As covert as they are, ESG-related issues have a tremendous impact on businesses, and more so in recent years with the launch of various modern business methods. The early blooming of trees and plants, glacier shrinkage, soil degradation, deforestation, waste, and burning of coal to create electricity are just some of the issues that make up the landscape of business factors to consider in relation to ESG. Other problems with ESG relate to social and governance issues that happen in the background but deliberately affect business policies. These require participation from governments, citizens, communities, corporations, businesses, and leaders. Whether you have employees working from home or in an office building, you must understand how ESG can affect your overall company.
What is ESG?
If you do not know what ESG is, it stands for Environmental, Social, and Governance, and it is the disclosure of environmental, social, and governance data, which increases the transparency within a business in order to reduce risks and identify opportunities. It examines how your business operates and considers governmental regulations to avoid financial consequences. ESG issues can affect accounting and company policies at large.
Environmental Issues That Can Affect Accounting Within Your Business
The Covid-19 pandemic is a prime example of how environmental issues can affect your business. At the height of the pandemic, the percentage of remote workers increased from five percent to 37 percent. It became a new trend after a survey showed that 76 percent of employers reported that their employees continue to work from home (WFH) post-pandemic. While most company policies cover workplace behaviors, including environmental and conduct, WFH workers are left out. Companies must consider energy, technology, travel, and waste to develop sustainable WFH policies comprising home energy reimbursements, for example. When reimbursing your remote employees for using utilities in their homes, your accounting team may now need to account for those financial transactions, reimbursements, or changed office-usage, in your books.
When conducting business in the US and other countries, there will be environmental issues using vehicles, transit, electricity, and computers. Cryptocurrency companies use a lot of energy to mine crypto coins and tokens, an automated process for validating transactions. They consume a large percentage of energy and cause emissions when utilizing fossil fuel as a power resource for the computational powering of thousands of mining machines. Commuting, recycling, and turning to clean energy are solutions for reducing climate change, pollution, and resource depletion we can practice at home, in the workplace, and in communities.
Accounting for utility reimbursements and the sustainability impacts of residential energy emissions is complex for business owners and small to large companies. With partnerships and corporations in the industrial and manufacturing sectors, GAAP and SEC require ESG disclosures with emission data. They must comply with governmental regulations regarding carbon emissions and pollutants released into the atmosphere or be subject to fines and penalties.
Social Effects on Businesses
Within ESG, consider the social aspects by examining the effects of an entity’s operations on the community, employees, human rights, and labor. You must consider the impact on the employees, citizens, and communities to reduce risk and ensure operational responsibility in running your business. Poor working conditions can result in breaking health and safety rules and regulations, fines, and in severe cases, shutting down your business. Addressing social issues with negative consequences on your business helps prevent legal actions and low employee retention.
Social issues organizations need to address:
- Diversity
- Corporate Social Responsibility
- Philanthropy
- Reducing poverty
- Sustainability
- Volunteer programs
- Well-treatment of employees
The Impact of Governance On Corporations
Corporate governance focuses on issues regarding control of management, disclosing information to shareholders and creditors, and the rules for directors. It prepares an organization to face challenges, such as the self-interests of employees, directors, and managers and violations of policies. Under the umbrella of governance, an issue is the arrangement of the board members because they make decisions that affect the company. The roles of directors, shareholders, and managers must be separate to avoid conflicts of interest that can have devastating consequences.
To generate the information required for investors, stakeholders, and directors to make vital decisions, your company must adopt GAAP and adhere to universal standards. Your business policies and practice should correspond to local, state, and federal laws for internal control efficient processes.
Corporate government focuses on those issues with strict rules and guidelines, starting with five essential fundamentals.
1. Accountability
The directors of the board and senior management are held accountable to stakeholders and investors under a corporate governance issuance.
2. Control
SEC (Security and Exchange Commission) exercises rights of control over directors and management to protect the interest of investors and shareholders through regulatory compliance.
3. Ethics
Ensuring fairness in all a company’s activities builds the foundation of corporate governance with good ethical practices in the workplace.
4. Transparency
Companies must be transparent in how they conduct business and their accounting records, transactions, and financial reports.
5. Trusteeship
Corporate governance guarantees the board of directors acts as trustees of the shareholders within a partnership or corporation business structure.
Are you having trouble wrapping your head around governance compliance and understanding how your business can function better, reduce risk and optimize costs considering relevant ESG issues? At Fusion CPA, our controllers understand environmental, social, and governance issues and their impact on businesses. We consult with clients to ensure compliance and best practice throughout the business, considering issues that you may not be aware of that might be affecting your operations or policies. We also analyse your books to help you reduce risk and save money in this regard. Contact us to discuss compliance for your business.
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