The pressure to establish an ESG reporting framework is mounting as various regulatory bodies issue guidance.
In June, the International Sustainability Standards Board announced IFRS S1 and IFRS S2, its first-ever sustainability disclosure standards. In July, the European Commission adopted the European Sustainability Reporting Standards, which apply to entities doing business in the EU. In October, California passed new climate disclosure laws that reach even further than ISSB’s standards by impacting public and private companies with a revenue threshold of at least $1 billion that are doing business in the state.
Despite looming compliance standards, new research from the Visual Lease Data Institute highlights that nearly 70% of surveyed senior finance executives say their organizations are not fully prepared to track and measure the environmental impact of their leased and owned asset portfolios, which has implications for their reporting efforts and audit readiness.
As the responsibility for ensuring compliance will likely fall to accounting and finance departments, there are three steps these teams can take to help their companies establish sound reporting practices:
1. Determine where the data lives
When implementing the latest lease accounting standards (ASC 842, IFRS 16 and GASB 87), many organizations found it challenging to gather the required data from lease agreements, contracts and other miscellaneous sources, which are typically scattered across an organization. Data collection will be just as critical — and even more challenging — for ESG reporting as it will encompass both leased as well as owned assets.
To accurately capture their environmental impact, finance teams must identify consumption data associated with a spectrum of greenhouse gas emissions, including but not limited to carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and others.
Identifying where this data lives is the first step toward successful reporting.
2. Establish a centralized system of record
Once finance teams gather the pertinent information, they should load it into a centralized record system. Doing so will ensure they are producing reports based on the same, complete dataset, including the inputs specific to measuring the environmental impact of the leased and owned assets across the company’s portfolio. This is critical to building the necessary audit trail to meet the attestation required by the different standards.
It’s critical, however, for these teams to invest in a system that enables a strong controls framework so they can manage who has access to the data at certain points within a lease’s lifecycle. Putting controls in place that have the ability to grow and scale with an organization will mitigate the risk of inaccurate financial reporting and potentially failed audits.
3. Establish clear roles and responsibilities to keep up with evolving requirements
As the world of ESG reporting is constantly evolving, businesses must designate who is responsible for staying abreast of these changes, ensuring the organization remains in compliance and well-prepared for any modifications to reporting guidelines.
Given how new this type of reporting is, individuals would ideally collaborate with a specialized third party that can help keep the business up to date on regulatory changes and provide guidance on establishing related processes. A professional services partner could also recommend technology-supported systems and workflows that can adapt and scale, as needed.
Avoid unnecessary challenges by preparing for ESG now
Ninety-nine percent of surveyed senior finance and accounting executives have concerns about maintaining proper control over their organization’s lease portfolio.
To get ahead of the emerging ESG reporting guidelines, it’s imperative for organizations to shift their focus from ad-hoc or disjointed methodologies and embrace the adoption of a dedicated system of record that facilitates robust lease controls over the various datasets that make up these complex legal agreements, as well as related records, such as environmental impact data, contract amendments, insurance agreements, etc.
This strategic choice not only streamlines the complex process of lease management but also empowers organizations to thrive in an era of heightened financial scrutiny and sustainability imperatives.
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