Empowering Accountability: Taking a Proactive Approach to ESG Reporting and Assurance
By Emily Hesketh, Director, Sustainability Assurance, Deloitte.
There’s no doubt that Environmental, Social, and Governance (ESG) considerations are higher up the list of priorities for businesses than ever before, but, for a large majority, it’s a relatively new consideration. To support businesses in getting to grips with compulsory and voluntary ESG reporting and setting targets and understanding progress, Deloitte’s audit team has taken proactive measures to address the evolving landscape of sustainability reporting while building capacity, expertise, and internal tools to ensure high-quality service in a rapidly-evolving market.
What is sustainability assurance and how is it different to audit?
Sustainability assurance provides an independent opinion on the accuracy of companies’ ESG (Environmental, Social, and Governance) credentials, such as the amount of greenhouse gases they produce, water usage, waste management, and gender diversity. This process essentially entails checking whether we have identified anything that indicates that the non-financial information is not correct (limited assurance). In contrast, a statutory audit focuses on financial information, including income, costs, capital expenditure, and cash balances, to test if the reported information is correct or not (reasonable assurance).
Audits are mandatory and required by law, whereas sustainability assurance is predominantly voluntary, although this is changing for certain companies with reporting obligations under regulations like the EU’s Corporate Sustainability Reporting Directive (CSRD).
Who typically ‘owns’ sustainability data and information for the purposes of reporting?
Historically, sustainability data and information have been owned by sustainability teams; however, there is a noticeable increase in the involvement and responsibility of finance teams in governing this data. This shift is attributed to the experience that finance professionals have become accustomed to in dealing with large volumes of data on a daily basis, encompassing both financial and non-financial information. Similarly to financial information, ESG data requires expertise in data extraction, complex modelling, analytical tools, and the potential utilisation of external or market data.
This evolution in ownership has led to the increasing integration of finance expertise and processes into the management and reporting of ESG information.
The regulatory requirements are evolving rapidly for sustainability reporting – what is the EU’s CSRD?
The EU’s Corporate Sustainability Reporting Directive (CSRD) represents a significant and comprehensive regulatory framework for sustainability reporting, with far-reaching implications for businesses. Firstly, it is crucial to note that the CSRD is mandatory, leaving little room for “best efforts” or compliance explanations. Its broad reach encompasses large PLCs down to private UK companies with operations in the EU, indicating its extensive applicability. Moreover, the complexity and anticipated costs of compliance should not be underestimated, as it could necessitate incremental resourcing, substantial implementation, operational costs, and compliance expenses.
Non-compliance with CSRD reporting obligations may carry legal and audit implications, underlining the importance of meeting these requirements. It is essential to understand that CSRD is not about reporting everything, but rather focuses on reporting what is material to a broad range of stakeholders, reflecting a targeted approach to sustainability reporting.
How mature are internal controls and governance processes over sustainability data and what sort of data structures are you seeing?
The maturity of internal controls and governance processes over sustainability data is generally less advanced compared to financial data. The processes are mostly manual, often relying on spreadsheets, with integration into reporting systems in the early stages.
The current practice of reporting once per year does not allow sufficient time to address intra-year ESG issues. Monitoring sustainability metrics as part of regular management updates will help companies to identify any issues sooner and facilitate better decision-making.
As the regulatory landscape for sustainability reporting continues to evolve, businesses should be proactive in understanding and addressing the implications and related requirements to ensure compliance and effective stakeholder engagement.
Getting it right will take time, and the resourcing and financial and reputational implications of ESG reporting shouldn’t be underestimated.
