ESG - how should we approach auditing it?

Let’s delve into a guide on auditing Environmental, Social, and Governance (ESG) aspects. ESG reporting has gained prominence in recent years, and companies are increasingly focusing on their ethical, inclusive, and sustainable practices. Here’s a detailed approach to conducting an ESG audit:

1. Understanding ESG Audits

An ESG audit assesses the risks related to environmental, social, and governance domains within an organisation. It aims to provide assurance over the integrity of a company’s ESG statements. Without a formal ESG audit, obtaining even limited assurance over the validity of ESG reporting can be challenging. ESG audits can be internal or external, and both play a crucial role in ESG assurance.

2. Key Steps in Conducting an ESG Audit

a. Stakeholder Interviews

• Begin by interviewing key stakeholders, including management, employees, and external partners. Understand their perspectives on ESG risks, goals, and reporting.

• Identify areas where ESG practices intersect with business processes and operations.

b. Incorporating ESG into Risk Management

• Integrate ESG considerations into the overall risk management framework.

• Assess how ESG risks align with the organisation’s risk appetite and tolerance levels.

c. Mapping ESG Compliance Requirements

• Understand relevant ESG reporting frameworks (such as GRI, SASB, or TCFD).

• Map ESG compliance requirements to other existing frameworks (e.g., ISO standards, industry-specific guidelines).

d. Selecting a Guiding ESG Framework

• Choose an appropriate ESG framework based on the organisation’s industry, size, and stakeholder expectations.

• Consider the materiality of ESG issues specific to the company.

e. Preparing for ESG Reporting

• Establish robust data collection processes for ESG-related information.

• Analyse and validate ESG data, ensuring accuracy and consistency.

• Document evidence and artefacts to support audit processes.

f. Recommendations and Benchmarking

• Auditors may offer recommendations to address gaps in ESG practices.

• Benchmark the company’s ESG performance against industry peers and best practices.

3. Key Questions for ESG Auditors

During the audit, consider asking the following questions:

• How does the organisation measure and report its environmental impact (e.g., carbon emissions, water usage)?

• What social initiatives are in place (e.g., diversity programmes, community engagement)?

• How transparent is the governance structure (e.g., board composition, executive compensation)?

• Are there any greenwashing risks (i.e., misleading ESG claims)?

• How does the organisation manage ESG-related risks and opportunities?

Remember, ESG audits contribute to building trust with stakeholders, enhancing transparency, and driving sustainable practices. As regulatory bodies pay closer attention to ESG disclosures, companies must provide reasonable assurance that their ESG information is accurate and verified.

For further insights, you can explore detailed guides from resources such as AuditBoard and Deloitte.