U.S. family businesses outpace big business on ESG – Accounting Today

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On Earth Day, many family-run businesses are ahead of corporate America when it comes to environmental, social and governance practices, according to a new survey by PricewaterhouseCoopers.

The vast majority, 93 percent, of U.S. family businesses engage in some form of social responsibility activities, especially when it comes to helping their local communities, according to PwC’s 2021 Family Business Survey. They are ahead of global companies, with 85 percent of U.S. businesses contributing to their local communities, compared to 62 percent globally. While 74 percent of U.S. family businesses are doing traditional philanthropy and grant-based giving, 42 percent globally are doing the same. Nearly half of the U.S. family businesses surveyed by PwC (45 percent) believe there is an opportunity for family businesses to lead the way in sustainable business practices.

As people celebrate Earth Day across the country and other parts of the world Thursday, awareness of environmental issues is on the rise. President Biden convened a video summit of world leaders Thursday to discuss the climate crisis and committed to reducing greenhouse gas emissions to achieve a 50 to 52 percent reduction from 2005 levels by 2030. The American Institute of CPAs organized its own webinar on LinkedIn on Earth Day to discuss progress on harmonizing ESG standards among the different standard-setters and how accountants can help clients. Accounting firms like PwC have been working on sustainability reporting for clients, and the AICPA is encouraging firms to provide assurance services on ESG reports.

“Family businesses have always been viewed as very strong supporters of their communities, and that’s something that has never changed,” said PwC U.S. family business leader Jon Flack. “If you look at any community where a family business operates, they are very focused and philanthropic on supporting those communities to grow.”

The SEC has been stepping up its oversight of ESG funds under commissioner Allison Herren Lee and its new chair, Gary Gensler, who have been making sustainability reporting a bigger priority, reflecting the Biden administration’s environmental policies. “Public companies through the SEC are having some increased requirements for reporting ESG activity, and family businesses are starting to get some of that pressure as well, both from where they’re a supplier to an SEC company and have to support their client with their reporting,” said Flack. “I think there’s also general pressure on companies, trying to make sure that they’re showing that they’re being responsible to the communities, that they’re aware of social issues. I’ve seen an increase in the amount of public transparency that private family businesses are putting out there.”

Family-owned businesses can be larger than many public companies, and some of the multibillion-dollar ones — such as Mars, Koch Industries, Cargill and Chick-fil-A — have disclosed their sustainability plans, perhaps in response to criticism of their environmental or sourcing practices.

“One of the things that we did see is we think there’s still an opportunity with family businesses to put together a strategy,” said Flack. “Only 23 percent of the businesses we interviewed said that they have developed and communicated a strategy around their ESG goals. The activity is there, but I think family businesses are really trailing in how they’re planning and developing their overall strategy related to ESG.”

For the annual survey, PwC asked about the top priorities of family businesses. The priorities usually include extending their business and focusing on new products and services among the top five. But this year, several other priorities also rose to the top: upskilling employees and embracing technology, improving digital capabilities overall for their organizations, and revising their business model. “Family businesses are starting to feel the pressure of changing digital capabilities, not only to be competitive with their products in a digital world, but also in operating their businesses,” said Flack. “Always a top concern or challenge that family businesses face is attracting talent, and when you get underneath that question about attracting talent, it’s attracting the right talent and then it’s retaining talent. They know that today’s employees are looking to continuously grow and evolve. They want to be digitally skilled in order to meet the challenges of business in the future.”

PwC has been helping clients with ESG reporting and assurance services. “We‘ve had a significant increase in businesses looking for us to support them in the development of their strategy, the assurance over how they’re reporting their goals, and being able to provide them with some oversight and independent viewpoints on that, and then thinking about the linkage of their financial goals, or their financial investment in ESG, as well as helping them think about the strategy behind the efficiency of how they’re operating ESG,” said Flack. “When a lot of businesses went out to start their ESG process, there were a lot of inefficient investments being made. That’s another piece that CPAs and accounting firms can begin to focus on. I’m a CPA myself, and I think the thing we can really support our clients with is to help them think through their strategy and then the accountability of the investments they are making.”

Accountants can play an important part in assisting clients with sustainability. “I think we have a crucial role in helping organizations address and improve their impact on the planet,” said Martin Farrar, associate technical director of management accounting at the Association of International Certified Professional Accountants during the AICPA’s Earth Day webinar. “We own the processes, the systems, the data, the management information, the reporting that supports our organization’s transition to sustainable businesses, and we also support sustainable decision making through our business analysis and our assurance of both financial and nonfinancial data.”

The AICPA is providing several resources to help accountants with ESG matters, including new reports “Putting the E in ESG” and “Key actions for establishing effective governance over ESG reporting.”

“Today on Earth Day, we’re launching Putting the E in ESG, which is the first of the three introductory reports into ESG factors,” said Farrar. “The report itself starts with an ESG organization or maturity model, so you can map your journey of where your organization is on its ESG modeling, and where it comes from.”

The report focuses on nine areas that financial professionals should look at in building environmental protection knowledge: energy, water, waste, recycling, climate change, greenhouse gas emissions, biodiversity and species accounting. The AICPA plans to offer follow-up reports in May and June on “Putting the S in ESG” and “Putting the G in ESG.” The AICPA is also working on providing summaries of the key sustainability standards and frameworks for finance professionals. One on the Sustainability Accounting Standards Board summary is already available on CGMA.org, while a summary of the Task Force on Climate-related Financial Disclosures will be available in early May, the Climate Disclosure Standards Board in mid-May, and the Global Reporting Initiative and the International Integrated Reporting Council by the end of May.

In addition to help with ESG matters, firms can also help family business clients with portfolio diversification and succession planning issues. The pandemic has prompted many family businesses to reexamine both of those areas. “This is one of the largest shifts that we’ve seen in the survey, at least since the financial crisis,” said Flack. “When you get into a pandemic or economic crisis, a lot of businesses come out of it saying, ‘Gosh, I sure would like to be more diversified the next time I hit one of those things.’ I’m not surprised that the urgency is there to be more diversified, but this is one of the largest shifts that I’ve seen. I think that CPAs and accounting firms are also helping. I know that we’re working with a lot of families to help them think longer term about their overall diversification.”

PwC recently published a white paper with the Kellogg School of Management about shared family capital, giving families a diversification strategy to follow. “If you look at family businesses beyond the second or third generation, they’re all heavily diversified,” said Flack. “That’s at the family level, where they’ve been able to take some earnings out of the business and do some diversification at the family level, but then that’s also within their business. That’s a real key to success for longevity for family businesses.”

Succession planning concerns have also risen given the health concerns around the pandemic. “Obviously, this type of crisis that we’re facing, unlike the financial crisis, has a health component to it, which gave a lot of family businesses the need and the urgency to look at their succession plan from that standpoint, but I think it’s also because the pandemic required us all to work differently,” said Flack. “It didn’t matter what type of business you were in. You were impacted by having to work differently, and I think that also put some emphasis on succession planning in terms of if it’s time to bring in the next generation of leadership who may be more attuned to these different ways to work and may be ready to lead an organization that looks different and may be working different. I’ve heard those conversations a lot from our family businesses on how leadership will change in this new evolution because of how differently we’ll work.”

A little over one-third (34 percent) of family businesses have a documented, communicated robust succession plan, according to the survey. That has grown considerably this past year: “You might look at that and say, ‘Oh, my gosh, there’s only one-third of family businesses out there that have a plan.’ There’s still a lot of room to work to do to get that in place. But that number actually climbed,” said Flack. “That statistic was 23 percent in 2016, and that number hadn’t really changed all the way back. In the 2010 survey, it was 21 percent. So it went from 21 percent to 23 and then it’s popped up to 34 percent. That’s statistically significant. If I were an accounting professional out there, I would be asking the open-ended questions of my clients to say, ‘What does your succession plan look like?’ See where that takes you in terms of being able to support your clients.”