Business and government leaders realise the urgency of ESG as an enterprise imperative, as environmental groups, activists, and asset managers step up pressure on major firms to make public commitments to sustainability, said The Institute of Internal Auditors recently.
While internal auditors continue to focus on risks that can significantly impact their organizations, the heightened focus on ESG — where failures could affect an organisation’s long-term outlook — have led companies to quickly wake up to the urgency of confronting and responding to these issues seriously and immediately, IIA President and CEO Anthony J. Pugliese pointed out.
What ESG reporting involves
ESG reporting involves a wide array of metrics, requiring organisations to establish policies and implement effective processes and internal controls that will generate reliable information for decision-making, according to Internal Audit’s Role in ESG Reporting, the latest report by IIA.
Similar to financial reporting, according to the report, data used to create sustainability reports are based on the day-to-day operations and decisions driving organisations toward achieving objectives.
Proper control activities must be designed and operating effectively — from the operational steps to the collection and analysis of the data that will be used in reporting, the IIA said.
In addition, ESG initiatives and reporting demand sound governance practices, with the governing body, management, and internal audit working “collectively to align with each other and the prioritised interests of stakeholders, IIA added.
The challenges and complexity of ESG reporting are abundantly evident, and the risks associated with poorly managed reporting can be high in terms of regulatory compliance and reputational damage, IIA warned.
To be sure, more companies – encouraged by investors and public interest – are responding to ESG challenges with increasingly sophisticated approaches to measuring potential impacts, IIA noted.
The IIA report cites a KPMG survey showing 80% of companies around the globe, including 96% of the world’s largest, now report on sustainability.
That has prompted regulators to increase their attention on the accuracy of sustainability reports and what they actually reflect, IIA said.
While it’s good news that so many organizations are focusing on ESG, many more are struggling or are ill-equipped to determine exactly what should be reported, said Pugliese.
“A key reason for this is a lack of a single set of standards and uniformity in reporting,” he said.
In a recent letter to the U.S. Securities and Exchange Commission, The IIA called for uniform climate disclosure by corporations and recognition of the role internal audit plays in providing assurance around complete, accurate, and reliable information.
“Business performance is no longer judged purely on short-term financial returns,” Pugliese wrote in the letter to the SEC.
“ESG issues represent a broad range of risks, including to external supply chains, internal operations, third parties, general control weaknesses, data accuracy, human capital, and more,” he said.
A single system of climate disclosures would provide an opportunity for comparability among corporations and investors and allow for more informed business decisions that consider ESG impacts, he pointed out, adding that this also would enable long-term organisational resilience.