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Embarking on the ESG journey
Efforts to mitigate the accelerating effects of climate change and
address perceived historical social inequities are two powerful issues
driving change globally. These movements have enhanced
awareness of how all organizations impact, influence, and interact
with society and the environment.
They also have spurred organizations to better recognize and
manage ESG risks (i.e., risks associated with how organizations
operate in respect to their impact on the world around them). This
broad risk category includes areas that are dynamic and often driven
by factors that can be difficult to measure objectively, such as
inclusion, ethical behavior, corporate culture, and embracing
sustainability across the organization.
Still, there is growing urgency for organizations to understand
and manage ESG risks, particularly as investors and regulators focus
on organizations producing high-quality reporting on sustainability
efforts. What’s more, that pressure is being reflected increasingly in
executive performance as more organizations tie incentive
compensation metrics to ESG goals.
Additional risk areas associated with ESG are varied and can
include reliance on third-party data, potential reputational damage
from faulty reporting, and the real possibility that an organization’s
explicit commitments to meet specific sustainability goals could
grow into a material weakness.
As ESG reporting becomes increasingly common, it should be
treated with the same care as financial reporting. Organizations
need to recognize that ESG reporting must be built on a strategically
crafted system of internal controls and accurately reflect how an
organization’s ESG efforts relate to each other, the organization’s
finances, and value creation. […] Seeking out objective assurance on
all ESG-related risk management processes from a qualified,
independent, and properly resourced internal audit function should
be part of any ESG strategy.
Adapted from: https://www.theiia.org/globalassets/documents/
communications/2021/june/white-paper-internal-audits-role-in-esg-reporting.pdf