Environmental, social and governance reporting is not generally required for non-public companies, but Mazars – an audit, tax, and advisory firm – recently helped a privately owned client in the food and beverage industry to put together its first non-financial reporting statement, according to Mazars Partner Kristen Walters. She said it could represent a trend.
“The company is in our middle-market practice which means revenues are below $500 million,” she noted. “This client implemented a sustainability report to respond to requests from customers to provide information on ESG metrics, and their will to organize and formalize their reporting to these clients.”
For a long time, large publicly held companies were the only businesses that had to be concerned with potentially costly ESG reporting. But now, it looks like privately held enterprises are increasingly being held to similar standards, often without regulatory mandates.
Investors and others are driving the move to expand ESG reporting, Walters added. “It is very much on the agenda of smaller middle-market and below companies. In these markets the drivers of ESG reporting are different stakeholders, like investors or clients for example.”
Some investors “have sustainability goals that affect their investment decisions and therefore companies that want to tap into such capital or are owned by such investors are reporting or working on their ESG reporting plans,” added Mazars Partner Jerome Devillers. “Likewise, a number of companies are entering the ESG reporting space because they are responding to requests from clients. These clients, either publicly held, foreign held, or simply on the forefront of sustainability reporting are now monitoring ESG metrics beyond the walls of their own organizations and throughout their supply chains. Satisfying requests from important customers is leading to a broader penetration of ESG reporting into smaller companies’ markets.”
ESG reporting certainly “will be perceived as another compliance cost or burden by many companies,” Devillers added. “There is no question that starting from scratch a new reporting function – that is implementing a process, training people, modifying systems, collecting, checking and aggregating a report – can be seen as overwhelming.”
Mazars helps clients of varying sizes “to elevate and update their understanding of this quickly developing field, assess the need and benefits of such reporting, organize a non-financial reporting function, or provide some assurance on their non-financial reporting,” according to Walters. As part of a global firm, “Mazars is uniquely positioned to helps clients in these markets on this area of non-financial reporting, with the combination of practical experience, locally trained consultants, and expertise in standards.”
Other professionals are seeing similar moves. “ESG creep is absolutely affecting an increasing number of smaller companies,” according to George Gallinger, a CohnReznick principal and Advisory, Governance, Risk and Compliance national director. “Like public companies, private companies have multiple stakeholders such as employees, regulators, and investors. The communities they operate in often identify an ESG strategy as being a key component of the company’s value proposition. More and more, a company without a stated ESG strategy is being viewed as a risk to these stakeholders given the public’s heightened concern with environmental and social issues.”
CohnReznick works with clients “to help them understand the various material ESG risks relevant to their organizations,” he added. “This includes related standards that may fit their needs from a goal setting and reporting perspective. We are also advising them on the need to develop and refine their ESG goals, establish various governance structures within the organization, and develop the infrastructure needed to maintain an effective, goal- driven ESG reporting program.”
Gearing up for the new gigs
Bottom-up pressure for ESG
Michael Hochman, a partner and co-leader of the New Jersey office of the accounting and advisory firm Grassi, has seen certain vendors require clients “to have one or more [ESG and other] policies in place in as a condition of doing business with them. Our largest niche is architects, construction and engineering firms, and we see this in the in the construction space where they require it. So it filters down to smaller markets.”
For smaller or middle-market companies in particular, ESG reporting may initially add another layer of cost, “but it may offer benefits too,” he added. “For younger people especially, this is important as an employee or an investor; so to be competitive, companies increasingly have to pivot to ESG.”
Even though it’s still an emerging service for Grassi, the firm is gearing up to help clients with ESG. “We’re talking about developing a service offering to help clients manage reporting requirements, and to develop policies and procedures for ESG,” he explained. “We’re still in the dialog stage, but we may bring on new people — it’s a developing segment and could open up new revenue opportunities for the firm.”
To handle the expanded scope of activity, CohnReznick is “ramping up our capabilities and services to become our client’s strategic ESG advisors,” Gallinger explained. “But we’re not doing this alone. We’re working in tandem with some of the best minds in the environmental space to deliver solutions. We are currently in the process of piloting and rolling out an ESG readiness assessment. This would be leveraged to help organizations identify and prioritize their specific ESG risks and develop an action plan to address them. The assessment process enables us to understand a company’s level of ESG readiness by evaluating a range of governance, process, risk, and controls protocols and develop oversight mechanisms within the organization to ensure the ongoing monitoring of goals and quality ESG reporting.”
In some cases, private equity funds are pushing target companies to engage in ESG reporting, said Joe Holman, ESG practice leader at Withum, an advisory and accounting firm. When private equity funds consider buying a company or making a loan, they often “analyze target companies using ESG factors,” he said. “PE firms and others are pushing companies to adopt ESG standards and reporting.”
And it can be expensive. “Bloomberg and other large companies can spend $100,000 or more on 100-page-plus glossy reports, but smaller companies can easily scale down the cost, by reporting on readily available metrics like employee turnover and diversity activities,” he noted. “And I don’t think you’ll see mom-and-pop companies get too involved in ESG initiatives and reporting, unless they see a marketing advantage.”
Other countries are pushing for mandatory ESG reporting, and stateside, the SEC has been tinkering with the idea. But Holman doesn’t think that mandatory reporting will occur anytime soon here. “The SEC has created task forces to study ESG, but the likelihood of broad ESG reporting requirements is unlikely,” he said. “SEC. Commissioner Elad L. Roisman in June stated that the SEC should wait until there is more agreement on what ESG information should be reported and who is responsible for setting ESG standards.”
Still, Nasdaq-listed companies — including those with smaller boards — will generally be required to have at least one diverse director by Aug. 7, 2023 — or explain why they don’t. And “in September the Commission has stated that a number of its disclosure rules may require disclosure related to climate change,” Holman said.
ESG is also “a big topic at organizations like National Association of Corporate Directors,” according to Ralph Albert Thomas, the NJCPA chief executive officer and executive director. “People — including investors, potential employees and employees — are asking public and non-public companies about they’re doing about ESG, and companies are responding because they want a welcoming environment that attracts talent.”
Will ESG reporting become mandatory? “That’s hard to say,” said Thomas. “But I believe it will be expected in large companies and the next-tier firms. If I were on the board of a privately owned company I’d be asking what we’re doing with regard to ESG and D&I (diversity and inclusion).”