December 14, 2021
ESG Reporting: A Push for Comparability and Reliability
An increasing number of organizations are reporting sustainability performance data, often called environmental, social, and governance (ESG) on their websites, in newsletters and within their financial reports. Simultaneously, customers, investors and other stakeholders are increasingly seeking and relying on ESG data for decision making. Given the novelty of ESG reporting, a reasonable person may ask:
Are companies speaking the same language?
Can I rely on ESG data that is being reported?
Despite increased demand for ESG data and reporting, the public often does not have the same level of confidence in the reliability and quality of published ESG data as they do with traditional financial data. That’s because the responsibility of communicating ESG efforts was historically shouldered by marketing and sustainability teams that may not have established internal controls and governance structures over the data being reported. More recently, companies are turning to the finance team and/or internal audit in order to focus on documenting internal controls and processes around ESG reporting in a similar manner as financial reporting.
External auditors play a key role in responding to stakeholder demand for more reliable ESG data.
Where to Begin: Setting Priorities
Before the auditors step in, an organization must select the ESG factors that are most significant to its business and operating environment. Utilizing a known framework and set of standards allows for comparability against other organizations. There are five leading frameworks and standard-setting organizations which can serve as a starting point to guide leadership through ESG initiatives. One of the more well-known standard-setters, the Sustainability Accounting Standards Board (SASB), designed voluntary standards, including a Materiality Map, to identify industry-specific sustainability factors that are likely to have material financial impacts on an organization. The map is interactive, and easy to use, making it a great first step on the path toward reliable ESG reporting.
A Critical Step: Documenting Internal Controls
Establishing governance over ESG metrics is a journey. Before, the journey ended with reporting sustainability information; however, organizations have come to realize that reporting is not enough – decision makers must have confidence that the information is reliable. An organization’s ability to communicate reliable and accurate ESG information to investors and stakeholders in part depends on the design and effectiveness of the internal controls surrounding the collection and reporting of ESG data.
A recent publication by the American Institute of CPAs (AICPA) identified five key action items organizations can take to establish and improve internal controls:
- Setting the tone: communicate to leadership
- Develop and document ESG reporting policies and procedures
- Develop a data management system
- Develop and document control activities
- Continually monitor policies and processes over time
The Role of the Auditor
The AICPA publication calls for auditors to engage in examining or reviewing a company’s sustainability information to both improve the reliability of ESG information and improve stakeholder confidence in ESG reports.
Auditing firms like Johnson Lambert are uniquely positioned to support organizations with the push for more comparable and reliable ESG reporting. First, auditors are required by professional standards to be independent from an organization. Second, they already provide assurance over financial reporting balances and disclosures that can easily translate to measuring and reporting ESG information. ESG is a natural space for expansion of auditor assurance that is trusted by stakeholders.
The approach to reporting ESG information is highly customizable. With the steps identified above, both organizations and auditors can aid in communicating a more reliable, comparable, and relevant ESG report. The results go beyond stakeholder confidence. Effective reporting in turn solidifies the universal focus on economic, social, and environmental goals, creating a more sustainable future.
Need more information on ESG reporting frameworks or assurance around your ESG reporting? Contact the Johnson Lambert team.