SMPs should prioritize building out an ESG strategy, experts say

At the very least, CPAs should have a baseline understanding of what ESG is all about, what may impact their business, as well as clarity about where their clients may need support (Getty Images/mihailomilovanovic)

Developing an environmental, social, and governance (ESG) strategy is as important for small to medium-size practices as their larger counterparts. Small and medium-sized practices (SMPs) are not mandated to report on ESG. However, they may be working with clients who are interested in their sustainability position and may begin to ask questions SMPs need to be prepared to answer.

“ESG is affecting all of us and is already impacting the Canadian economy,” says Edward Olson, CPA, partner and national leader of environmental, social and governance for MNP. “Understanding these changes will be essential for SMPs to adjust to the evolving business environment.”

DISCLOSURE MANDATES COMING TO A BUSINESS NEAR YOU

There are many examples of the proverbial canary in a coal mine—the leading indicator of changes affecting the way business is being done in Canada, he explains. “The Federal Government’s new Treasury Board Standard on the Disclosure of Green House Gas Emissions and the Setting of Reduction Targets directive applies to contracts worth $25 million or more. While the size of these contracts is beyond the usual book of business for an SMP, it does indicate where the federal government is headed for suppliers to disclose their GHG emissions and set reduction targets.”

These reporting requirements will inevitably cascade down to smaller contracts throughout the supply chain and further into procurement contracts at the provincial and territorial levels, adds Olson. “If SMPs are not focusing on ESG, it could directly impact their business and their clients’ businesses who also work with government entities.”

“For this reason, SMPs in particular should prioritize building out an ESG strategy to meet the requirements of their customers and stakeholders,” says Leah White, assurance partner, Grant Thornton.

At the very least, CPAs should have a baseline understanding of what ESG is all about, what may impact their business, as well as clarity regarding where their clients may need support. “CPAs need to know the language and realities of ESG,” says Olson. “You will be expected to participate in the conversation. You will be expected to provide ESG responses that show you are aligned with your clients should they ask. And if you can’t answer questions about topics required by your clients--whether in regard to their relationship with you or their needs for help navigating this complex ESG world—you risk losing that client.”

ESG AND THE FIGHT FOR TALENT

Beyond requirements and personal values, ESG strategies also help differentiate firms from a talent acquisition and retention standpoint.

Angus Bonnyman, CPA, chief executive officer, The AC Group of Independent Accounting Firms Limited, an alliance of firms across Atlantic Canada, says ESG is a critical component in its search for the best talent. “We’re looking to a new generation for staffing requirements. ESG is important to them, and they are asking about it, so we need to evolve our practices to make sure we are employers of choice.”

“Generational shifts are shaping the drive toward ESG,” confirms White. “Millennials and Generation Z demographics are holding employers to higher standards in terms of diversity, equity and inclusion, and sustainability. As they are expected to comprise 75 per cent of the workforce by 2025, businesses need to consider developing an ESG strategy to retain and attract talent.”

GUIDELINES TO CONSIDER

Following are practical steps that small to medium sized practices can consider taking.

1. Develop an ESG framework

The first step SMPs should take when creating an ESG framework is to determine customer needs and business goals, says White. “Once businesses know which ESG topics to prioritize, it’s important to assess existing programs, policies, metrics, and engagements to see where there’s alignment. An experienced advisor, like a CPA, can help.”

“Depending on your size you don’t need to create a formal committee within your firm, as long as you have the principal partners involved to drive the strategic imperative of ESG,” says Olson. He provides the following 10 questions to guide CPAs in their efforts to understand the impacts of ESG to their clientele:

• Are your clients aware of the potential impact of ESG on their financial performance and reputation?
• Have your clients implemented any ESG-related policies or practices?
• Are your clients disclosing ESG-related information to their stakeholders?
• Are your clients aware of the potential risks and opportunities associated with ESG?
• Are your clients prepared to respond to ESG-related inquiries from investors, regulators, and other stakeholders?
• Do your clients need assistance in identifying ESG-related risks and opportunities?
• Do your clients need help in developing ESG-related goals and strategies?
• Do your clients need assistance in implementing ESG-related practices and initiatives?
• Do your clients need guidance on ESG-related reporting and disclosure requirements?
• Are your clients prepared to adapt to evolving ESG-related regulations and standards?

2. Start taking steps to reduce carbon emissions

An SMP should also take steps to assess their carbon footprint. In order to do this, they will need to establish a baseline and then set targets.

Success in reaching greenhouse gas emission targets can include a number of simple-to-implement actions, such as travelling less, and attending conferences and events online, says Bonnyman.

Waste saving initiatives at his organization include double-sided printing and checking with clients if they need hard copies of their financial statements. “Even the engagement letter process can be electronic with the use of digital sign offs.”

3. Assess potential risk in your client bases

Olson recommends SMPs also evaluate the potential implications of ESG on their own practices. This includes identifying and understanding how many of their clients are included in the top 10 emitting industries in Canada. “If any fall into those top 10, consider the changes impacting them and how you need to align your professional services to help them on their journey,” says Olson. “If the SMP or their client are unwilling to adapt to these changes, this will eventually impact revenues and ultimately going concern. Staying on top of ESG is good business practice. This is about future proofing your revenues by understanding the changes to the business environment, as well as basic business resilience through conducting an internal business analysis based on external economic trends.”

The typical SMP needs to ask the following questions of themselves:

• Will your clients be asking you for information on your ESG activities and are you prepared to answer them?
• Are there social ramifications to your business model? Do you have policies regarding social topics such as diversity, equity and inclusion, workplace harassment, code of conduct, etc.?
• Do you understand what carbon footprint means? Are you able to quantify GHG emissions?
• Could you disclose your GHG emissions if a client is asking for this information from you?
• Have you done a diagnostic on your current client portfolio to assess which are in the top 10 emitting industries in Canada, and who most likely will be required to establish targets and outline decarbonization strategies?
• Are you clear regarding which clients within your portfolio will likely need assistance in navigating the world of ESG?

4. Consider your social actions and policies

“Your strategy to address social priorities will directly, or indirectly, impact financial value to you as an SMP. So the question remains, how do you change your governance model to formally deliver on addressing social priorities such as gender inequity or Indigenous reconciliation,” says Olson.

Tackling the social pillar can seem especially challenging for smaller firms, says Bonnyman. “The more successful firms are those that take more of a balanced approach to work and allow flexibility. It’s not all that revolutionary, but it all helps and makes a huge difference to employees. We also need to change our practices to be more inclusive and start being aware of the different things we can do to make the workplace more welcoming. For example, we are working with community partners at getting a better understanding of barriers to different groups and eliminating them to the extent possible.”

Even social community events can make a social statement, he adds. “Smaller firms have a vital role to play with community and non-profit groups.”

5. Build a communications strategy

Practices should also be forming a communications strategy around their ESG efforts. “Before building a communications strategy, SMPs should consider who they need to communicate with,” says White. “For SMPs with limited resources, prioritizing clients and stakeholders will be more meaningful, particularly for B2B businesses.”

Communication should be honest and transparent to mitigate risks around “greenwashing”, she adds. “It should also seek to respond to questions customers or prospective customers might have from an ESG perspective.”

6. Change the CPA mindset

“In our profession, everything is about the fundamentals of utilization, realization, and profitability,” says Olson. “Sustainability impacts all of those. How we measure it is just as important. ESG should be interrelated with what you monitor every day so you can see the linkage in terms of how you manage your firm. To miss this business imperative will ultimately negatively impact the SMPs ability to create value.”

Smaller practices do have one key advantage that they can leverage, he adds. “You have a great opportunity at this point to learn from the lessons and mistakes of the [larger firms] in front of you. They are charting courses with varying degrees of success. Be clear as to what has worked, what hasn’t worked, what you should be focused on, and how you can best assist your clients. These are all things you need to be thinking about today.”

WHERE TO GET HELP

Following are examples of more formalized offerings for interested CPAs. “Which ones will be best is really dependent upon your industry and the services you will be providing,” says Olson.

There are starter or micro credential courses such as the CPA Canada micro credential course. “Provincial CPA institutes will be creating similar micro credentials,” says Olson. “Earth Academy is another potential resource.”

For those looking to take a deeper dive into the world of ESG, options include the SASB FSA Credential which addresses many aspects of ESG from market expectations to materiality to ultimate disclosures. Others include the GRI Sustainability Reporting Certification, Sustainalytics, which includes corporate ESG training, or the CDP Climate Change Course.

MORE ON THE “S”

CPA Canada has a wealth of sustainability resources. To learn about where Canadian public companies stand on social reporting, see State of Play: Study of social disclosures by Canadian public companies and The S in ESG: an increasing focus for organizations. Plus, find out more about the business impact of environmental and social issues and how CPAs can lead ESG initiatives.