What can you lease? An asset. What has a carbon footprint? An asset.
Not long ago, global accounting teams began to comply with ASC 842 and IFRS 16. The process involved painstaking data collection for each individual asset owned by a company.
Now, a similar but more extensive exercise is underway to collect Environmental, Social, and Governance (ESG) data, more commonly referred to as sustainability data. Sustainability accounting promises to be a much larger project. But the lessons learned from lease accounting compliance will prove invaluable.
Kelly Ånerud, VP of Consulting at RGP and sustainability expert, sees the similarities too.
“What's happening in the ESG, we saw that in lease accounting,” said Ånerud in an interview on The Lease Alert podcast, “I’m starting to think about how we can build on that experience and then apply it to this new subject matter that I'm quite excited about and enthusiastic about. I think our accounting and finance folks have a key role to play.”
The difference between sustainability and ESG
“I like to think of sustainability as the very broad area that relates to behavior,” says Ånerud, who spent a significant portion of her career in Norway – where the definition of sustainability was developed by the United Nations Brundtland Commission back in 1987 when Gro Harlem Brundtland was the Prime Minister of Norway.
“This definition of sustainability relates to behavior. And it was defined as meeting the needs of the present without compromising the ability of future generations to meet their own needs. So that's the way I like to think of sustainability. Very broad, related to behavior, behaving in a way now that won't compromise our kids and our grandkids future,” she continues.
But how is ESG different than sustainability? While they’re certainly two peas in the same pod, they’re not identical.
“ESG, I like to think of it as a framework. A framework with three pillars. You've got the E, which is environmental. There we're talking about climate change, emissions, pollution, water, waste management, deforestation, all those things. You've got the S, which is the social pillar that relates to diversity, human rights, health and safety, data privacy. And then the G, which is governance, relates to business ethics, executive compensation, board diversity, those kinds of things,” Ånerud adds.
Lesson 1: don’t delay
Reflecting on the ASC 842 transition, many lease accountants at public companies regret not starting sooner.
“Why would you not seize this opportunity now to make your company even better and appeal to all these stakeholders?” said Ånerud.
Even before the guidelines were finalized, proactive companies began organizing working groups, consolidating information silos and collecting lease data into central repositories. This practice turned out to be an enduring best practice amidst industrywide changes.
Companies should adopt a similar approach for sustainability standards. Regardless of the form of the final standard, we will likely need to collect extensive data.
Most companies took the lease accounting transition down to the wire. Some even ran out of time and had to implement costly temporary solutions that required reworking later. By starting early, companies can avoid pitfalls and ensure a smoother transition to comprehensive sustainability reporting.
Lesson 2: involve the right stakeholders
Just as with lease accounting, the information required for ESG and sustainability reporting will be controlled by various groups within the organization.
Opening lines of communication with these groups is crucial. And to frequently update about stakeholders about what to expect.
Common stakeholders involved in ESG reporting include:
- Real Estate and Property Management
- Logistics and Maintenance
- IT – Servers, Printers
- Procurement and Fleet Management
- Legal
- Financial Planning
- Accounting
- External Reporting
- Investor Relations
- Treasury
- Tax
- HR
- Sustainability
- Energy Management
Each of these groups holds pieces of the ESG data puzzle. Bringing them together early in the process ensures two things:
- All necessary data is collected.
- No gaps exist in the reporting.
Collaborative efforts across departments will lead to a more comprehensive, accurate ESG metrics and have a more positive impact on the organization as a whole.
Lesson 3: It’s all about the data
Enterprise companies need the capacity to collect high-quality, auditable sustainability data. They must have the proper controls in place to ensure accuracy and completeness. This data must then be consolidated into central repositories in an organized format that enables effective reporting.
“Ultimately, just like lease accounting, you're going to be presenting this information for assurance. It's going to be audited,” says Ånerud.
Moving forward
Sustainability reporting will ultimately lead to greater transparency and accountability, benefiting not only individual companies but the broader business landscape as well.
However, the overall cost and burden on your company will depend on the steps you take now to set the stage. Investing in software with robust data collection and management systems will pay off in the long run, providing a solid foundation for sustainability and ESG reporting and helping to avoid the pitfalls of hasty, last-minute data gathering.
The transition to sustainability reporting is a significant undertaking. But the lessons learned from lease accounting compliance offer a valuable roadmap. By starting early, involving the right stakeholders, and focusing on data quality, companies can navigate this transition smoothly and set themselves up for success.
Need a little guidance to get started? Check out this CoStar Real Estate Manager guide to getting ahead of sustainability compliance.