As ESG Requirements Grow, Analytics Becomes Must-Have Tool
Environment, Social and Governance (ESG) issues are growing in importance for companies around the world and, by extension, their internal audit departments. Yet, according to a new report from the Internal Audit Foundation, many organizations are hampered by outdated and cumbersome data collection processes that will need to be enhanced as this information comes under heightened scrutiny.
Due to rapid climate change and Diversity, Equity, and Inclusion (DEI) issues, key stakeholders such as investors, boards, employees and regulators have increasingly grown aware of ESG risks. This has led companies to proactively assess ESG risks for navigating related issues and their impacts on their company’s long-term strategies.
ESG risks are a critical consideration for businesses because they can be the sole reason for rejection of a company’s product. Consumers are willing to pay a premium price for products from environment-friendly businesses and will avoid buying from businesses that aren’t environment conscious.
Additionally, many countries are, or will soon be, introducing new regulations around ESG reporting, as evidenced by the recently proposed ESG disclosure rules in the U.S.
Internal Audit’s Role in ESG Compliance
Given these circumstances, internal auditors are being called upon to lend their expertise to their employers’ efforts to prove their ESG commitment and performance. Internal auditors are most often involved in assurance services, supporting processes, controls and data validation for ESG reporting. They identify risks and advise senior management and the board on how to implement specific measures to counter risks. Internal auditors can use their skills to take a standalone or an integrated approach to provide assurance in ESG reporting.
However, according to the report, bottlenecks like low data availability, lack of emphasis on ESG in internal audit plans, and its non-inclusion in ERM (Enterprise Risk Management) efforts continue to undermine internal audit involvement in many firms’ ESG initiatives.
Inconsistent data quality from different geographical regions have severely weakened the ability of internal auditors to draw conclusions from data points. Most companies lack a systematic policy in this area, which makes the use of a robust data analytics solution critical.
“Internal audit can be a key advisor in assessing the effectiveness of controls,” states Shannon Roberts, EY Principal, Climate Change and Sustainability Services (CCaSS), Ernst & Young LLP, in the report. She adds, however, that “many organizations are still using informal processes and manual data collection for key ESG metrics, which will need to be enhanced as this data receives more scrutiny in the market and by regulators.”
Assessing ESG Risk Through Data Analysis
A robust information system that provides a broad yet detailed overview of ESG metrics can make things much easier for internal audit departments.
A key component in the drive to adapt to the evolving needs of ESG reporting is a modern data analytics solution. Data analysis plays an important role in risk assessment. It helps identify trends, highlight outliers and save manual effort through automation — all without compromising the integrity of the data.
Plus, modern software also offers visual representation of data points. For instance, a company can see what geographical regions are integral to achieving its ESG goals and strategize accordingly.
ESG Trends Impacting Internal Auditors
The report also revealed other trends around internal audit’s role in relation to ESG matters. It found that about 62 percent of the surveyed companies have an ESG program in place, and another 24 percent are planning to implement one. Among these, about 65 percent involve their internal audit function in their ESG initiatives.
About 54 percent of the Chief Audit Executives (CAEs) indicated that their companies provide at least some sort of ESG disclosure. This, and the evolving new disclosure requirements being introduced by regulators, makes obtaining assurance from internal auditors critical.
The report also revealed that 43 percent of the companies issue a separate sustainability report, while 25 percent issue ESG reporting as a component of their annual report. Raw material sourcing and community relations are major items reported in the disclosures, followed by environmental, data privacy, business ethics and climate risks.
At least two-thirds of the CAEs said they plan to perform ESG-related engagements over the next 12 months. These executives view ESG reporting as the next Sarbanes-Oxley (SOX), as there are many parallels between today’s ESG reporting landscape and how SOX was developed in the early 2000s.
While there is no doubt about the impact the internal audit function can have on the ESG initiatives of a company, only 30 percent of the Chief Audit Executives (CAEs) agreed there are no barriers to their involvement in the initiatives.
How Caseware IDEA Aids With ESG
It’s becoming clear that the old ways of collecting, interpreting and reporting data will not suffice for the growing reporting requirements around ESG. Caseware IDEA is a user-friendly data analysis solution with a multifunctional dashboard, ERP integrations, and cloud-based infrastructure that helps internal auditors analyze data efficiently. Want to learn more? Give IDEA a try today!