Integrating ESG Into the Business/Accounting Curricula: Some Thoughts and Ideas

I have previously blogged about whether ESG really matters. In this blog I look at the education needed in sustainability and ESG to prepare college business school students for the increased knowledge requirements in these areas.

ESG captures mainly nonfinancial information that can create risks and opportunities inherent in a company’s operations. According to Deloitte in What is ESG, investors are increasingly incorporating ESG elements into their investment decision making process, making ESG increasingly important from the perspective of securing debt and equity capital. While ESG is typically used in the context of investing, it has also been applied to customers, suppliers, employees and the general public.

The Spread of ESG Reporting

According to the Ernst & Young (EY) report, Why ESG Performance is Growing in Importance for Investors, the growing significance of ESG issues to investors can be seen in the 2020 EY Climate Change and Sustainability Services Institutional Investor survey. The survey found that, of the 98 percent of investors surveyed who assess ESG, 72 percent conduct a structured review of ESG performance, compared to 32 percent in the 2018 survey (EY, 2021).

Bloomberg Intelligence reports that global ESG assets surpassed $30 trillion in 2022 and are on track to surpass $40 trillion by 2030, which is over 25 percent of projected total assets under management (Bloomberg, 2024).

A variety of reports and standards exist to guide sustainability reporting including: (1) engage stakeholders; (2) conduct materiality assessment; (3) gather and analyze data; (4) compile report; (5) verify and assure; (6) communicate effectively; and (7) improve and iterate.

Framework for Reporting

The sustainability report should address ESG issues using a framework for reporting that aligns with global reporting standards like the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) standards. The framework should be used consistently and be comparable across reports. In addition to an assessment of materiality, the report should be verified to ensure credibility and reliability of the disclosed information.

The Governance & Accountability Institute, Inc. (G&A) issued its 2023 Sustainability Reporting in Focus report that analyzes the percentage of sustainability reports issued by Standard & Poor’s (S&P) large-cap companies and the smallest half by market cap of the Russell 1000. The results follow (G&A, 2023):

• 98% of S&P companies published sustainability reports in 2022.
• 82% of mid-cap companies published sustainability reports, up from 68% in 2021.
• 90% of Russell Index published reports in 2022, up from 81% in 2021.
• SASB remained the most widely used sustainability standard utilized by the Russell 1000 by 78% of reporters in 2022, while alignment with GRI remained constant at 54%.
• Alignment with the Task Force on Climate-related Financial Disclosures (TCFD) continued to grow rapidly with 50% of Russell 1000 reporters utilizing TCFD in 2022 compared to just 4% in 2019.

Deloitte reports in its December 2022 Survey Findings on ESG Disclosures and Preparedness the following about the frequency of  using five frameworks for reporting ESG data:

• Task Force for Climate-related Financial Disclosures (TCFD) (56%)                     
• Sustainability Accounting Standards Board (SASB) (55%)                                      
• Greenhouse Gas (GHG) Protocol (50%)                                         
• International Integrated Reporting Council (IIRC) (48%)                                 
• Global Reporting Initiative (GRI) (47%)                                                                     

Disclosure Standards

ISSB issued two disclosure standards on March 6, 2024, that are designed to improve trust and confidence in company disclosures about sustainability to inform investment decisions. The standards establish a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects. International Financial Reporting Standard (IFRS S1) requires an entity to disclose information about its sustainability risks and opportunities while IFRS S2 deals with climate-related risks and opportunities. In both cases, the standards require an entity to disclose information that enables users of general-purpose reports to understand sustainability-related (S1) and climate-related risks and opportunities (S2). This information could reasonably be expected to affect the entity’s cash flows and its access to finance or cost of capital over the short, medium or long-term (collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).

On April 21, 2024, the SEC decided to hit pause on the implementation of IFRS S1 and IFRS S2. Originally set to go into effect in 2026, the effective date was postponed while legal challenges to the new rules are dealt with. In addition to reporting GHG, the SEC rule requires U.S.-listed companies to publicly report their climate-related risks and information about their plans to transition to a low-carbon economy.

Integrating ESG Into the Business School Curriculum

The Association to Advance Collegiate Schools of Business (AACSB) includes sustainability in its accreditation standards and emphasizes the importance of including ESG and sustainability in its members’ business and accounting curricula. Regarding ESG, the AACSB’s 2020 Guiding Principles and Standards for Business Accreditation sets forth a vision “To transform business education globally for positive societal impact.” Similarly, the introductory statement on the AACSB Accelerators states: “To solve society’s global challenges requires new thinking and leadership skills as businesses shift to a triple bottom line that includes people, profit, and planet.” AACSB’s Standard 9 (Engagement and Social Impact), stipulates that business schools demonstrate impacts that positively affect society.

Integrating into the Accounting Curriculum

There has been a paucity of research on integrating ESG into the accounting curriculum. One paper does stand out. Simmons et al. (2024) surveyed 452 accounting faculty about their views on whether ESG should be taught, how it should be taught/methodology, where it should be taught in the accounting curricula, what the learning objectives should be, what topics should be included and what level of instruction should be utilized. In the interests of brevity, here are the major findings:

1. The vast majority of respondents thought ESG should be taught in an integrated manner (43.6%) or hybrid (39.7), which means a standalone course plus integrated strategically with other topics. Only 5.1% chose a separate sustainability course while 11.7% chose coverage in one course but not ESG.
2. The participants favored teaching ESG at the graduate level.
3. Audit and assurance courses (60.2%) were chosen as the most popular way to incorporate topics related to ESG, followed by accounting ethics (58.0%), financial accounting (48.4%), managerial/cost accounting (45.6%), and a separate sustainability/accounting course (43.8%).
4. The preferred method of teaching is using case studies, followed by articles/other readings, guest speakers, and using hands-on projects. The use of classroom lectures was fifth.
5. Participants indicated that a general discussion of ESG was the most common way to utilize ESG in their courses (36.9%), followed by reviewing sustainability frameworks (22.8%). Students also complete ESG assignments (20.8%), review CSR reports (14.1%), and analyze case studies (12.1%).

The ideal way to teach ESG/sustainability accounting is the hybrid mix whereby relevant topics are integrated into the curriculum while a separate standalone course pulls it all together. One reason for this dual approach is to stress the importance of sustainability accounting throughout the accounting curriculum. Some will point to the difficulty of full integration because some instructors may not feel comfortable teaching ESG/sustainability. This is why the separate course may work best. It would be up to each institution to decide based on the available resources.

A Gallup poll was conducted during the April 3-25, 2023, period through telephone interviews with a random sample of 1,013 adults. The pollsters found that efforts to promote adoption of the ESG framework in investing have gained traction in previous years and become the subject of pro-and anti-ESG legislation, yet the general public did not seem to be more familiar with ESG at the time of the survey compared to two years prior. Indeed, 37 percent of Americans reported being “very” or “somewhat familiar” with ESG, basically unchanged from 36 percent in 2021. Another 22% were “not too familiar,” while 40 percent were “not too familiar at all.” (Saad 2023).

Does ESG Really Matter?

An article in McKinsey Quarterly, Does ESG really matter—and why? examines the criticisms of ESG and identifies four categories of objections as follows :

• ESG is not desirable, because it is a distraction.
• ESG is not feasible because it is intrinsically too difficult.
• ESG is not measurable, at least to any practicable degree.
• Even when ESG can be measured, there is no meaningful relationship with financial performance.

The measurement issue is of paramount importance. While individual components may be measurable, the aggregate score has little meaning. Moreover, organizations such as GRI and SASB can measure the same event differently.

In addition to the rating agency chaos, greenwashing is another common criticism leveled against environmental data. It involves making an unsupportable claim to deceive consumers into believing that a company’s products are environmentally friendly or have a greater positive environmental impact than they actually do. A company might emphasize sustainable aspects of a product to overshadow its involvement in environmentally harmful practices. Another practice is to use false information to intentionally hide wrongdoing, such as misleading labels. This practice is known as “whitewashing.”

The bottom line is that a company may adopt practices that suggest environmentally conscious or friendly practices in an attempt to capitalize on the growing demand for environmentally sound products. Another practice that creates challenges is greenhushing which is the opposite of greenwashing, the latter of which is when companies overstate their sustainability in an attempt to market to environmentally conscious consumers. Greenhushing is when a company intentionally does not publicize its environmental or social efforts, such as climate-friendly actions or goals. Companies may do this out of fear of criticism or backlash, such as being perceived as greenwashing or not meeting their stated goals.

In evaluating the usefulness of ESG data, we need to look beyond investors, who seek maximum returns on their investments, and creditors who seek to protect their outstanding amounts due and look at the interests of other stakeholders including customers, suppliers, employees and society at large. These user groups should welcome ESG data, especially information related to social activities and governance. Indeed, the governance data alone provides a valuable perspective on whether a company manages its financial and non-financial risks.

The question whether an ESG backlash is forthcoming seems unclear, perhaps because not everyone understands what the purpose is of collecting ESG data. It could be that support for sustainability broadly will increase over time in part because Gen Z and millennials seem to be more supportive of this concept than employees from older generations. In the meantime, accounting standard setters, especially in the U.S., should work with their international counterparts because there is global support for ESG standards.

Posted by Steven Mintz, Ph.D., aka Ethics Sage, on July 16, 2024. You can sign up for his newsletter and learn more about his activities at: https://www.stevenmintzethics.com/.