ESG INSIGHT AND ASSURANCE FROM THE INSIDE OUT
The focus on ESG is building traction across companies of all sizes and nature. #COP26 rightly focused global attention on climate and the environment and the essential actions we must all take. We must act individually and collectively with courage. When we apply hindsight it’s clear that to really embed sustainable change there must be clarity over accountabilities within the company and authentic, meaningful leadership from the Board and executive leadership.
As directors we must have the confidence to drive responsible and ethical business practices throughout our organisations and to talk about this with our stakeholders, including our employees and customers. We must be able to stand by the information and promises we are making to avoid claims of greenwashing.
Confidence comes through having the right governance processes in place to understand the reality of the situation in the organisation combined with monitoring and assurance functions that enable us to know that what we are saying is true.
In a governance sense, research indicates that less than 10% of companies have a dedicated Board Committee to focus on these issues. In some companies this is because responsibility is embedded clearly in whole Board meetings or in another Committee, most frequently the Audit Committee. But does this really drive the required level of focus with sufficient time devoted to debating the practical challenges and requirements? In 2020, one in four S&P companies cited ESG when discussing their business strategy in earnings discussions*. Whilst this is the highest proportion recorded to date, it indicates that in most companies ESG is not a central plank of strategy that needs to be reported on regularly.
Similarly, if we are going to drive a culture of accountability, monitoring and assurance must be a critical plank – the adage remains that what gets monitored and measured gets managed.
For internal assurance functions we believe this requires a focus similar to the levels we have come to expect over financial processes, controls and disclosures. It means creating insight through focusing on:
- Strategy design, definition and communication;
- Underlying systems, policies and procedures including metric definitions and reporting criteria;
- Data management, including the quality of data, data collection tools, organisation, and accuracy;
- Calculations, estimates and judgements in the same way as financial information;
- Physical and operational control design back on an end-to-end process basis; and
- Consolidation, reporting, risk oversight and disclosure.
In addition, the transition to net zero and embedding other fundamental changes to the business operation represents a core transformation programme for many organisations. Internal assurance and audit functions need to have a plan that enables real time and ongoing assurance to ensure that these change programmes deliver their anticipated benefits. This will require innovation in an environment where there remains uncertainty and subjectivity. It’s an opportunity for innovation and to use technology effectively.
Internal audit and risk professionals must focus on delivering foresight with recommendations that support and enable companies in embedding their promises across the organisation and managing the associated risks within acceptable parameters. Only then can companies really be confident that what they disclose is not simply greenwashing.
*Factset – Earnings March 5, 2021
AUTHOR.
CAROLYN CLARKE.
