What is good business? Pricing products competitively? Providing 24/7 customer support? In today’s world, consumers aren’t dazzled by these things alone. They want the businesses they patronize to have a positive impact on the world.
In fact, a survey published in Forbes says that many consumers are willing to pay more than 10% more for environmentally sustainable products. On top of that, market research firm McKinsey & Co. reports that businesses with high environmental, social, and governance (ESG) ratings often financially outperform their competitors. That economic one-two punch is hard to ignore. In response, businesses are starting to not just account for their financial success, but account for good.
Simply put, accounting for good means measuring the far-reaching impacts of a business’s actions and policies. These observations are then used to guide everything from hiring practices to production techniques. According to Professor Jennifer Stevens of Ohio University’s School of Accountancy, accounting for good represents a complete ideological shift:
“We are moving from a pure financial focus into an economy and world where we’re thinking about the impact of businesses on a diverse array of stakeholders. We’ve recently started to see companies issue sustainability reports that revolve around their environmental impacts as well as their social and governance impacts.”
But even though a world of corporate responsibility sounds nice, accounting for good isn’t an easy task. “Good” is a subjective word that often defies measurement. In business administration, decisions based on vague concepts don’t typically please investors or foster productivity.
In a recent interview with AccountingEDU.org, Professor Stevens discussed accounting for good, how it’s measured, and why traditionally finance-focused accountants are the perfect people to track and motivate corporate stewardship.
Before earning her PhD in Accounting and Management Information Systems, Professor Jennifer Stevens was a forensic accountant for two global professional consulting firms. Throughout her career, she’s enjoyed success as a licensed CPA, a faculty member at The University of Notre Dame, and a prodigious researcher with a passion for transparency and an eye for the human element behind economic trends. Today, she teaches classes like Accounting Theory and Forensic Accounting in Ohio University’s School of Accountancy. But given her unique and diverse career, she’s also one of six instructors for the school’s interdisciplinary Introduction to Forensic Studies course.
Measuring Good: The ABCs of ESG
Accounting for good requires coming up with metrics to measure a company’s environmental, social and governance impacts. While that may mean different things to different people, many of today’s corporations are graded by the ESG rating scale.
First popularly used in a 2004 United Nations-sponsored economic report, ESG stands for environmental, social, and governance. The actual ESG scale runs from 0 (least positive) to 100 (most positive). Positive examples of each component of ESG include:
- Environmental: using recycled materials to create packaging.
- Social: sponsoring local charities and nonprofit initiatives.
- Governance: making executive salaries and decision-making processes transparent.
However, there is not one common set of ESG metrics and there isn’t a universal ESG appraisal agency. Measurement and reporting guidelines are in their infancy but rapidly developing through several independent bodies, including the Sustainability Accounting Standards Board (SASB). Some third-party organizations publish ESG scores using publicly-available data, company interviews, and product analysis, although these organizations are not regulated and ratings between different rating organizations are not consistent.
Companies like financial data giant Bloomberg offer ESG rating software and services, but utilizing these resources often requires intense internal review and restructuring. Companies that want to do better don’t always know where to begin. As Professor Stevens points out:
“You can’t manage what you can’t measure. Companies need guidance as to how to measure and report this information so that the information they are reporting is relevant, verifiable, consistent, and comparable among entities.”
So who can companies turn to when they want to internally track and report their environmental, social, and governance progress? While consulting firms can certainly help, Professor Stevens thinks businesses already employ professionals who are equipped to handle it: accountants.
How Accountants Drive Informed ESG Decision-making
Many may think the accountant’s role is strictly limited to monetary affairs. They collect and track financial information, correct it when necessary, and help executives make decisions based on trends and projections. But currently, accountants analyze a vast array of information within businesses and help drive business decisions. To Professor Stevens, this skillset is easily transferred to an even more impact-focused role:
“Accountants are really, really good at measuring things. We’re good at taking all of this data and turning it into usable information for decision making. ”
For instance, consider a company that wants to ensure its production practices support their local environment. They can work with researchers and local officials to determine what impact their business has on waterways, soil, and air quality. The accountants can then take that tangible data, generate reports, and help their colleagues make scientifically-informed, fiscally-sound changes that reduce their environmental footprint.
While this may seem like an unusual use of an accountant’s talents, Professor Stevens asserts that along with financial information, investors and other stakeholders want concrete data about a business’s impact on the world around it:
“Stakeholders care about this and they’re demanding this information from companies. And so as we are trying to manage environmental and societal impacts, we need to start thinking about how to measure it reliably and report it to stakeholders who care.”
So if a company’s sustainable practices are so tied up with their finances, it seems apparent that accountants can and likely should be integral parts of the process.
Why Good Accounting is Vital to Stewardship and Progress
Outside of its potential ESG applications, accounting is largely considered to be a neutral, behind-the-scenes profession. If a business is doing something good, it’s not the finance department doing it. It’s the hands-on professionals. Accountants just type away apathetically with a mind full of numbers.
But that’s not how Professor Stevens sees her profession. She asserts that good accounting is necessary to corporate stewardship. In her interview, she provided a powerful example of this principle in action:
“There are two companies developing cancer drugs. One is a very well-run company that’s paying its bills on time and has promising research and development and great employees. The other company doesn’t have great research and development, isn’t paying their bills on time, and isn’t run well. My colleagues in the sciences would say accountants don’t help cure cancer, but I’m going to tell you that I think they do.”
In this scenario, it doesn’t seem likely that the second company will ever meet its goal. It probably won’t have the capital to conduct research very long or attract enough employees. So if a company wants to develop life-saving drugs, support their local community, or take part in conservation efforts, accountants make it possible for those companies to communicate their prospects to outsiders, raise the necessary capital and use it wisely. If the finances aren’t in order, everything else may be doomed to fail.
Transparency: How Accountants Help Good Companies Secure Investments
No matter their specific role, an accountant’s efforts to promote transparency are central to ushering in an era of true corporate stewardship. Because in today’s data-driven and sometimes cynical world, it’s not enough to project a caring image — investors want concrete facts.
Professor Stevens and her colleagues at Ohio University work hard to remind their students of their role in this dynamic:
“I try to emphasize the importance of transparency and reporting in the efficient functioning of the capital markets. I want my students to think about the bigger picture and about how what companies are measuring, managing, and reporting influences not only how businesses act, but how investors allocate capital to businesses that they deem worthy. Accounting helps companies that have the most promising ideas and products get the capital they need.”
Investors seem to be putting more and more of their money behind these ethically-worthy companies. In 2020, the Forum for Sustainable and Responsible Investment found that investments in sustainable assets had reached $17.1 trillion. In 2014, they had only totalled about $6 trillion.
In the context of this astronomic growth, one particularly affirming phrase from Professor Stevens rings true:
“The information that accountants are providing and managing is making a difference.”
Whether accountants are actually helping companies account for good or enabling stewardship through good accounting, they’re integral to making business-as-usual a more positive, transparent affair.