DOI: https://doi.org/10.62204/2336-498X-2023-4-5

THE ESG CONCEPT IN THE BUSINESS ACCOUNTING

AND INFORMATIONAL SUPPORT SYSTEM:

IMPORTANCE AND THEORETICAL BASIS

Lesya Leshchii,
Ph.D. in Economics, Associate Professor,
Ukrainian-American Concordia University,
lesya.leshchiy@uacu.edu.ua; ORСID: 0000-0003-2520-0589
Natalia Bielous,
Ph.D. in Economics, Associate Professor,
Academy of Labor, Social Relations and Tourism, Ukraine,
ordnadi@ukr.net; ORСID: 0009-0002-5596-4889
Serhii Nikolaienko,
postgraduate student,
Academy of Labor, Social Relations and Tourism, Ukraine,
serhiinikolaienko98@gmail.com; ORСID: 0009-0008-7190-4011

Annotation. Considered the possibility of including aspects of ESG – the external environment, social and management components in the accounting and information provision of business. The article examines the origins of the problem – modern challenges facing the globalized economic space and the need to adhere to the concept of sustainable development. The results of a public survey regarding environmental issues and their solution are given, which indicate interest in this problem. On the basis of all the mentioned provisions, as well as a study of the works of scientists, practitioners, public organizations and consulting firms, the importance of reflecting ESG aspects in corporate reporting is substantiated.

This will contribute to increasing the level of informativeness of reporting, which is important for investors and other users, and will also generally contribute to achieving the goals of sustainable development.

Keywords: ESG, sustainable development, business accounting and information support, corporate reporting.

Introduction. For a long time, the importance of a comprehensive assessment of business activity has been discussed in the economic space. Previously, this approach was based to a greater extent on the fact that effective management of non-financial components – for example, training and growth of personnel, research on the level of consumer satisfaction – leads to an increase in the efficiency of activities in the long term and profitability in general. Now more and more attention is paid to the importance of taking into account non-financial indicators within the framework of the concept of sustainable development.

Considering this, it is appropriate to pay attention to the main trends in global economic discussions, in particular, to the results of the conference in Davos, which took place on January 15, 2024. So, the list of topics included [1]:

  1. Security and cooperation in today fragmented world.
  2. Ensuring growth and jobs in the new era.
  3. Artificial intelligence as a driving force of the economy and society.
  4. Long-term strategy for climate, nature, and energy.

As you can see, the challenges of the modern world are emphasized, in particular, the ecological component and threats associated with global warming. Therefore, it is logical that global socio-economic trends should be reflected in the indirect information provision of business, because it performs two main functions. First, it is the basis for managing the enterprise – it is reflected in the company’s financial statements, as well as in management reports intended for internal use, as the basis of management accounting. Secondly, this reporting is the basis for the formation of statistical data on a national and global scale, on the basis of which it is possible to evaluate the world trends of sustainable development and take into account the consequences of global warming. And thirdly, this information is necessary for integrated reporting. In order to understand to what extent the goals of sustainable development are being achieved by region and whether positive changes are taking place to prevent global warming, we must first of all assess the contribution of each business to this task.

In this context, the importance of the concept of ESG is increasing. ESG is an abbreviation for environmental, social, governance. With this approach, the company tries to take into account all the mentioned components as much as possible when building corporate governance. And it is the information obtained as a result of more objectively and fully compiled financial statements that can contribute to this.

Literature review. World practice shows sufficient interest and a certain level of research on this topic. Thus, in a study by Pedro Matos [2], conducted on the basis of the CFA Institute Research Foundation, it is noted that “ESG,” “responsible investing,” and “sustainable investing” are broad umbrella terms that refer to the incorporation of environmental, social, and governance (ESG) considerations into investors’ portfolio decisions. Investors typically assess ESG factors using nonfinancial data on environmental impact (e.g., carbon emissions), social impact (e.g., employee satisfaction), and governance attributes (e.g., board structure).

Agnes Sipiczki in a study conducted on the basis of CEPS [3] says that environmental, social and governance (ESG) investing has been practiced in Europe for more than two decades, during which it has moved from niche to the mainstream market. Consulting companies also draw a lot of attention to this topic. Thus, in the study by Knachel Eric and Porter Brad [4] conducted on the basis of the company Deloitte & Touche LLP, it is stated that companies know that ESG matters not only have become a fixture in mainstream and social media but also have become top-of-mind for investors, credit rating agencies, lenders, regulators, policy makers, and other interested parties. Also interesting is the study by Rim El Khoury, Viviane Naimy, Sahar Iskandar [5] in which they compare the ESG concept with traditional financial performance evaluation.

Among domestic specialists, we note Korobkov O., Suskachevych A., Golov S., Shchur D., Chaly I., Kononenko O. and others. They note that as the environmental, social and governance ESG landscape rapidly evolves, the involvement of financial professionals is likely to play a key role in the next phase of the ESG reporting process. They emphasize the importance of reporting in this area, the development and improvement of indicators of such reporting, as well as overcoming difficulties, since the task requires a complex innovative approach [6; 7; 8]. Also, many practitioners and scientists emphasize that business compliance with ESG principles and disclosure of information about ESG indicators becomes a significant factor in the investment attractiveness of a business, the future value of investments in it, that is, it directly affects the financial decision-making by investors [6].

Research methods. A generalization of a number of legislative acts, scientific and applied studies regarding the inclusion of ESG indicators in reporting was carried out, including studies conducted by consulting companies, in particular Deloitte. Surveys conducted in Ukraine regarding the importance of the ecological component and its relationship with economic goals are analyzed. The experience of Ukrainian and international companies in preparing a management report is summarized. The work uses the methods of induction and deduction, comparison and generalization.

Results and discussion. The study of the ESG concept in the system of business accounting and information support is best started from the origins of this approach – namely, from the concept of sustainable development, which has been widely recognized for many years, but has not yet been sufficiently researched and implemented in practice, especially in Ukraine.

Thus, the goals of sustainable development to be achieved by Ukraine by 2030 are specified in Document 722/2019 of 2019 – Goals of sustainable development of Ukraine for the period until 2030 [9]. This document was adopted for the purpose of harmonizing with the legislation of the EU countries, as well as for the purpose of Ukraine considering global trends. It should be noted that the document is dated before the full-scale retreat of Russia into Ukraine, it does not consider all the problems that arose in connection with the war, and in our opinion, it should be supplemented after the victory.

Let’s consider some provisions (which will be relevant at any time) and their interconnection with the direct management of the company (table 1).

As we can see from the table, the goals of sustainable development, at first sight of a non-financial nature, can have a logical and consistent reflection in quite specific measures, the result of the implementation of which can be measured quantitatively and reflected in reporting. And it is the concept of ESG can be used for this. Let’s pay attention on its components in more detail.

Environment –  assessment of energy consumption, pollution, emissions, efficiency of use of natural resources and animal welfare. It’s about environmental risks and how companies manage those risks over the longer term. In this context, it is also important to cooperate with state environmental regulators.

Social – Social factors – how the Company interacts with and cares for people, as well as how it affects the local community and culture in general. The factors consist of inclusiveness, gender policy, the privacy, protection of personal data and customer satisfaction. It is also important to understand how much the Company cares about the health and safety of its employees.

Table 1

Interconnection between the goals of sustainable development, the sphere of management and measures to ensure the achievement of the goals

Goals     of                 sustainable development

the           sphere           of

management

Measures taken by the company to ensure the goal
ensuring a healthy lifestyle and promoting well-being

HR;

production management

timely and full provision of vacations, preventing of overtime work;

compliance safety equipment

ensuring quality education and lifelong learning

opportunities

 HR; knowledge management; innovative development conducting trainings and education for employees, matching the level of education to the position held; stimulation of innovativeness and motivation of employees for selfdevelopment
ensuring gender equality, expanding the rights and opportunities of all women

HR;

legal management

 preventing            of            gender discrimination in terms of salary or obtaining a managerial position; provision of maternity leave for men as well

ensuring availability and sustainable management of water resources and

sanitation

 production management; management of production resources analysis of the use of water resources in the production process and development of measures to save them
ensuring access to affordable, reliable, sustainable, and modern energy sources for all

energy efficient management;

Production management

 analysis of available modern alternative energy sources, development of a business plan for their implementation

taking urgent measures to combat climate change and

its consequences

production management; logistics management;

management of waste

disposal

 reduction of logistics chains in order to save climate pollution in the process of transportation; sorting and recycling of waste

                                           Source: compiled by the author based on [9]

Governance – this is to ensure the rights of shareholders and prevent potential violations of specific regulatory standards. This element includes internal control, access to industry best practices and dialogue with regulators (mainly tax authorities, national banks, and other government bodies) (depending on the industry). It is important to understand whether the company has developed measures to fight corruption and bribery, whether there are effective mechanisms for protecting the company’s interest in court, if necessary, etc.

As you can see, the concept of ESG considers a rather wide range of elements, and it is gradually starting to be considered more and more as an element of corporative reporting. Additional evidence of the importance of considering environmental indicators in financial reporting can be considered the growing interest in environmental aspects among the public.  

Thus, according to the results of a research conducted by the public organization Friedrich Ebert Stiftung in 2021 [10], the majority of respondents (60.5%) of the mass poll  supported the idea of increasing tariffs for the sake of Ukraine’s transition to environmentally friendly energy sources. Also, citizens of Ukraine consider problems with processing and storage of garbage to be one of the most important environmental problems in Ukraine. Table 2 shows the attitude of citizens to environmental problems – as we can see, in most regions environmental protection is a prerogative over economic growth, and the younger and geographically closer to Europe the respondents are, the higher this indicator is.

Table 2

Distribution of respondents’ answers to the question

“What do you think is more important: economic growth or preservation environment?” depending on the region and age

REGION AGE, years
North Center East West South

18-29

 

30-44

 

45-59

 

 60 and more
Economic growth 29,3% 25,4% 46,4% 30,6% 44,9% 30,5% 35,6% 38,8% 35,5%
Preservation of the environment 50,4% 57,2% 34,2% 54,7% 33,3% 53,2% 48,2% 43,3% 43,2%
Difficult to answer 20,3% 17,4% 19,5% 14,7% 21,8% 16,2% 16,2% 17.8% 21,8%

 

 Sourse: Poll report, 2021 // https://library.fes.de/pdf-files/bueros/ukraine/17805.pdf

Also, according to the results of the same poll, we can see the opinion of citizens regarding the measures should be done by the state for promotion responsibility of business to environmental problems (respondents could choose several answer options).

Table 3 Opinion of citizens regarding environmental measures

Activities Number of responses
Strengthen environmental requirements for enterprises and increase fines for their non-fulfilment 60,6%
Close all environmentally dangerous enterprises, if they are not will introduce measures to improve environmental safety 39,4%
Introduce tax benefits for enterprises engaged in increasing environmental safety 36,6%
Other and difficult to answer 5,6%

 

   Sourse: Poll report, 2021// https://library.fes.de/pdf-files/bueros/ukraine/17805.pdf

Sociological research shows that citizens consider it is reasonable to strengthen environmental requirements and to shut down the enterprises if they do not meet environmental requirements. Currently, compliance with these requirements is almost not reflected in the financial statements of enterprises. That is, based on corporate reporting, investors will not be able to assess the environmental risks of the enterprise (as well as social or other risks related to sustainable development). In our opinion, this does not quite correctly reflect accounting information.

Research of the activities of Ukrainian companies conducted by the Professional Association of Corporate Governance (PACU) and the Center for the Development of Corporate Social Responsibility with the support of the Center for International Private Entrepreneurship (CIPE) show a certain level of disclosure of non-financial information by large Ukrainian companies. The average level of disclosure of information companies of Ukraine according to ESG indicators is 32%, and companies from the TOP-10 – more than 60%. Some participants in the ESG Transparency Index 2020 disclose general information about the company, information about environmental protection and community relations. The issues of human rights and management and company leadership are the worst illuminated items [11].

In addition, according to Ukrainian legislation, medium-sized and large enterprises that prepare reports based on the taxonomy of financial statements and according to international financial reporting standards must submit the report “Management Report” along with other reports. This document, containing financial and non-financial information, characterizes the state and prospects of the enterprise’s development and discloses its main risks and uncertainties. The management report is submitted together with the financial statements and the consolidated financial statements. If the company submits consolidated financial statements, a consolidated management report is submitted.

It should be noted that in December 2023, Commission Delegated Regulation

(EU) 2023/2772 of July 31, 2023 was published – supplementing Directive 2013/34/ EU of the European Parliament and of the Council on reporting standards in the field of sustainable development, which should be applied from January 1, 2024. This Regulation approved the European Sustainability Reporting Standards (ESRS). They cover both the requirements for disclosure of information about the business entity, and the main provisions regarding the impact of the business entity’s activities on the environment, the social sphere, as well as management issues within the business entity [12].

Therefore, the issue of considering ESG aspects is not fully regulated, it is at the stage of development, so the business entities need to start preparation work on the study and analysis of information that will be needed in the near future to make appropriate changes to accounting. We should also note that Ukraine has suffered greatly from armed aggression and the consequences of the war should also be considered in the ESG concept.

In general, this does not change the method, however, some emphases should be shifted – for example, the assessment of the environment should include not only the ecological state, but also, for example, the level of demining of the territory, the level of demolition of rubble (destroyed buildings) and the level of infrastructure restoration and opportunities for employment of persons with special needs (disabled from war). However, this will not so much differentiate the domestic model from the internationally accepted standard, but to a greater extent complement and adapt it to real social-economic conditions.

Conclusions. Summarizing, we note that the concept of ESG is popular in scientific societies, as well as in actual activity of companies, due to more and more business participants are aware of the importance of a global method, taking into account longterm risks, switching to energy-saving technologies and protecting the environment. This dictates regulatory requirements regarding this issue.

    The article provides grounding to change the accounting and information model of business support in accordance with the goals of sustainable development, taking into account challenges: environmental and safety risks, ensuring decent working conditions, etc. It is explained that the concept of ESG, considering such components as Environmental, social, and corporate governance, meets the best to these information requests and can serve as a basis for supplementing of  corporate accounting

    The results of sociological polls were analyzed. They show that most Ukrainian citizens consider environmental aspects more important than economic growth and consider it necessary to introduce certain measures against violations of environmental rules. Therefore, we consider it is reasonable to reflect environmental indicators in accounting and oblige enterprises that have a significant impact on the environment to submit ESG indicators in their corporate accounting report. Similarly, ESG accounting should also consider other aspects – social and corporate governance, which are proposed to be supplemented by certain management measures, and which are an integral component of sustainable development.

References:

  1. World Economic Forum Annual Meeting. Davos-Klosters, Switzerland 15–19

January 2024// https://www.weforum.org/events/world-economic-forum-annual-meeting2024/?gad_source=1&gclid=EAIaIQobChMIhPGq1_mRhAMVnlaRBR3b8QZBEAAYA iAAEgIBWPD_BwE

  1. Matos Pedro (2020) / Literature review ESG and responsible institutional investing around the world. A critical review. CFA Institute Research Foundation. // https://rpc. cfainstitute.org/-/media/documents/book/rf-lit-review/2020/rflr-esg-and-responsibleinstitutional-investing.pdf
  2. Sipiczki Agnes (2022) A critical look at ESG market. CEPS Policy Insights No 2022-15 // https://cdn.ceps.eu/wp-content/uploads/2022/04/PI2022-15_A-critical-look-atthe-ESG-market.pdf
  3. Knachel Eric and Porter Brad (2021) Accounting Considerations for Environmental Objectives. Deloitte & Touche LLP. Heads Up | Volume 28, Issue 14
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rivenuchasti-finansovyh-fahivcziv

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Sound in Ukraine: point of view. ISFPS practice. No. 1 // https://ibuhgalter.net/ material/1265/25459

  1. About the Goals of the current development of Ukraine for the period until 2030. Presidential Decree

Ukraine. Document 722/2019, official, current edition dated September 30, 2019 https://zakon.

rada.gov.ua/laws/show/722/2019#Text

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