Internal audit plays a central role in ESG reporting
Amid the growing momentum towards increased organizational disclosure of environmental, social and governance (ESG) information, internal audit has a central role to play in creating organizational value related to these issues.
Interest in these issues has grown in the United States, with the SEC exploring potential regulation amid a calculation on diversity, equity and inclusion (DCI) issues over the past year. In many regions outside of the United States, ESG regulations have already been established.
Even where regulations do not yet exist, investors and the public demand information on these topics. Anthony Pugliese, CPA / CITP, CGMA, President and CEO of the Institute of Internal Auditors (IIA), said organizational value will be affected by these disclosures.
“With a closer look at organizations on ESG issues, those at the forefront of performance disclosure are likely to have an edge in the market, especially from the perspective of investors and other stakeholders.” , did he declare. “For those who don’t, they will face increased risks and potential negative reactions. “
A white paper The recently published IIA on the role of internal audit describes independent assurance as an essential part of ESG reporting. Pugliese acknowledged that this is an area that can be difficult as there is still a lack of a set of standards and the regulatory environment is always changing.
A more uniform approach could emerge after the fall, as the IFRS Foundation considering the creation of a board of directors to set standards for global sustainability reporting. In the meantime, Pugliese said, organizations are struggling to find the best way forward when it comes to ESG reporting in an environment that is both exciting and inconsistent.
“There are mixed messages and with a new [US government] the administration gives it priority, it also adds a lot of pressure, ”he said. “The standards, I think, are going to have to start merging quickly. Otherwise, we’re going to have a lot of people publishing reports that don’t have the right context. “
Internal auditing can help eliminate the confusion. Pugliese said internal audit imperatives for ESG reporting may include:
Advisory services. If the board or management is unsure of best practices for ESG reporting, internal audit can be helpful. “Sometimes the board and management know they have the capacity, in a well-resourced internal audit function, to say, ‘Hey, we need help. Could you please work independently and give us some advice on where we want to focus? ‘ ”Said Pugliese. Once internal audit provides information, management and the board can make more informed decisions about how to move forward.
Compliance work. Regulations in this area are increasing. Companies with operations outside the United States may need to comply with regulations set out in their ESG reports. Some states, like California, may have more stringent regulations that should be considered in reporting. “Is there anything in your local environment that will require disclosures?” Pugliese asked. Internal audit must be on top of this, as well as any new requirements that may emerge.
Respond to the request. Pugliese said internal auditors will need to analyze the metrics that investors, customers, banks and other stakeholders would like to know about the ESG issues the company is able to provide. “What’s difficult about this is that it’s going to continue to evolve, and you’re never going to have quite nailed it until we have a common reporting system,” Pugliese said.
Remember the audience. ESG reports must be understandable to investors and other users of the information. “It’s one thing to be in compliance when you’ve signaled what you need,” Pugliese said. “It’s another thing for the average consumer or investor to be able to understand this and its context. “
Assessment of controls. Internal auditors will need to understand which ESG measures are applicable to their organization, “and the risk assessment process would start there to find out whether the company has an internal control system around the oversight of these measures,” said Pugliese.
Checking consistency and comparability. The value of ESG reporting may be limited if there is no way to compare it. “Sometimes we see companies come up with their own measures, but it’s less than ideal because it only creates a lack of consistency,” Pugliese said. “You want to have something consistent so that a company can be measured against others in its industry, or you want to look at companies in different industries and see how they perform against their benchmarks. “
Perhaps the most important thing to remember for internal auditors is that ESG reporting requirements and best practices are set to change dramatically in the years to come as attention to these issues increases.
This means that it will be important to continuously monitor what comes next, even as internal auditors provide advice and assurance on current ESG issues.
“There are just a lot of moving parts,” Pugliese said. “We’re going to be very careful about it. “
– Ken tysiac ([email protected]) is the JofAeditorial director of.