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October 2, 2023

ESG 2.0: account for everything

As featured in the Pi Labs ‘Strength in numbers: ESG 2.0 and non-financial reporting in the built world’ report:

I’ve spent seven years studying to have three insights about ESG. Not a great return, you might say, but they are the foundations of Omnevue. Firstly, because ESG is perceived to be material to value, it is bound to come under the remit of professional accountants. The first sustainability accounting standards were released by the ISSB on 26 June. The aim is to bring the same “discipline, rigour and professionalism of financial reporting to carbon and non-financial accounting”. The second insight is that SMEs are a huge part of the economy and have to be part of any sustainable solution. The 1.4 million SMEs with employees account for 35% of all UK greenhouse gas (GHG) emissions. The third insight is that ESG can be profit-making. Only accounting-grade non-financial data can be meaningfully linked to the profit and loss statement. For example, if you save X kg of CO2e, you’re saving Y amount of money.

Marc Lepere

What is ESG?

Remember Adam Smith and his three factors of production: capital, labour and land? One way to think about ESG is that for the past 70 years we have accounted only for capital and ignored labour and land. ESG is an opportunity to account for the whole business (insight number one), but for SMEs that can be costly and time consuming because it’s complex and not (yet) business-as-usual.

What is Omnevue?

Omnevue offers SMEs (insight number two) both the painkiller and the vitamin of accounting-grade data. It’s the accounting engine for ESG (think Quickbooks for non-financial data). The platform removes pain by automatically collecting data (which already exists in most SMEs), analysing and reporting it in line with new international accounting standards. It’s a vitamin because it converts ESG impacts into money for better decision making. This allows owners to unlock insights and new key performance indicators, attract new customers, access cheaper capital and work with happier, more engaged employees (insight number three).

Introducing ESG 2.0

Regulators and standard setters are responding to the perceived threat that climate change poses to the stability of the financial system. These regulators are working in a co-ordinated and networked ecosystem in over 40 jurisdictions worldwide. This phase of regulation can be characterised as ESG 2.0. ESG 2.0 (2022-onward) is fundamentally different to the period of ESG 1.0 (2004–2018). It shifts ESG disclosure from being unregulated to regulated; from being voluntary to being mandatory; from being self-assessed and cherrypicked to being based on accounting and assured data that aims to be consistent and comparable to financial data.

Where we’re headed

Where we’re headed is business-as-unusual. Where financial and non-financial data are reported alongside each other in what the ISSB call an integrated report. Basically, integrated reporting is a single report in which a business allocates its assets to six capitals: financial; manufactured; intellectual; human; social and relationship; and natural. At year end, the business reports on how it has used each capital by measuring whether the stock of each has risen or fallen during the year. Just like financial reporting there’ll probably be a lite version for SMEs.

Integrated reporting will soon become the new accounting normal. This new normal means accountants needing to understand ESG and sustainability data; and sustainability professionals recognising the opportunity of being able to prove how sustainability can be profit-making (again, insight number three).

The Pi Labs research team completed Strength in numbers: ESG 2.0 and non-financial reporting in the built world. The above is an excerpt from the paper, Dr Marc Lepere, co-founder and chief science officer at Omnevue, shares his work on ESG 2.0 and non-financial reporting.

You can download Strength in numbers: ESG 2.0 and non-financial reporting in the built world free of charge via the Pi Labs website

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