5 Key Environmental Reporting Factors: Accountants Focus on the ‘E’ in ESG

As companies’ focus on environmental factors assumes a more pronounced role in their operations, accountants and auditors will play an increasingly larger role in this area.  Much of their responsibilities will focus on reporting organizations’ results on their environmental performance. 

But what exactly will they be reporting on, and how can these factors be measured? 

Let’s look at five key environment-related reporting factors that finance professionals will be focused on and how they have typically been gauged to this point. 

1 – Greenhouse gas emissions

Greenhouse gasses (GHGs) are chemicals that, once released into the atmosphere, trap heat. GHGs are closely linked to global warming and climate change, according to the U.S. Energy Information Administration. Examples of GHGs are carbon dioxide, methane and nitrous oxide.

As part of ESG, companies aim to reduce the GHGs their business is responsible for. They typically track Scope 1, 2 and 3 emissions:

• Scope 1: These are direct emissions, such as from a company’s own machinery.
• Scope 2: These are indirect emissions, such as those that result when a company buys energy from others and their processes create GHGs.
• Scope 3: These are indirect emissions up and down the company’s value chain, such as emissions that result from a consumer using the company’s product.

GHGs are measured in tons. Companies typically have reduction targets to bring down the percentage or number of tons of GHGs they emit in every financial quarter or year. Businesses can use GHG measurement tools like those developed by the U.S. Government’s National Institute of Standards and Technology (NIST). 

2 – Energy consumption

To achieve ESG goals, businesses reduce their use of energy, and also transition to using more renewable energy sources. Energy use is measured in watts. Companies track consumption by comparing the amount of energy use before and after implementing conservation measures, as well as on an ongoing basis. 

Companies adopt a few different strategies to meet this ESG metric. They might use the same type of energy, but reduce power usage by switching to energy-efficient machinery and appliances. This way, they waste less energy and accomplish the same business goals using less power. 

Businesses can also adopt reusable forms of energy, such as:

• solar
• wind
• hydropower
• biomass
• geothermal

Often, energy efficiency allows businesses to save on operational costs. An example would be a company paying for power by the watt and thus being able to reduce the number of watts used. 

3 – Water usage

Water is critical for many industrial processes. But it is also a precious resource necessary for life. Taking care with how a company uses water is therefore another ESG goal. 

One starting point is finding the minimum amount of water necessary for a task. This minimum amount of water forms part of the U.S. Environmental Protection Agency (EPA)’s definition of water efficiency. 

Businesses also aim to avoid water waste by:

• fixing leaks and replacing faulty equipment
• reusing water when possible
• using low-flow water appliances
• using the minimum amount of water in actions such as cleaning

Water is measured in gallons with flow meters, also called water meters. Water meters measure the amount of water coming into a location as a whole. Submeters measure water used in each specific task, such as cooling or landscaping.

4 – Pollution and waste

The old adage “reduce, reuse, recycle” is the short summary for ESG efforts to curb waste and pollution. Companies aim to use less disposable or harmful materials, to reuse or recycle materials when possible, and to replace materials like plastics with Earth-friendlier fibers like paper.  

This is an important metric not only for consumers, but investors in companies who practice ESG. An Investopedia survey found pollution and waste management was the top ESG issue among investors, valued by 80 percent of respondents. It beat out carbon emission reductions (69 percent) and water conservation (67 percent).

Companies measure waste and pollution reduction through user friendly metrics like the number of harmful pieces they have kept out of circulation. As an example, The Walt Disney Company states on its website its elimination of single-use plastic straws and stirrers has resulted in the elimination of 175 million straws and 13 million stirrers globally each year. 

Disney is also an example of how a company can meet ESG goals by better managing organic waste. Instead of sending it to landfills, the company ships it to a composting facility where the waste becomes nutrient-rich soil Disney uses to feed the plants on its grounds. 

5 – Air quality

Air quality is a broader ESG metric than GHGs, taking into account all potential pollutants a business might be able to prevent. According to the World Health Organization, pollutants of major public health concern include:

• particulate matter
• carbon monoxide
• ozone
• nitrogen dioxide
• sulfur dioxide

Industrial facilities can be a major source of pollutants. Businesses can take steps to measure its progress with this ESG metric by curbing or stopping practices that emit harmful substances into the atmosphere. 

According to the U.S. Environmental Protection Agency (EPA), the largest source of environmental sulfur dioxide is fossil fuels, burned by industrial facilities and power plants. Businesses that burn fossil fuels might consider changing to another power source. Or, if that is not possible, to exceed the standards set by the EPA for emission reductions.

Integrating ESG into accounting and auditing practices

Corporate environmental performance has emerged as an important signpost for investors and other stakeholders who seek companies with sound environmental, social and governance practices. 

This article has examined some of the top reporting factors that accountants and auditors will be measuring and reporting on in the immediate future. However, these are just a few of the metrics that will help paint the pictures of corporate environmental performance. Over time, others will be added and existing ones refined. 

As the field evolves, audit and accounting will play a crucial role in ensuring organizations’ efforts are reflected accurately and effectively. It is therefore crucial for practitioners to prepare for this exciting opportunity that will only continue to grow in the years ahead.