Are current ESG data reporting approaches ready for an era of mandatory assurance, when a third party must verify and make a judgment about the design and effectiveness of reporting controls and methodologies? Adrian Wain, ESG advisory lead at UL Solutions, weighs the question.
- Legislation, customer requirements, investor pressure and the need for strategic certainty are making verification and assurance of ESG reporting a must.
- Due to the rapid evolution and expansion of ESG reporting, current controls may be insufficient to meet expectations of assurance bodies.
- Getting to assurance readiness depends on a company mastering the reporting standards and guidance for its industry, as well as mapping the reporting ecosystem, and integrating ESG reporting with core business performance reporting.
ESG is characterized by multiple moving parts, which makes parsing current and future requirements a formidable task. But there is reasonable certainty that third-party verification and assurance of ESG reports, especially when it comes to greenhouse gas (GHG) statements, will be a must-do. Assurance is essential for transparency, and as voluntary and mandatory GHG programs advance globally, companies will thrive with accurate, and verified, GHG reporting.
As we quickly approach the moment when assurance is not just expected but required, many companies may be questioning whether their ESG reporting controls satisfy assurance criteria. Accordingly, now is the time for companies to act quickly and decisively to identify and resolve any deficiencies in ESG reporting controls, i.e., the specific actions the company has established to mitigate the risk of material errors in reporting.
Underlying causes of deficient ESG reporting controls
While ESG is hardly new, it has evolved quickly and constantly, and many companies are behind the curve when it comes to reporting controls. Contributing to this situation is the fact that ESG reporting had been voluntary, which means that ESG has not been subject to the level of internal controls as have other core functions, such as financial reporting.
Beyond that, the pace of the evolution of ESG reporting standards has exceeded many companies’ capacity to develop and implement controls around them; the boundaries of ESG reporting have expanded to areas and subjects with very few pre-existing controls, and ESG reporting technologies have advanced and proliferated to the point that in-place control mechanisms have been disrupted.
Deficient ESG reporting controls also emanate from day to day operations of companies
Understandably, companies have much to catch up on operationally when it comes to ESG reporting controls. For instance, from a people perspective, many companies have yet to put in place overall oversight assignments, dedicated ownership roles and sufficient expertise in ESG reporting.
In terms of process, challenges and deficiencies related to workflow, documentation, internal review and issue resolution remain unsolved. In addition, while ESG reporting technology may be in place, it hasn’t been sufficiently integrated with many companies’ existing systems.
Effects of deficient ESG reporting controls
Inaccurate or deficient ESG reporting can have a range of negative outcomes – for the company, for customers, for investors, for regulators and, ultimately, for society. The problem begins with the fact that deficient reporting controls fail to compromise and to conform with the widely applied principles of good ESG reporting, which include relevance, accuracy, transparency, completeness and consistency.
There are three significant steps company leadership can take to begin to prepare reporting controls for the era of required third-party ESG verification and assurance. First, the owners of the reporting process must truly immerse themselves in and master the ESG reporting standards and criteria the company is reporting against. Second, they must proactively engage and educate all contributors, throughout the organization, on ESG reporting, particularly the parts of the standard relevant to their related area of the business. And they must build a path to the integration of ESG reporting into the company’s traditional reporting workflow.
In addition, companies can look to the outside for help. For example, assurance readiness assessment tools and customized checklists and roadmaps are often available to companies that partner with outside services and experts.
Getting ready for required ESG reporting assurance is a tall order – but the payback for being sufficiently ready is significant.
The opinions of guest authors are their own and do not necessarily represent those of SG Voice.