We present AP Professional Services perspective to ESG Audit and Sustainability Assurance practices.

In a constantly changing audit landscape, achieving efficiency, accuracy and consistency is necessary. One of the new and latest reporting needed to be integrated in an Audit Engagement is ESG Audit and Sustainability Assurance. ESG addresses organization’s responsibilities beyond taking care of their bottom line (Profits) and financial performance.

In the past, we have integrated Tax and Company Secretarial Audit into our audit process. Now it’s the time to integrate a fully ASSURANCE PROCESS into our Annual Audit plan.

ESG stands for Environmental, Social, and Governance. Another name for ESG is Corporate Social Responsibility (CSR). For illustration purposes, CSR is like what Management Accounts (Unaudited Financial Statements) or better still Trial Balance is to organizations while ESG is the AFS and Sustainability reporting is like the Audit Opinion.

Sustainability assurance refers to providing independent assurance or verification of an organization’s sustainability-related information, performance, or reporting. Sustainability Assurance is what Audit Opinion is in traditional audit.

Business leaders increasingly see sustainability as pivotal to risk management and value creation. In line with this trend, more and more companies are investing in third-party assurance for ESG and sustainability reporting to mitigate risk and bring valuable benefits.

It’s about assessing how your company’s operations impact the world and ensuring these actions are aligned with your values and the values of society at large.

There are some countries that are charged with Mandatory ESG Reporting. However, it can be adopted as voluntary obligations in countries where it is not mandatory. In those countries where ESG Reporting is mandatory, regulations are in place demanding certain companies to provide specific financial or non-financial data disclosures in their strategic report.

Some of Mandatory ESG Reporting areas are:

(1) Climate-related disclosures in financial reporting.  

(2) SEC demands from publicly traded companies to submit annual reports on human capital resources (HCR)

RELATED SERVICE PROVIDERS
ESG Assurance Providers
Sustainability Assurance Providers

NOTE: Experienced Chartered Accountants and Auditors are the best fit to perform ESG audit services as they have vast experience in determining whether a client is in compliance with multiple standards and frameworks.

What is ESG reporting?
ESG reporting is an organization’s public disclosure of its environmental, social, and corporate governance data in order to ensure transparency into the organization’s ESG activities and measure its sustainability performance so stakeholders, such as investors, consumers, and NGOs, can make better-informed decisions.

A comprehensive and continuous ESG auditing helps protect organizations from ESG-related risks. ESG audits is part of a Risk Management tools that helps organizations identify and assess their impact on the environment and society, and develop strategies for mitigating or otherwise addressing ESG risks. Also, ESG Audit is an essential source of information for investors, employees, and customers, who demand accurate information and transparency around how organizations approach ESG issues. ESG Audit allows companies and organizations to benefit from stakeholder confidence, regulatory compliance, and an enhanced reputation.

ESG Audit is needed where pressure on any of these ESG elements (Environmental, Societal and Governance) are identified:

(a) An organization is exposed to Environmental pressures. Example is the Climate Change impact, waste management challenges, hazardous materials handling, pollution impact and supply chain depletion (depletion in source of material supply).

(b) An organization is exposed to societal pressures as a result of relationships with Employees, Customers, Communities. Examples are procedures to adhere to Labor laws, procedures not to violate human rights, policies on child labor and work conditions, Data Protection and privacy risk and policy framework on DEI Issues (Diversity, equity, and inclusion)

(c) An organization is expected to abide and make disclosure regarding laid down code of conducts and sets of Corporate Governance rules and regulations

ESG REPORTING FORMAT (ESG FRAMEWORK) Four well-known ESG frameworks are:
(1) Sustainability Accounting Standards Board (SASB)✅

Presently, ISAE-3000 (revised) is an assurance standard by the International Auditing and Assurance Standards Board (IAASB) that deals with assurance engagements other than audits or reviews of historical financial information. ISAE3000 on provide guidance for ESG Audits.

ISAE stands for International Standards of Assurance Engagements. ISAE are issued by issued by the International Auditing and Assurance Standards Board (IAASB)

Newly, we are having ISSA5000 to replace ISAE3000 as one unified guidance for a standard Sustainability reporting and combined guidance for both ESG Audit and Sustainability Assurance.

ISSA stands for International Standards Sustainability Assurance. ISSA issued by the International Auditing and Assurance Standards Board (IAASB)

(2) Task Force on Climate-Related Financial Disclosures (TCFD)

(3) ISO Standards. International Organization for Standardization.

Some useful ISO standards that provide ESG audit frameworks include ISO 26000 (Social Responsibility), ISO 14001 (Environmental Management Systems), and ISO 45001 (Occupational Health and Safety)

(4) GRI: The most popular or well-known of these frameworks comes from the Global Reporting Initiative (GRI). This framework is focused on sustainability and impact reporting. 

NOTE: SASB offers sector-specific guidance while TCFD is more specifically geared towards climate issues. As some frameworks address a specific aspect of ESG, you may want to consider whether using or combining parts of multiple frameworks makes sense.

Any ESG reporting frameworks adopted will provide guidance to:
(a) Identify ESG topics or better still risk areas

(b) Provide criteria on how to structure and prepare information to disclose for each topic.

STEPS ON HOW TO CARRY OUT ESG AUDIT (HOW TO PERFORM ESG AUDIT)

(a) Data collection (Data Mining) from stakeholders in order to understand and identify specific ESG Risk Exposure. Automate this process for continuous auditing and evidence collection

ESG data refers to information related to a company’s environmental impact, social responsibility, and governance practices.

Types of ESG Data
The different types of ESG data can be broadly categorized into the following areas:

• Environmental data: This includes data on a company’s energy usage, carbon emissions, water usage, and waste management practices

• Social data: This includes data on a company’s labor practices, human rights policies, community engagement, and diversity and inclusion initiatives
• Governance data: This includes data on a company’s board composition, executive pay, anti-corruption policies, and other metrics
• Financial data: This includes the financial performance and stability of the company, which may be used alongside other ESG data to calculate intensity ratios and other ESG KPI

(b) Select an ESG framework that aligns with your organization’s goals.

(c) Set up ESG Goals and KPI per each ESG potential risk identified. This will be used to determine if Risk is POTENTIAL or not.

(d) Map out strategy to manage and mitigate against potential risks identified under c above

ESG AUDIT RISK
Companies that fail to manage or mitigate ESG risks face financial, reputational, and legal cos