Four IRM Tips for Conquering the Biggest Accounting Experiment in 100 Years
In his recent article, "Are you ready for the biggest accounting experiment in 100 years?" Professor Florian Hoos analyzes the European Union's directive on sustainability reporting and the adoption of the European Sustainability Reporting Standards (ESRS). This shift towards forward-looking, sustainability-focused reporting, particularly the EU's double materiality concept, is indeed set to redefine the business landscape.
The EU law requires all large companies and listed companies (except listed micro-enterprises) to disclose what they see as the risks and opportunities arising from social and environmental issues and the impact of their activities on people and the environment. As outlined in the European Commission's FAQ, this directive will impact more than 50,000 companies and is expected to have far-reaching effects on the business ecosystem.
However, to address these new sustainability risk disclosure requirements, we must go beyond the traditional Governance, Risk Management, and Compliance (GRC) approach focusing on compliance risk. While GRC is a critical component of risk management, focusing solely on it can limit our view to specific regulatory mandates, often missing the "bigger picture" of strategic risk.
Integrated Risk Management (IRM), on the other hand, incorporates GRC but goes further. It links other risk disciplines, including Enterprise Risk Management (ERM), Operational Risk Management (ORM), and Information Technology Risk Management (ITRM), providing a holistic view of the organization's risk landscape - see figure below. This deeper understanding and context are crucial for business leaders in this era of sustainability reporting.
Source: Wheelhouse Advisors LLC, IRM Navigator™
It's within this IRM framework that we can effectively implement both Professor Hoos' tips and my additional suggestions:
Leverage an IRM Approach and Enabling Technology: Utilize an IRM approach and robust technology to streamline your reporting processes, manage risks associated with ESG factors, and gain deeper insights into your ESG performance. This is especially crucial as the EU's directive makes reporting requirements "subject to materiality," requiring businesses to determine what is truly relevant to their operations.
Enhance Collaboration, Context, and Communication: Foster a culture of cross-functional collaboration between accounting and risk management and the entire organization. This will ensure that everyone understands the context of sustainability risks and can communicate effectively about these changes.
Integrate Sustainability Risk with Other Risk Disciplines: To eliminate redundancies and costs associated with the new requirements, integrate sustainability risk with other risk disciplines. This will provide a comprehensive view of the risk landscape, enabling more effective decision-making and resource allocation.
Engage with Stakeholders: Actively engage with your board members, external/internal auditors, employees, regulators, and investors about these changes. Clear, transparent communication will be vital in managing expectations and building trust in this new era of reporting.
Professor Hoos' "strategic materiality" concept also resonates strongly with me. It's about seeing the other side of the risk management coin — opportunity. By identifying those material aspects in your industry where you can outperform your competitors, you can move beyond just complying with the new rules.
At Wheelhouse Advisors, we believe in the power of IRM to help businesses thrive in this new era of sustainability reporting. We're ready to help you navigate this significant shift, ensuring you're compliant and strategically positioned for success.
The future of accounting is here. Are you ready?
