UNLOCKING HIDDEN VALUE: PEOS CAN BENEFIT FROM SUSTAINABILITY REPORTING 

PEOs that adopt strong corporate sustainability initiatives as part of their business model have incredible opportunities for increased sales and corporate value.

What Is Corporate Sustainability?

Corporate sustainability refers to a company’s activities demonstrating the inclusion of social and environmental concerns in business operations and interactions with stakeholders. It involves integrating a company’s core strategy and operations to ensure long-term viability, positively impacting society and the environment. Sustainability focuses on environmental management, social justice, and economic development. While corporate sustainability reporting is very popular today, the roots of the movement began in the 1980s.

The Development of Financial Reporting

Well before the popularity of corporate sustainability, corporations had financial reporting requirements. Financial reporting requirements have developed over the years, most specifically for publicly traded companies. Various events, including financial crises, fraud, and increased complexity of business models resulted in legislation. The stock market crash of 1929 and the ongoing lack of public confidence in publicly traded securities led to the Securities and Exchange Act of 1934. This legislation created the Securities and Exchange Commission (SEC) and mandated ongoing audited financial reporting by publicly traded companies to ensure transparency, protect investors, and restore confidence in public markets.

As business models became increasingly diverse and complicated, the Financial Accounting Standards Board (FASB) was formed in 1970 to improve financial and reporting standards. The fall of Enron expanded scrutiny of internal controls and fraudulent financial reporting led to the passing of the Sarbanes-Oxley Act of 2002. This legislation enhanced internal control requirements and increased penalties for fraudulent financial activity. The

The financial crisis of 2007-2008 led to the Dodd-Frank Wall Street Reform and Consumer Protection Act to increase transparency in the financial services industry, enhancing reporting for investment advisers and hedge funds. The JOBS Act of 2012, the FAST Act of 2016, and 2020 Amendments to Regulation S-K were further legislative efforts regarding financial reporting requirements.

These regulations substantially apply to financial information of publicly traded companies. In the United States, there are no federal reporting requirements regarding corporate sustainability. While there are no mandated reporting requirements, evidence suggests that a substantial number of publicly traded companies provide sustainability reports, including some publicly traded PEOs. As of 2020, 90% of companies included in the S&P 500 issued sustainability reports. Corporate sustainability is currently a progressive movement.

Privately Held Companies and Sustainability Reporting

Like publicly held companies, there are no federal regulations mandating environmental, social, and governance (ESG) reporting for privately held companies. In California, the Climate Corporate Accountability Act requires large companies operating in the state that generate over $1 billion in annual revenue to report greenhouse gas emissions. Many experts on the sustainability movement see this as progress, and a sign for future mandates at either the state or federal level.

Sustainability And Opportunities for Privately Held Peos

Existing market research suggests different types of companies that seek to conduct business with other ESG-focused companies. PEOs will often have several ESG qualities which can attract such companies. Below is a list of categories of prospects, and reasons for their attraction to strong ESG values, and opportunities on how PEOs may reach them.

• (Type of Company) Sustainability-Focused Companies
  • (Reason for Attraction to Strong ESG Values) Seek partners that align with their commitment to sustainability
  • (How a PEO Can Reach Them) Highlight their sustainable HR practices and green initiatives.
• Large Corporations with CSR
  • Partnering helps meet CSR objectives and improves public image.
  • Demonstrate how their services enhance corporate responsibility.
• Investment and Financial Firms
  • Consider ESG factors as lower risk and better long-term prospects.
  • Emphasize their compliance and governance strengths.
• Regulated Industries
  • Partner with firms that help navigate complex regulatory environments.
  • Showcase expertise in regulatory compliance and risk management.
• Innovative and Tech Companies
  • Prefer innovative partners who are adaptive to future challenges.
  • Present tech-savvy solutions and data-driven decision-making.
• Consumer-Focused Brands
  • Appeal to a customer base that values sustainability and ethical production.
  • Outline their support for ethical employment practices.
• Government and Public Sector
  • Require suppliers to meet certain social and environmental standards.
  • Focus on their strong ESG compliance to win public contracts.
• NGOs and Nonprofits
  • Look for partners that share a commitment to environmental protection and social justice.
  • Engage in community initiatives and collaborations with NGOs.

Different Reporting Frameworks

Two approaches for reporting corporate sustainability are the ESG framework and the SASB (Sustainability Accounting Standards Board) framework. Both frameworks serve the growing demand for transparency in corporate sustainability efforts, although they do so in different, distinct ways. The ESG framework focuses on environmental, social, and governance issues. The SASB framework is more narrowly focused on sustainability topics most relevant to financial performance. The key features of Sustainability Accounting Standards (SAS) published by the SASB include industry-specific standards, issues that are financially material, and investor focused.

Synthesized Reporting

Most PEOs are required to have their financial statements audited annually. The financial statements are presented in accordance with generally accepted accounting principles promulgated by the FASB. Publishing corporate sustainability information in accordance with SASB standards alongside an annual financial statement audit can be highly beneficial for a company. PEOs should carefully assess their capabilities, expectations, and significant operations. This approach can greatly enhance a company’s credibility and sustainability performance, and reach out to markets with a targeted strategy.

If you own a PEO and are interested in more information regarding corporate sustainability reporting, you can research published sustainability reports, and contact your organization’s financial statement auditor.