How can companies make the connection between sustainability accounting and corporate governance? Continuing research in the Strategic Risk Management Lab at DePaul University’s Kellstadt Graduate School of Business studies how companies can develop and execute strategies to create long-term sustainable value based on risk governance. This research includes studying leading practices in developing the connection between sustainability accounting and corporate governance.


Sustainability and Long-Term Value Creation, published in Strategic Finance in October 2022, discussed how companies make the connection between sustainability strategies and finance to create and protect long-term value. Turning the focus to sustainability accounting and corporate governance, it’s time to explore how to apply the Strategic Risk Assessment process to sustainability and how sustainability accounting can use the process from the 2020 Committee of Sponsoring Organizations of the Treadway Commission (COSO) report Creating and Protecting Value: Understanding and Implementing Enterprise Risk Management to develop a strategic approach to sustainability accounting and reporting.


Mark L. Frigo and Robert Herzwho serves on the boards of directors and various board committees of companies including Fannie Mae, Morgan Stanley, and Workiva, and who served as chair of the Financial Accounting Standards Board (FASB) from 2002 to 2010are joined by Ray Whittingtonwho served as dean of the Driehaus College of Business and director of the School of Accountancy & MIS at DePaul University—to discuss the latest developments in sustainability accounting, corporate governance, and strategic risk assessment.


Skills for Boards and Executive Teams


Effective corporate governance, especially as it pertains to sustainability, calls for specific skills, expertise, and experience on the part of executive teams and boards. Research at DePaul University has found that high-performance companies support a knowledge-building culture and develop distinct adaptive capabilities as discussed in Strategic Life-Cycle Analysis: The Role of the CFO and Strategic Valuation in the New Economy.


Mark L. Frigo (MLF): Bob, during a panel titled “Building Better Boards” at Notre Dame’s Center for Accounting Research & Education (CARE) conference on Accountability in a Sustainable World in September 2023, you mentioned that the expectations of board members has risen, which requires new skills, expertise, and backgrounds. You also mentioned that boards can develop a skills/experience matrix and that these skills/experience matrices are being disclosed by some companies in SEC [U.S. Securities & Exchange Commission] proxy statements. What are your recommendations for developing the skills and expertise of boards?


Robert Herz (RH): Yes, boards need expertise in a number of new areas (including cyber risks and risk management), a tapestry of expertise, and the ability to develop a skills/experience matrix. In addition to expanding the gender and ethnic composition of their boards, many boards have also been trying to expand the range of backgrounds, experiences, and skills of candidates that serve on their boards. Following the enactment of the Sarbanes-Oxley Act in 2002, public company boards added former partners of public accounting firms and current and former CFOs that qualified as being “financially literate” and as “audit committee financial experts” to their boards and audit committees. In the wake of the Great Recession and financial crisis of 2008-2009, candidates with experience in risk management were increasingly sought, particularly for the boards of financial institutions. The growing importance of technology to most companies and rising threats from cybersecurity have prompted many boards to add members with significant experience in those areas. And with environmental, social, and governance (ESG) issues and sustainability now being an area of focus for CEOs, senior management, and boards, candidates with experience in ESG issues are being recruited.


Board Training and Board Professionalism


MLF: Research at DePaul University has found that sustainable high-performance companies invest in organizational and human capital, especially as it pertains to the skills and expertise of its board and executive team. This requires keeping up to date with significant forces of change to develop resiliency (see also Resiliency and Strategic Risk Management in the May 2023 issue of Strategic Finance).


You’ve stressed that an element of professionalism is for board members to engage in ongoing training to keep up to date in today’s environment. This training should obviously be customized and tailored to the company and the specific board members, rather than boilerplate training. Please describe your advice for board training and board professionalism.


RH: Yes, service on boards means being a member of a profession that requires certain knowledge and skills and a commitment to keeping up to date on current internal and external developments that impact the companies on whose boards you serve and on the role and responsibilities as a member of the boards and various board committees.


I have found that many companies provide periodic educational sessions and deep dives on relevant matters and that there are many groups and organizations including the National Association of Corporate Directors; Tapestry Networks; the major accounting and law firms; leading business and law schools that offer conferences, webinars, podcasts, and email alerts; and a cornucopia of publications on developments and subjects of interest to board members and members of particular board committees. I find in-person and virtual conferences and get-togethers of board members from different companies very helpful, and they provide an opportunity not only to get updates on current topics and issues, but also for attendees to inform each other on what we are seeing in our roles, to exchange views, and to share best practices.


Professional Education and University Education


MLF: The area of sustainability accounting is evolving. Please describe your advice for accounting educators in terms of including sustainability accounting and corporate governance in accounting education and in professional education for accounting professionals, including CFOs.


RH: In response to increasing demand from investors, the area of sustainability accounting and reporting has been rapidly evolving in recent years with more companies now publishing annual sustainability reports and new standards and regulations mandating disclosures relating to greenhouse gas (GHG) emissions, human capital, and other ESG issues. Accordingly, companies have been turning to their accounting and finance groups along with internal subject-matter experts and outside advisors to put in place the systems, processes, and internal controls needed to produce this information for both internal and external reporting. Increasingly, this information is being subjected to independent assurance by a company’s auditor or another assurance provider.


In addition, board and audit committee oversight of these activities has also been evolving in recent years. For example, audit committees are often now charged with overseeing the company’s sustainability reporting. As a result, companies, accounting firms, and consultants have been hiring more graduates versed in ESG issues and sustainability reporting, making it increasingly important for accounting educators to get up to speed on these subjects and to develop and include relevant courses in the curriculum. Fortunately, there’s an increasing volume of educational materials, conferences, and webinars by the major accounting and consulting firms, professional organizations, and organizations such as the International Sustainability Standards Board (ISSB), the Global Reporting Initiative, and COSO that can aid accounting educators in course development.


Strategic Risk Assessment and Sustainability Accounting


MLF: In this section, Ray Whittington joins the discussion focused on ongoing research in the Sustainability Accounting & Reporting Initiative at DePaul University.


Ray Whittington (RW): In Sustainability and Long-Term Value Creation (Strategic Finance, October 2022), we discussed how companies make the connection between sustainability strategies and finance to create and protect long-term value. We discussed how to use the Strategic Risk Assessment process from the COSO guidance paper mentioned above. This process can be useful in developing a way for boards and executive teams to integrate sustainability strategies with ERM [enterprise risk management] and to develop a strategic approach to developing sustainability accounting and reporting. Please describe the latest developments in the initiative and your advice about how boards and executive teams can take a strategic approach to sustainability accounting using this Strategic Risk Assessment process in today’s environment.


MLF: During the last year, I have conducted interviews with board members and executives about sustainability accounting and corporate governance. In a recent discussion with Jim Logothetis, who serves on boards and advises boards, he indicated that the Strategic Risk Assessment process provides a rigorous systematic approach that has been vetted by boards and executive teams and provides a continuous process for the development of knowledge and skills of board members and executives in the area of sustainability accounting.


In a recent discussion with an experienced board member, Dennis Chookaszian, he stated, “It’s critical for a board to establish a risk-oversight process that’s board driven.” The Strategic Risk Assessment process provides a way to establish a risk-oversight process that is board driven.


RW: What regulatory factors are impacting sustainability accounting and corporate governance?


MLF: Recently the Federal Reserve, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have published guidance to banks relating to climate change. This is an area where sustainability accounting knowledge and skills can be valuable for boards at banks as well as boards of bank loan customers. The Strategic Risk Assessment process provides a systematic way for boards to develop needed knowledge and skills in sustainability accounting. This process can include adopting E-liability carbon accounting developed by Robert Kaplan and Karthik Ramanna (see Sustainability Strategies and Net-Zero Goals), which is a simple but rigorous approach relating to climate-change GHG data. I advise bank boards and boards of bank loan customers to become knowledgeable in E-liability carbon accounting to help in navigating this regulatory guidance.


MLF/RW: The Strategic Risk Assessment process should consider sustainability risks in relation to a company’s suppliers and customers. The areas of supply chain risk and customer sustainability risks have risen in importance in recent years. As we have discussed, for years ERM has focused on the risks inherent in companies’ supply chain and customer base. However, recent developments have caused management and boards to specifically focus on the risks in these two areas related to sustainability. This is vividly illustrated by the new guidance that describes how financial institutions should manage putative climate risks. It emphasizes that climate-related financial risks should be identified, measured, monitored, and controlled within the institution’s risk management framework. It indicates that these risks should be incorporated into the institutions’ lending policies to help ensure that their loan portfolio remains consistent with the institutions’ risk appetite.


While the management and boards of some companies may adequately incorporate sustainability risk, this new guidance serves as a reminder of the increased importance of sustainability risks related to a company’s suppliers and major customers.


Failure to adequately consider the sustainability risks of suppliers may put the company’s supply chain at risk. To adequately consider supplier sustainability risks, the company may need to delve deeper into the operations of the supplier than has been done in the past. There may even be a need to scrutinize the supply chain of the supplier. If the company has major customers, a similar analysis may be needed. This is especially true when loss of the customer presents significant risk to the company.


A number of risk analysis tools are available for considering stakeholder sustainability risk, including exposure analysis, heat maps, climate risk dashboards, and scenario analysis. Scenario analysis is particularly useful in evaluating the intermediate and long-term potential sustainability risks. Those tools can be used along with the Strategic Risk Assessment process.


CFOs and management accounting professionals have an opportunity to take a leadership role in developing the skills and expertise of board members and leading the way by developing these skills and expertise in the finance function of the organization. Here are a few action items for CFOs and finance organizations:

  • Assess the skills and expertise of the finance function in sustainability accounting; this may include how to use the COSO Strategic Risk Assessment process for sustainability accounting development and the E-liability carbon accounting method for measuring GHG emissions.
  • Assess the skills and expertise of the board in sustainability accounting, and identify needed training areas and resources.
  • Develop an action plan for board training and executive team training in sustainability accounting, and implement the action plan.
  • Assess the firm’s strategic risk assessment process to determine if it’s sufficiently comprehensive in its consideration of sustainability risks.


 This article is part of the Creating Long-Term Sustainable Value Creation series (see Creating Long-Term Sustainable Value by Mark L. Frigo and Dominic Barton in the October 2018 issue of Strategic Finance) and part of the Sustainability Accounting & Reporting Initiative in the Strategy, Execution and Valuation Initiative and Strategic Risk Management Lab at DePaul University, which focuses on leading practices in sustainability accounting and reporting to help corporate professionals, advisors, and investors create and protect long-term value.


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