Environmental, social and governance (ESG) is becoming increasingly important for organizations across the world today. Stakeholders from all walks of life want to know that organizations are doing good by the world, and some government regulatory boards even require certain ESG standards.
By undergoing an ESG audit, organizations can assess the risks they face that are related to the domains of the environment, society and governance. Without these formal audits, it would be difficult for an organization to achieve any level of trust from stakeholders and regulatory boards that they are adhering to ESG standards.
More than just providing transparency, though, ESG audits also highlight opportunities for organizations to achieve increased stakeholder confidence, an enhanced reputation and consistent regulatory compliance.
By going through an ESG audit, and adjusting any operations as a result of the findings, organizations can demonstrate how committed they are to responsible business practices and sustainability, among other things.
They can lead to lower cost of capital, increased employee buy-in and productivity, more sustainable operations and higher returns.
Below is a checklist of all the things your organization needs to consider with an ESG audit.
Understanding ESG Risks
A main goal of ESG audits is to identify risks the company faces in the areas of environmental, social and governance. These risks could all pose potential negative impacts on the business if not addressed properly.
Best practices of ESG audits would suggest that organizations consider all of these risks as interdependent, even though they are listed as separate factors. In other words, while you could certainly treat environmental risks as their own entity, it’s best viewed as interconnected to potential social and governance risks as well.
Approaching ESG risks this way allows an organization to provide an all-encompassing plan for how to mitigate risks.
There are endless potential ESG issues, but some of the most important ones to keep an eye on include climate change; diversity, equity and inclusion (DEI); greenwashing; and regulatory expansion.
ESG audits are essential because organizations that don’t mitigate or manage these risks can face legal, financial and reputational costs.
Preparing for an ESG Audit
As you prepare for an ESG audit, you must understand what the landscape for these factors are in your business’ industry and sector. Governance risks might be different for waste management companies, for instance, than they are for linen manufacturers.
Analyze what your competitors are doing in terms of ESG, which will help guide you as you undertake the process.
Next, decide on what reporting framework you will follow. There are many generally acceptable principles-based guidance that these frameworks provide to help identify ESG topics and also inform you on how you should prepare and structure information, data and resources.
Two of the most commonly-used ESG frameworks are the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). Again, though, you should choose a framework that best applies to your industry and sector.
Then, research tax and accounting tools that harness the power of artificial intelligence and machine learning technology so you can stay abreast of changes to legislation and government policy as they pertain to ESG. This will help you remain in compliance and up to current standards when you go through future ESG audits.
To that point, these audits should be integrated as part of your organization’s annual plan. Doing so will help ensure that you are well-prepared to meet the needs of your customers, employees, investors and other stakeholders by collecting and providing reliable and transparent ESG information on a consistent basis.
Conducting an ESG Audit
There are a few more steps that you should take before diving into an ESG audit.
One important one is to set up reporting processes and develop clearly-defined ESG KPIs. Just like measuring, tracking and reporting is crucial to any goal-based project, the same is true of an ESG risk management program.
KPIs will not only help your organization have a clear path forward for your ESG audit and future initiatives, but they’ll also make it easier and more transparent to communicate your organization's progress toward achieving those goals, which helps to align the organization from top to bottom and build support from various stakeholder groups.
If you want to conduct an effective ESG audit, you’ll need to acquire complete buy-in from multiple stakeholders, adhere to specific ESG standards and have detailed reporting processes in place. By following a detailed ESG checklist, it’ll be easier for everyone involved to identify, understand and manage your organization’s ESG risk.
It’s also important during the preparation and setup phases to understand that an ESG audit isn’t a one-and-done activity. It’s something that needs to be done on a continuous basis to ensure your organization is abiding by all current standards and meeting the needs of stakeholders.
As such, it’s advisable to automate as much of the data collection and auditing process as possible. Luckily, modern risk management platforms have many of these features built-in, so you don’t have to set them up manually.
ESG Audit Execution and Reporting
Now comes the nitty-gritty work of actually conducting the ESG audit.
Once your criteria is set, it’s time to compile as much quantitative and qualitative data as you can. Sources of this data can be direct observations, reviews of documents, deep dives of accounting information as well as interviews with staff, customers and other stakeholders.
Records of the findings should be very detailed and well-kept so that you can easily analyze the results and develop strategies for improvement.
During the analysis phase, what you’re looking for are any trends and patterns. You also want to highlight areas for potential improvement as well as areas in which your company performs well.
This analysis ultimately will help your organization uncover multiple opportunities to enhance its ESG performance.
Once the analysis is complete, a full report can be compiled and presented to senior leadership for review. This helps to ensure visibility and enable informed decision-making.
Finally, your organization can report the ESG audit results, which you might do for a variety of reasons — including achieving accountability, meeting stakeholder expectations and being as transparent as possible.
Overcoming ESG Audit Challenges
There are many common challenges, and as a result mistakes, that organizations make in ESG auditing. This includes not collecting enough data, not getting full buy-in and engagement from stakeholders and/or ineffective reporting.
Not addressing these challenges, and figuring out how to overcome them, could result in your company facing financial, reputational and/or legal costs.
To overcome challenges in ESG audits, engage the appropriate people to ensure that, not only is everyone aware of the ESG strategy and goals, but that they buy into them, too.
Also, by recognizing how ESG risks are interconnected with other types of risks across your organization, such as those presented by third parties and cybersecurity, you can be better prepared to overcome associated challenges.
ESG Audit Certification and Best Practices
Once your ESG audit is complete, your organization should consider obtaining third-party certifications.
These independent validations prove you are adhering to certain ESG standards, which further helps to build stakeholder trust and reputational protection. They verify the ESG best practices your organization is following as well as your overall commitment to sustainability.
Ultimately, this further enhances transparency and builds trust.
Leveraging Technology for ESG Audits
Advanced technology powers just about everything in business today. But, it’s not just the technology itself that’s important in ESG audits; it’s also the buy-in of your organization’s IT department.
CIOs play an essential role in the ESG audit process as well as your company’s ability to achieve ESG initiatives. Employees in high-level IT positions coordinate and collaborate with their C-suite colleagues to identify ESG issues, risks and opportunities.
IT workers are the ones who are doing a majority of the data collection, and they are familiar with the tools, systems and processes your company has at its disposal — and which ones are available to obtain.
The department as a whole can help to automate the collection, analysis and reporting stages of ESG audits, which makes the process more efficient and effective.
By implementing specific ESG audit software and guidance, you can protect your organization from ESG risks, which should be a part of any effective enterprise risk management program.
One to consider is Risk Cloud’s ESG Solution, which can help your organization achieve its ESG goals and streamline audits with simplified reporting, continuous auditing and evidence collection — much of which is completely automated.
No matter how you approach ESG audits, realize that they are a large, but very necessary, undertaking.
Checklist for ESG Audits
To sum it all up, here is a quick checklist that you can reference as you complete your ESG audit …
- Identify the ESG risks that your organization faces.
- Analyze what your competitors are doing in relation to ESG.
- Decide which ESG framework you will follow.
- Harness the power of AI and machine learning through powerful tax and accounting software.
- Integrate ESG audits into your annual planning.
- Set up reporting processes.
- Develop clearly-defined and measurable KPIs.
- Acquire buy-in from all stakeholders.
- Compile as much quantitative and qualitative data as possible.
- Analyze the data for trends and patterns.
- Compile a full ESG report to present to senior leadership for review.
- Release the results of the ESG audit to other stakeholders and the public.
