Addressing the Growing Imperative: Strengthen Your ESG Oversight Through Audit Committees and Independent Assessments

The Growing Pressure for Corporations to Embrace ESG

In recent times, regulators at global and national levels have been advocating for greater disclosure of ESG (Environmental, Social, and Governance) issues and standards among organizations. Legal developments and demands for corporate transparency have encouraged the emergence of many rating agencies and reporting frameworks.

As some standards are converging towards establishing universal, material, and verifiable ESG metrics, many companies are reviewing their operations through an ESG lens to obtain better information for informed decision-making. Notably, research by FactSet showed that more than one in four (129) S&P 500 companies referenced "ESG" when discussing their business strategies during Q4 2020 earnings calls, up from just 5 total in Q1 2018.

The increasing emphasis on ESG disclosures reflects the concerns of key stakeholders, including large institutional investors and regulators. They recognize that a company's management of ESG risks and opportunities impacts its cost of capital, long-term growth prospects, and overall “social license to operate.”

Stakeholder groups are calling for increased transparency regarding corporate efforts, as they understand that ESG risks, such as climate change responses, resource scarcity, board diversity, racial justice and inequality, safety issues, data security, executive pay, and tax transparency, are critical considerations.

Given these developments, overseeing and disclosing ESG information has become a strategic imperative for corporations, necessitating the establishment and maintenance of processes and controls for ESG reporting.

How to Address ESG Issues with Committees and Assessments

Forbes cites a survey of public company directors that revealed that an increasing number of corporations are using well-defined ESG priorities to shape strategies that drive long-term business value, even though compliance remains a driving force for many.

Bringing external insights and expertise into the boardroom, such as through newly-specialized committees or existing committees such as audit or governance committees, can help businesses shift from a compliance mindset to a strategic one. This shift requires a thorough examination of the specific ESG issues that are most relevant and impactful for each business.

Tailoring the approach of the board to the unique circumstances of the company is crucial. Committees, including those responsible for audit, compensation, nominating and governance, and other board-level matters, play a vital role in deepening the board's focus and directing appropriate attention to various environmental and social areas.

By leveraging the expertise of these committees, boards can effectively oversee how ESG matters are integrated into strategy, talent management, and risk management.

Enhance Your ESG Disclosures through Audit Committees

Boards, particularly audit committees, play a critical role in developing and implementing ESG reporting policies. Establishing resilient and well-structured disclosure processes and controls, including those related to data quality, is essential. The audit committee should oversee ESG disclosure processes and controls while obtaining assurance, both internal and external, over ESG reporting.

To ensure reliable reporting processes and maintain stakeholder confidence, involving internal audit is crucial. This collaboration helps provide credible and high-quality data to the market, ensuring the integrity of ESG disclosures. An audit committee's framework for overseeing ESG should encompass three key areas: disclosures, processes and controls, and assurance.

As companies continue to integrate and refine their ESG programs and processes, the role of audit committees in assuring the reliability of ESG information is expected to grow. Boards will need to enhance their governance structures to provide appropriate oversight. Audit committees, with their expertise in risk oversight, are uniquely positioned to contribute to the development and oversight of ESG reporting policies.

By establishing robust processes, controls, and assurance mechanisms, companies can enhance the reliability and credibility of their ESG disclosures. This not only meets the growing expectations of stakeholders but also positions the company as a responsible and sustainable organization in the eyes of investors, regulators, and the public.

An audit committee's involvement in ESG oversight helps identify new risks and growth opportunities by investing in quality data collection, evaluating the marketplace, and aligning the company's game plan.

Choose the Right ESG Verification 

While the importance of internal audit in incorporating and enhancing ESG disclosures in corporations cannot be overstated, the consideration and criteria for selecting external, third-party verification of external reporting are just as important. Criteria to consider include:

• Your adoption of reporting guidelines;
• Management standards;
• ESG frameworks; and
• The verifier’s expertise in all of the above.

A skilled and experienced verifier will bring industry knowledge, highlight best practices and identify gaps with the qualifications to deliver to the relevant and desired assurance standard.

Moving Forward with Your ESG Goals

Audit committees, as the primary owners of risk oversight, play a critical role in overseeing ESG issues, considering appropriate disclosures, and ensuring the reliability of reported information. Their involvement strengthens the company's ESG reporting processes and controls, ultimately promoting transparency, accountability, and long-term value creation.

Similarly important will be securing independent verification of your ESG efforts that is up to par.  That will mean carefully vetting vendors to ensure they can deliver—Schellman is now expanding to offer ESG services,  and we would love to speak with you further regarding your desired goals and initiatives as we continue to shape our ESG services. Please contact us today.