KPMG Chair Alison Kitchen: how accounting can improve ESG impact
As ESG reporting and disclosure become increasingly important, accountants can play an important role in measuring and driving sustainability outcomes
Organisations and their leaders have a responsibility to ensure accounting and reporting of sustainability metrics is of the same quality as financial reporting, so capital markets and stakeholders can make informed decisions about the companies they invest in, buy from and work for.
That’s the message from Alison Kitchen, National Chair of KPMG Australia, who observed the current state of sustainability reporting is insufficient and significant work needs to be done to improve the quality of reporting globally. “There is a significant variation in the type and quality of data that undermines its integrity and comparability, and in turn, how effective its disclosure might be at directing capital flows to sustainable businesses,” she said.
“Spaghetti soup. Alphabet soup. Fragmented – all terms commonly used to describe the current state of global sustainability reporting requirements. On one count, there are 600-plus standards, against which companies are reporting to feed the different information demands of various stakeholder groups.”
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The current state of ESG disclosure
In the absence of a global consensus, various regions and nations are moving at their own pace, which is a reflection of the political will, legal frameworks and social context of each region and nation, said Ms Kitchen, who recently presented the Bill Birkett Memorial Lecture, the annual keynote lecture run by the School of Accounting, Auditing and Taxation in partnership with CPA Australia.
Australia has taken a relatively slow, soft-touch approach to mandating ESG (environmental, social and governance) disclosures: “we operate within a fragmented framework of legislation and codes of practice with varying levels of application and for the most part, a principles-based, ‘comply or explain’ approach,” said Ms Kitchen, who noted most disclosures are made by the “big end of town”, focused on climate risk, done on a voluntary basis and aligned with industry-based standards, guidelines, or private-sector initiatives.
Ms Kitchen, who has held a variety of management and governance roles within KPMG, as well as serving as external audit partner for a range of five ASX top 50 companies with global operations, said Australia lags well behind Europe (a leader in sustainability reporting) as well as major competitors and countries in the region like New Zealand. “As someone who watched international accounting standards develop at a snail’s pace, the progress global standards setters are making on sustainability-related standards is quite remarkable, particularly since the International Sustainability Standards Board was established by IFRS at COP26 last November,” she said.
While Ms Kitchen observed a certain level of collective drive to push for harmonisation across the globe, she said the reality is there are currently three significant sets of sustainability reporting requirements being developed. And, although there is commonality across the standards under development by the European Financial Reporting Advocacy Group, the US Securities and Exchange Commission and the International Sustainability Standards Board, she said there are significant areas of difference that will present practical challenges for multinational corporates.
Variation in ESG maturity
There is “enormous variation” in ESG maturity and the extent to which corporate Australia is responding to related market forces, Ms Kitchen said. At one end of the scale are organisations that take a compliance-focused approach. In the middle, organisations are integrating sustainability goals into their operations with interim targets, regular transparent reporting and holding themselves to account. At the other end of the scale are organisations that are well advanced and looking to use their leading position to influence change across their ecosystem of partners, suppliers, consumers and employees, said Ms Kitchen.
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“Outside this group are the sceptics and I suspect it will take the weight of mandatory sustainability disclosures to drive change. And even then, the nature of regulation and how ESG impact is measured will be key to determining the extent to which accounting for non-financial matters drives meaningful change towards sustainable capitalism,” she said.
A recent KPMG survey of more than 1300 global CEOs, for example, found that over 50 per cent are pausing or reconsidering their existing or planned ESG efforts over the next six months while 34 per cent have already done so. However, 69 per cent of CEOs reported stakeholder demand for increased reporting and transparency on ESG and 72 per cent believe stakeholder scrutiny will continue to accelerate.
“So, while there may well have been a swing back to the ‘here and now’ and hard financials, my sense is the undercurrent of stakeholder expectations is sufficiently strong that there is merit in all businesses starting or continuing their journey to embed greater transparency and accountability on ESG issues,” said Ms Kitchen.
The role of accounting in ESG disclosure and reporting
The accounting profession has a crucial role to play in ESG disclosure as the conduit between non-financial information and capital markets. “We are an important part of the system seeking to drive change, influencing capital market allocation of funds, and encouraging a more sustainable and inclusive model of capitalism,” said Ms Kitchen.
Further, the elevation of ESG metrics presents an opportunity to make accounting more relevant and valuable to society, she observed. For example, as organisations grapple with new data requirements around ESG, accountants will play an important role in processes around collection, storage and controls.
“My experience at KPMG and conversations with clients point overwhelmingly to the finance teams at the early stages of the ESG journey,” she said. “They are tasked with understanding the stakeholder information requests, working with process owners across the business to understand how information is defined, captured, and building new systems and controls, to ensure data quality is on par with financial accounting.
“It’s the accountants, sitting alongside technical specialists who might be called on to develop methodologies to quantify the social impact of an organisation’s operations on the environment, economy, and community. It’s the accountants who will be called upon to develop the models to help organisations do the feasibility analysis on energy transition plans and make decisions about retiring carbon-intensive assets.”
However, to drive real change, Ms Kitchen said the end goal must be independent external assurance of a company’s sustainability reports, alongside financial reports. “This creates an exciting opportunity for our profession to apply our discipline, integrity to verify a new set of data and further instilling trust in our capital markets,” she said.
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The future of accounting
In raising the bar of ESG assurance, Ms Kitchen said there is an urgent and pressing need for the accounting profession to work with policymakers and academia to define additional skills required and build a pipeline of talent – whether in the education system or through skilled migration.
“We need to get better at talking to students contemplating university course selections and ensure government course funding places appropriate value on commerce alongside new and emerging areas such as STEM. I’d say to any students or anyone doubting their career choices, there has never been a more exciting time to be an accountant,” she said.
“Accounting for ESG impacts will allow you to broaden your horizons, expose you to new and different parts of the organisation and provide the chance to work with subject matter experts across a wide range of fields traversing carbon emissions to human rights. I’d challenge everyone to seize the opportunity and take ownership for your learning.”
Just as every accountant must have a baseline understanding of technology and digital, Ms Kitchen said they also need a sound grasp of ESG. “Accounting might not be as sexy as being a human rights lawyer or an environmentalist, but we are a vital cog in the shift to telling the world how business is delivering on its promise to solve the world’s problems, profitably,” she said.
ESG opportunities for accountants
Paul Andon, Professor and Head of Accounting, Auditing and Taxation at UNSW Business School, moderated an engaging Q&A session with Ms Kitchen following her lecture. For Prof. Andon, Ms Kitchen’s message about the opportunity ESG presents for accountants is one that the profession should continue to heed.
“As the business world increasingly turns its attention to ESG matters, accountants have central roles to play in satisfying demands for credible insights, including by advancing conditions for relevant and reliable measurement, reporting, and assurance of an organisation’s environmental and social impacts,” said Prof. Andon, who echoed Ms Kitchen’s sentiments about the accounting profession’s potential to drive change for the better.
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“As Ms Kitchen outlined, ESG is not only a significant opportunity for our profession; but one where we have a social responsibility. Being highly trusted business advisors, influencers of capital flows, and enablers of business accountability, accountants are indeed a vital cog in efforts to shape a more sustainable and socially just future. I don’t think it’s an overstatement that accountants can, and indeed should, leverage their influence to change the world,” he concluded.