Organizations all over the globe are adjusting their operations to meet standards set forth in what’s known as the environmental, social and governance framework. Better known as ESG, it covers the larger responsibilities an organization should have beyond just their bottom line
Businesses have a responsibility to take care of more than just their own financial performance. They must ensure they’re operating sustainably, taking evolving societal expectations and pressures into account, and/or complying with increasing disclosure requirements.
Today, it has become essential for modern businesses to demonstrate that they’re committed to social responsibility and sustainability. Consumers expect it, in fact, which results in ESG being a key factor in the brand value and reputation of a company.
Stakeholders and investors are also increasingly seeking transparency with companies’ ESG initiatives.
Conducting an ESG audit is a great way to figure out whether your organization is aligned properly with these initiatives, and consistently doing so. Here are some ways to do so.
Understanding ESG Risks
ESG has put companies across the board on notice in a number of different areas, which creates some risk associated with the impact the company has on governance policies, social practices and environmental risk.
ESG risks are independent of each other and can manifest themselves in different ways. They could damage a company’s reputation and trust among consumers, result in financial losses such as regulatory fines, or cause damage to the environment.
There are a number of different examples of ESG risks.
Potential governance issues include transparency of executive pay and the quality of a company’s board, both of which are important to managing social and environmental risks.
Climate change is obviously a significant concern for the public at large, but it doesn’t just cover a company’s greenhouse gas emissions. It also includes their production choices, corporate operations and investments as well.
Over the last few years, diversity, equity and inclusion (DEI) initiatives have gained momentum. Companies can no longer ignore this aspect of doing business and must increasingly focus on their own social responsibility as well as accountability.
The Importance of ESG Audits
With such an increased focus on ESG, and the public’s interest in holding companies accountable to these measurements, it’s become increasingly important for organizations to conduct ESG audits.
These audits provide the public, investors, stakeholders and government entities regarding ESG disclosures. In addition, such an audit can help organizations identify any gaps, assess all risks and then develop an action plan on how to correct them.
ESG audits are very important today, as stakeholders and investors are seeking transparency in all ESG initiatives. Without these audits, it would be possible for companies to manipulate data, which would render it unreliable to people who rely on it to make investing and purchasing decisions, for instance.
There are many benefits that ESG audits provide companies, including increased stakeholder confidence, an enhanced brand reputation and easier regulatory compliance.
Preparing for an ESG Audit
There are multiple steps to an ESG audit, and they can be complicated and complex, depending on the size of your organization. Being well-prepared for them is essential to ensuring they are done properly.
Here are some of the steps your organization can take in preparation for an ESG audit.
Determining ESG Risk Exposure
If you want to effectively and properly identify and then manage ESG risk, you need to first understand where in the organization these risks exist.
To do so, you need to include everyone in your organization’s “sphere of influence” in the process. This includes not just senior management but also other employees, investors, suppliers and customers.
Choosing an ESG Audit Framework
There are many standard ESG audit frameworks available that can serve as a “jumping off point” if you’re new to ESG auditing. You should choose a framework that aligns with the location, industry standards and goals that apply to your organization best.
Well-known frameworks include those produced by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD), as well as the Carbon Disclosure Project (CDP) and Global Reporting Initiative (GRI).
The framework you choose should apply to your industry’s specific challenges and align best with the sustainability objectives your organization has.
Setting up ESG Reporting and KPIs
Just like other major initiatives, being able to set, measure, track and report on your organization’s ESG initiatives and goals is critical if you want to run an ESG risk management program that’s successful.
The most common and direct way to do this is to use key performance indicators (KPIs). This will allow you to track your organization’s progress toward clearly-written and defined goals, as well as communicate that progress to others.
In the end, this helps your organization align directly with the goals so that you can build support from stakeholders.
Conducting an ESG Audit
There are multiple steps to conducting an ESG audit, too, which we break down below.
Assessing the ESG landscape
For your ESG audit to be successful, you have to have a deep understanding of your company’s strategy, as well as its risk factors and maturity. Therefore, the first step in an ESG audit is understanding the particular landscape for ESG in your business’ industry and sector.
This will help guide you along the way and keep you accountable to certain standards.
Integrating ESG into an Annual Audit Plan
There are many audits that businesses should go through on an annual business. By incorporating ESG into the recurring audit process, you can ensure that you’re always providing reliable and transparent information related to ESG.
After all, achieving ESG goals isn’t a one-and-done task. It’s something that’s always evolving and must constantly be addressed to make adjustments where necessary based on your changing company and demands of society.
Implementing Audit Software and Guidance
ESG audits would be extremely challenging without the help of specialized software. Accountants can use ESG auditing software to help them drive efficiencies during the audit process.
It can provide the necessary parties with the access they need to learning solutions and advanced research to identify risks and opportunities, and then address any shortcomings.
ESG Audit Process
The ESG audit process includes multiple steps.
First is data collection and analysis, which help you verify the accuracy of all information related to ESG initiatives. Data-driven analysis will help your company identify gaps in ESG initiatives, assess all risks and develop a recommended plan of action.
Once you’ve identified these risks, everything should be compiled into an in-depth report that details the discoveries of the data assessment, outlining strengths and weaknesses.
The ESG audit process should also result in your organization developing actionable recommendations for how you will mitigate and/or address ESG risks that were identified and any other weaknesses in this regard.
Finally, you need to set up ESG reporting protocols and areas that the reporting should cover. This should cover who you want to disseminate the reports to — such as internal members of the organization, outside stakeholders and the public at large — as well as those you are required to submit them to, including in some cases regulators.
ESG Audit Challenges and Opportunities
There are some common challenges that organizations face in ESG audits.
One common mistake is how complex the data collection process is. For your ESG audit to be accurate, you must ensure that the data you’re collecting is accurate and that it’s done in the right way.
This is why having the right processes in place is so essential, and how specialized software can help. Invoice auditing at GPS Waste is something that we do everyday to ensure that we are adhering to best-in-class standards of our industry.
You also have to constantly stay on top of the current ESG standards, and the evolving expectations and standards of the public and stakeholders.
There are even challenges you may face in terms of stakeholder buy-in to the ESG audit process as a whole. Getting everyone on the same page in terms of the importance of the audit, and ESG standards as a whole, is a vital step to be successful.
You can communicate why ESG audits are so important by engaging the appropriate people to get the buy-in necessary for your strategy and goals. You can also educate stakeholders on how ESG audits can help your company identify opportunities where it can grow and innovate, providing it with a competitive advantage and enhancing its reputation along the way.
ESG Certification and Assurance
ESG audits are great internal tools that can improve your company from start to finish, but there are also ways today that you can rubber stamp your ESG initiatives through third-party certifications.
These certifications provide independent verification of your organization’s ESG practices and its commitment to sustainability — both of which are key to building trust among stakeholders and protecting your organization's reputation. This independent validation is a great way to provide assurance that your company didn’t manipulate any data, and that everything you’re saying is trustworthy.
Conduct an ESG Audit the Right Way
ESG audits have become increasingly important in today’s business world for companies of all sizes and in all industries. They ensure that all of your ESG data is verified, which validates its comparability and reliability.
These audits provide transparency on all your ESG risks and opportunities, which then allows your company to benefit from things such as an enhanced reputation, stakeholder confidence and regulatory compliance.
Not all ESG audits are designed equally, though. To do them right, you must be prepared, have a deep understanding of your company’s processes and evaluation procedures for how you will collect, analyze and report that information.
And by integrating regular ESG audits into your company’s overall strategy, you’ll always ensure you’re staying up-to-date on evolving needs and demands.
