Startups Need Accounting To Manage Sustainability
Despite the Corona crisis, the topic of sustainability continues to play a central role for startups: On the one hand, the proportion of startups dedicated to the green economy is growing continuously. According to the Deutsche Startup Monitor 2020, green startups have increased from 32.8% to 43.4% since 2018. On the other hand, the startup industry is generally committed to more sustainability. This is shown, for example, by the success of the Leaders for Climate Action initiative. Within a year, this association managed to convince 500 VC companies and startups to join it and reduce their carbon footprints.
Not only do consumers want to buy sustainable products or receive services from sustainable companies, but investors are also paying attention to the sustainable commitment of startups. They will be increasingly asked to report on their sustainable strategies, commitments, activities and impacts.
Challenge For Startups To Deliver A Convincing Sustainability Report
The problem is that there are no standard formats for this kind of reporting. The reason for this maladministration is that too many stakeholders and interests are involved. For example, many NGOs work independently of one another to develop standards for sustainability reports. It is true that there are generally accepted environmental, social and corporate governance (ESG) criteria that should set standards for companies and are used by investors to review potential investments. However, these ESG-related sustainability reports do not present a uniform standard either, which means that they can hardly be questioned or checked by stakeholders and investors.
Investors are confused about these different standards, benchmarks and metrics that are shown in ESG reports. In addition, some high ESG ratings have been misleading and companies with high ESG ratings even had serious environmental problems later on that were not revealed by the current reporting situation. Another disadvantage is that sustainability reports are produced completely separately from financial reports, which makes it difficult to see the positive effects of sustainable performance on financial performance.
The Advantages Of Sustainability Reports, Created By Accounting
● The accounting department would check and analyse all data and results, and match investments with the results of the sustainable activities and with the financial performance of the company. Based on these numbers and analyses, CEOs and CFOs can build a much better strategy and invest more efficiently in sustainable measures.
● An effective management of sustainability is attractive to investors. In addition, they want to see the same clarity in a company’s sustainability reporting as they expect from any financial reporting.
● Transparent and measurable business data and analytics on the company’s sustainable activities and impact will increase trust, support risk management and therefore raise the company’s value.
Accountants Need The Right Framework
● A standardised ESG reporting format is needed: A core responsibility of the accountant is assurance. Accountants need to verify company’s processes and controls to ensure that the information of a company is accurate. Therefore, accountants and auditors need a qualified and global specificity and guidance to be able to compile reliable data, to analyse the sustainable activities and the positive effects on the environment. This is the only way to build trust in the results. Therefore, they need an universal and standardised ESG reporting format.
● Resources are needed: Learning and applying new reporting frameworks in regards to the company’s sustainability and align them with the financial reporting system will consume a lot of time and resources.
There is still no solution to the problem. However, it is clear that companies and startups are becoming more and more sustainable and that this must be presented to stakeholders and investors in a transparent, trustworthy and comparable manner.
For this reason, we cannot avoid universal standards for a company’s sustainability report. The fact that accountants and financial professionals will play an important role in this solution is shown by the release of ESG reporting metrics in September 2020, developed by the four major accounting firms (KPMG, EY, Deloitte and PwC) together with the World Economic Forum (WEF).
The hope is that the IBC companies will start with its environmental reports on this basis and thus establish a global standard format. In any case, ESG advocates need to work with finance professionals and accountants to launch a final solution.
If you have any questions about this topic, please contact our CEO Magnus Bilke (magnus@donefinancials.com).
