The Growth of ESG Reporting Standards
Investor interest in Environmental, Social, and Governance (ESG) reporting has surged in recent years, marking a significant shift from traditional financial reporting standards. ESG reporting is still in its developmental phase, evolving rapidly as it’s influenced by changing priorities, public demand, regulations, and political factors. These developments are critical for investors, regulators, and consumers who are increasingly focused on understanding an organization’s long-term value creation and its broader impact on climate and social issues.
The Complexities of Current ESG Reporting Standards
ESG reporting is marked by its complexity, with various global standard setters each pushing their own agendas. This complexity is further compounded by the rapidly changing regulatory environment. For example, over 200 ESG-related regulations are being considered globally. A notable development in this realm is the European Union’s Corporate Sustainability Reporting Directive (CSRD), which imposes comprehensive ESG reporting requirements on about 50,000 companies, including U.S. companies with significant operations in the EU.
The Path Towards Standardization
The International Sustainability Standards Board (ISSB), formed by the International Financial Reporting Standards (IFRS) Foundation, is making strides towards standardizing ESG reporting globally. The ISSB’s efforts, including the incorporation of organizations like the Climate Disclosures Standards Board (CDSB) and the Sustainability Accounting Standards Board (SASB), aim to create a unified set of ESG reporting standards. This initiative is a promising step towards establishing a global foundation for ESG reporting.
Current ESG Reporting Standards
As of now, the most referenced ESG reporting standards are the Global Reporting Initiative (GRI), SASB, and the Task Force on Climate-Related Financial Disclosures (TCFD). These organizations, initially global non-profits, have a shared goal of developing a common set of ESG standards. For example, GRI has been offering sustainability reporting standards for over 25 years, covering a broad range of topics from biodiversity to health and safety.
The Regulatory Landscape
The regulatory landscape for ESG reporting is rapidly evolving, with a wide range of regulations being considered globally. These include ESG Fund Requirements in various countries, Sustainable Taxonomies in nations like Canada and China, and broader Corporate ESG disclosures in regions such as Hong Kong and India. A key example in the EU is the EU Taxonomy, a classification system defining criteria for sustainable economic activities.
ESG Reporting and Internal Audit
For internal audit departments, the rise of ESG reporting presents both challenges and opportunities. Assurance over ESG reporting is becoming increasingly important, with requirements ranging from limited to reasonable assurance. Internal audit can support ESG reporting by understanding risks, identifying controls, and managing compliance costs. However, given the breadth of ESG, it’s challenging for internal audit departments to cover all areas, highlighting the need for integrated assurance and collaboration with other assurance functions.
Tools and Strategies for Effective ESG Reporting
To effectively manage ESG reporting, auditors can leverage tools like EmpoweredESG, which has incorporated standards like GRI, SASB, TCFD, and the EU Taxonomy into its audit tools. This integration allows auditors to streamline their workflow and stay updated with the latest standards.
Addressing the Knowledge Gap in ESG Reporting
While Internal Audit departments are well-equipped to handle ESG reporting, there’s often a knowledge gap that needs to be addressed. Internal auditors must gain enough understanding of ESG issues to assess risk, create audit plans, and choose appropriate audit approaches. Building a foundational knowledge in ESG and leveraging external expertise when necessary is crucial for effectively navigating the complexities of ESG reporting.
In summary, the landscape of ESG reporting is evolving rapidly, with a growing emphasis on standardization and regulation. This evolution presents both challenges and opportunities for organizations and their internal audit departments, underscoring the importance of staying informed and adaptable in this dynamic field.