at web-zero by 2050, which includes a overview of its guidelines and legal mandates. Norway, the United Kingdom, and Sweden are the maximum ranked, and 9 nations around the world have binding web-zero commitments. Ten nations around the world have set web-zero targets, accounting for a overall of 51% of world emissions.
- What is the publicity from the broader provide chain and purchaser foundation? Just about every party likely puts stress on its suppliers to cut down emissions. CFOs really should also talk to regardless of whether critical consumers are producing inquiries about emissions reduction options.
Effects of Decarbonization
Decarbonization is the reduction of carbon dioxide emissions as a result of the use of very low-carbon energy resources. As firms set decarbonization methods, CFOs have to keep an eye on impacts on existing belongings, inorganic development methods, and financing options, alongside with the accounting impacts for economic reporting. Carrying out so drives discussion across the corporation to ideal embed an ESG lens into the organization’s long run.
- Has the corporation dedicated to reducing emissions? When a motivation to cut down emissions may well start as a statement of intent, the steps that movement from that strategy will likely have popular finance and accounting implications. These selections likely influence the noted benefit of long-lived belongings, the strategies utilised to estimate long run funds flows, and the accounting for revenue contracts or leases. As a final result, the CFO may well need to have to carefully track market place changes to have an understanding of the probable economic dangers of environmental aspects. And they will need to have to have an understanding of termination or modification clauses in contracts, as effectively as substitution rights.
- Is the corporation organizing acquisitions or disposals? We normally speak about transforming with ESG in intellect. For acquisitions, ESG thanks diligence can help make certain new targets are aligned with a company’s ESG strategy to stay away from steps that generate unexpected economic dangers.
- Will the business concern credit card debt instruments containing an ESG feature — this sort of as sustainability-connected bonds? Unlike typical inexperienced bonds, which right finance inexperienced investments, sustainability-connected bonds incentivize firms to make a optimistic ESG-relevant effect by reducing fascination rates primarily based on hitting unique ESG goals. The accounting for sustainability-connected bonds is elaborate and may well have to have bifurcating the bond from an embedded spinoff depending on the character of the agreement.
Thinking about All Impacts
Immediately after comprehending the exterior landscape and formulating the organizational strategy, CFOs really should examine and approach for broad-ranging accounting matters. For instance, taking into consideration environmental aspects in tests a broad variety of nonfinancial belongings for impairment is increasingly critical. Wanting at the reporting strategy, CFOs really should talk to regardless of whether existing disclosures meet up with mounting needs, which includes SEC staff members concerns about the robustness of disclosures outdoors the economic statements, and regardless of whether the company’s decarbonization strategy affects person reporting segments.
These assessments may well not considerably change economic reporting nowadays but placing up processes and establishing anticipations for the economic statement disclosure committee will empower bigger reporting sophistication down the highway. Irrespective of whether it’s new very low-price methods to elevate cash, appealing M&A options, or added benefits commonly outdoors a CFO’s scope — manufacturer popularity, purchaser acquisition, and obtain to talent — firms have the probable to gain an ESG edge.
Scott Flynn is the audit vice chair at KPMG and Maura Hodge is audit leader at KPMG Impression.