Board’s sustainability narrative is auditors’ imperative

Board’s sustainability narrative is auditors’ imperative

Sustainability is one of the top agenda items in every boardroom. The ESG value proposition is well established with stakeholders. Investors link it to enhanced shareholder returns, suppliers and employees see it boosting the brand, and customers’ buying decisions are increasingly moving towards companies with sustainable growth. For finance and investor relations, it is a value enhancer, while legal teams view it as a way to cut compliance costs.

Boards of large companies devote significant time to weaving sustainability into their strategic plans. This involves not only developing key metrics but also ensuring the right personnel are in place to steer the company towards these goals. Efforts also focus on aligning these new practices with the company’s culture.

Moreover, governments and regulators worldwide are encouraging companies to ramp up sustainability efforts, offering incentives, subsidies, and financial aid. However, ESG rules are fast evolving and keeping abreast of policy changes requires dedicated attention.

To effectively address all these factors, boards are leveraging new technologies, such as AI and Gen AI-based ESG platforms trained on sector-specific data, to develop or source tools that support their efforts in tracking, measuring, and performing on ESG parameters. However, these efforts by themselves are not enough to establish transparency and integrity and auditors are required to provide assurance reports to ensure the credibility, accuracy, and reliability of the information. Integrity of companies’ ESG reporting is a crucial aspect.

1. Auditors provide assurance reports.in a phased manner, starting with the size of the business, industry, complexity and ESG maturity level along with identifying and assessing risks related to a company’s ESG initiatives, such as regulatory compliance issues, operational disruptions, or reputational risks. Engaging with board members and senior management and executives can be an initial step. A close study of ESG-related policies, including environmental policies, social responsibility statements, sustainability reports and governance codes give a view of the company's overall ESG strategy and objectives. Alignment between the leadership and policies form the foundation for a company’s strategic direction, policies and ESG initiatives.
2. Auditors must also identify potential risks in ESG reporting specific to the company’s operations and industry. Understanding the materiality of different ESG factors helps identify the ones that can have a significant impact on financial performance and risk. For instance, for a mining company, carbon emissions in the form of total Scope 1, 2 and 3 greenhouse gas emissions and intensity per unit of production along with factors such as energy consumption, use of renewable energy and community engagement would be significant ESG factors. For an e-commerce company, the factors would include cybersecurity, environmental impact of data centers and reverse logistics and share of single-use plastics.
3. Digital technologies are not only leading to an emergence of new business models but also playing an increasing role in companies’ ESG strategy. Moreover, with ESG reporting requirements becoming more stringent, leveraging technology will help ESG auditors meet these demands. To enhance the effectiveness and efficiency of ESG assurance by improving the accuracy, reliability and timeliness of insights, auditors must adopt relevant tools as well as understand the technologies that companies are using. Blockchain, IoT-enabled data capture mechanisms, digital twins, machine learning, AI tools that analyze internal data as well as external sources such as social media posts are just some of the solutions that auditors can utilize.
4. Auditors need to understand the sustainability reporting KPIs, underlying business process changes undertaken and new internal controls. For testing controls, auditors need to assess both design level and operating level effectiveness. To test details, one must understand the KPIs, have the ability to assess reporting consistency in each business unit and know the manner in which data is collected, analyzed and presented. Data integrity and reliability depends on the data being free of material misstatements and verification to reflect the company's actual ESG performance and impact.

Auditors report is now an important element for stakeholders to understand and appreciate the quality of reporting particularly in terms of transparency and trust. In India, while reporting is required only by certain class of companies under the BRSR framework at present, it is becoming a norm for companies that are raising capital in domestic or overseas markets to voluntarily present their KPIs together with assurance reports from auditors. To fulfil these demands, auditors have to ensure that they have the necessary competencies and capabilities to provide this assurance.

By ensuring companies stay true to their ESG objectives, auditors contribute to the shift towards adoption of sustainable business practices, playing a crucial role in borad-level decision-making. At the same time, the scrutiny of ESG aspects helps investors make informed decisions and build confidence in a company. Auditors’ rigor will define their role as critical evaluators of true reflection of ESG principles in business practise.