How Does ESG Affect Accounting and Financial Reporting?

Deloitte has released Do ESG Matters Affect Accounting and Financial Reporting Today?, a brief primer on potential effects of environmental, social, and governance (ESG) matters on a company’s financial accounting and reporting in the context of the existing accounting guidance and the current regulatory environment. With respect to accounting, Deloitte points to an FASB staff paper published in March, Intersection of Environmental, Social, and Governance Matters With Financial Accounting Standards. That paper highlights the connection between ESG matters and the financial statements. Deloitte sets out three of these examples of accounting impacts in its publication, including cases in which ESG matters could affect the impairment of an intangible assets, the useful life of an asset, or the value of inventory. As to financial reporting considerations, Deloitte summarizes and cites recent SEC activities that point to the Commission’s increased attention on how companies apply existing rules to account for ESG risks and impacts to their business. In this regard, the authors opine that an increase in SEC comment letters related to ESG matters is likely. Audit committee members seeking to understand how ESG risks can affect the financial statements and audit risk may find this publication useful.