Sustainability Reporting and The Role of Internal Audit

Sustainability framework is a guide to organize thinking about sustainability as well as inform planning, management, and evaluation of the ESG activities in the organisation. It helps companies in selecting and implementing sustainability initiatives by developing and applying a sustainability strategy to achieve, among others, competitive advantage and leverage efficient business operations. There are various frameworks that guide reporting on sustainability and some of the current top well-known frameworks are:

• Global Reporting Initiative (GRI).
• Sustainability Accounting Standards Board (SASB).
• Carbon Disclosure Project (CDP).
• International Integrated Reporting Council (IIRC).
• United Nations Global Compact (UNGC).
• Sustainable Development Goals (SDGs).
• International Organisation for Standardisation (ISO26000).
• International Finance Corporation Sustainability Framework.
• Accountability AA 1000 Series of Standards.

Each of these frameworks differ and reporting in line with any framework depends on what the company is aiming to achieve, and which is most relevant to the organisation based on its operations.

What is ESG?

ESG stands for Environmental, Social and Governance aspects of a business. It is an area of business that has become increasingly important in determining the value of a business and their ability to create long-term value and positive outcomes.  It is concerned with the impact an organisation has on its internal and external stakeholders across the Environmental, Social and Governance elements of their organisational practices.

• E “Environmental” reflects the impact the organisation has on the surrounding environment such as carbon emissions, Waste management, water management, climate change vulnerability etc.
• S “Social” criteria are established from the interactions and relationships the organisations have with internal and external stakeholders such as employees, customers and their community at large.
• G “Governance” focuses on the organization’s leadership and corporate policies such as executive’s pay, board diversity and structure, business ethics, data protection etc.

Around the world today, efforts are being made to mitigate the effects of climate change. There have also been increased concerns about an organisation’s regard for its stakeholders and the way the organisation is being governed (culture and policies). This has led to stakeholders (both investors and customers alike) increasingly making business decisions based on the ESG information of an organisation. Some job seekers today also make their choice of company based on its ESG footprint. These indicators can be seen to have a direct impact on the business elements such as corporate reputation, cash flow, brand value, stakeholder’s trust, cost of capital, etc. 

Key Considerations for Good ESG Reporting 

Governance: Governance plays the biggest role in the reporting and disclosure on ESG. It is the responsibility of those charged with governance to set out the ESG plan and strategy. A good governance structure is needed to be able to implement and oversee the effectiveness of the overall ESG strategy in the entity. Provided in FIRS’ circulars. On the contrary, it is only reasonable to adopt guidance from an FIRS’ circular when it aligns with the provisions of the tax laws and ignore any position that does not align with the tax laws.

Internal Controls: Internal controls also play a key role when reporting on ESG. ESG reporting can contain a wide variety of metrics and as such, organizations must establish policies, processes, and controls that generate reliable information for decision-making and ensure the quality of data being produced and reported.

The Role of Internal Audit: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. From its definition, Internal audit is an independent and objective assurance and as such, its involvement in the ESG reporting process is a critical element that gives a reliable third-party assurance on the effectiveness of the ESG strategy.

Internal Audit can help achieve a better sustainability report through performing the following functions:

Assurance: One of the major functions of the internal audit unit is to give an assurance on the effectiveness of the ESG reporting. Internal audit can the review reporting metrics for relevance, accuracy, timeliness and consistency and ensure they are in line with the set out ESG strategy. It also gives a huge confidence to stakeholders that ESG information being reported are being reviewed by a competent third party.

Advisory: Internal Audit function can help management build a proper ESG reporting environment. They can recommend sustainability frameworks for management to manage ESG risks and can also recommend reporting metrics (what to report). Internal audit can also add value by assessing the feasibility and credibility of the company’s ESG strategy and objectives and evaluating the quality of the ESG policies, procedures and controls.

Compliance: With Sustainability reporting getting more traction today, regulations are being formed by different bodies. There is already the EU sustainable finance disclosure regulation (SFDR) and there are talks of the IFRS Foundation “considering” creating a board to establish standards for global sustainability reporting. In Nigeria, Part E of the code of corporate governance (2018) developed by the Financial Reporting Council of Nigeria (FRCN) talks on sustainability reporting.  Internal audit function can help monitor compliance to new regulations.

Conclusion

Sustainability reporting is becoming a growing area of reporting in today’s business world. The growing momentum toward increased organizational disclosure of environmental, social and governance information has made more companies (especially public companies) to see the need to report on their ESG operations. Governments and regulators are also having increased interests in sustainability reporting and there could be emergence of new unified regulations very soon. There is also an increase in the demand for disclosure of these ESG information from investors and general public and these could influence the value of a firm in the long run. As a result of these, internal audit has an important role to play in driving organizational value related to these issues. Internal audit would need to assure the company and its stakeholders that sustainability reporting is done properly, in line with the company’s plan and international best practice.