What is the auditors role in sustainability reporting?
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Show The Corporate Sustainability Reporting Directive contributes to extending the European Green Deal across all sectors and existing regulation.The EU is set to adopt the Corporate Sustainability Reporting Directive (CSRD) in October 2022, amending the previously applicable
Non-Financial Reporting Directive (NFRD). The CSRD supports the European Green Deal, a set of policy measures intended to combat the climate crisis by transforming the EU into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases by 2050. Furthermore, the directive is part of the bigger Sustainable Finance package, which enables the Green Deal by helping to channel private investment behind the transition to a climate-neutral economy. The Sustainable Finance package includes the EU Taxonomy (with the Climate Delegated Act), which provides clarification around the economic activities that most contribute to meeting the EU’s environmental objectives. In addition, the package features six amending Delegated Acts on fiduciary duties, investment and insurance advice, which aim to ensure that financial firms include sustainability in their procedures and investment advice to clients. Scope of the proposed directiveThe scope of the directive is considerably extended to apply to more entities. EU companies First, the directive will apply to all companies listed on the EU regulated markets, except for listed micro companies.1 Listed small- and medium-sized enterprises (SMEs) have until 1 January 2026 to comply with the reporting requirements, even though there’s an “opt-out” clause until 2028. Second, it will apply to a “large undertaking” that is either an EU company or an EU subsidiary of a non-EU company. A “large undertaking” is a defined term in the Accounting Directive2 and means an entity that exceeds at least two of the following criteria:
As a third category, the CSRD will apply to insurance undertakings and credit institutions regardless of their legal form. There are also exemptions to the application of the CSRD. Most notably, a subsidiary will be exempt if the parent company includes the subsidiary in its report that complies with the CSRD. As mentioned above, listed micro companies and non-listed SMEs fall outside of the scope, but can apply the provisions on a voluntary basis. To respect the principle of proportionality, the European Commission will adopt mandatory sustainability reporting standards for large companies and separate, proportionate standards for SMEs. While SMEs listed on regulated markets will be required to use the proportionate standards from 1 January 2026, non-listed SMEs may still choose to use them on a voluntary basis. Third-country companies Non-European companies with substantial activity in the EU market (net turnover of more than €150 million in the EU at consolidated level) and which have at least one subsidiary (large or listed) or branch (net turnover of more than €40 million) in the EU are required to draft a sustainability report at the consolidated level of the ultimate third-country undertaking. The EU subsidiary or EU branch is responsible for publishing the sustainability report of the third-country undertaking. The sustainability reports of the third-country undertaking should be prepared according to separate EU reporting standards (i.e., standards different to the ones applying to EU companies). The undertaking can also report according to the standards applying to EU companies, or according to standards which are deemed equivalent according to a Commission’s decision. In order to ensure the quality and reliability of the reporting, the sustainability reports of third-country undertakings should be published alongside an assurance opinion by a person or firm authorized to give an opinion on the assurance of sustainability reporting, either under national law of the third-country undertaking or of a Member State. To print this article, all you need is to be registered or login on Mondaq.com. Sustainability reporting is the disclosure and communication of Environmental, Social, and Governance (ESG) goals of an organisation and its progress towards them. Drivers of increased sustainability reporting today arise from Investors, other stakeholders, regulatory requirement and social pressure. 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:
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.
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 ReportingGovernance: 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. ConclusionSustainability 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. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. POPULAR ARTICLES ON: Accounting and Audit from Nigeria Best Practices For Account Receivable Management Mazars Revenue from sales activities serves as one of the essential sources of a business working capital; therefore, the company is required to manage its accounts receivable arising from credit sales effectively. Tax Audit And Investigation: What A Taxpayer Should Expect Taxaide Professional Services Ltd The recent revenue drive arising from fall in oil prices and the need to diversify Nigeria's revenue away from oil to non-oil sources, such as taxation, has led to increase in the frequency of tax audits and investigations ... What is the auditor's role in sustainability reporting?all public sustainability reports provide information that accurately depicts an organization's ESG efforts. Internal audit can provide assurance on whether data (quantitative and qualitative) being reported is accurate, relevant, complete, and timely. This is particularly important as regulatory oversight increases.
Do sustainability reports need to be audited?Do sustainability reports have to be audited? Sustainability reports don't have to be audited if the company is doing them annually. If not, then it is recommended that all sustainability reports be independently audited.
How important is the internal auditor's role in ESG reporting?“Internal auditors provide the independent internal assurance needed for trustworthy ESG disclosures, and help ensure the effectiveness of continuous monitoring processes and internal controls across the organisation.” With ESG, one of the major challenges is reporting accurately and responsibly.
What is the purpose of a sustainability audit?A sustainability audit will serve two crucial functions: 1) identifying important environmental, social and governance (ESG) risks and 2) benchmarking your organisation's sustainability initiatives against competitors.
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