A recent article by The Wall Street Journal anticipates that auditors are to play a much bigger role in sustainability metrics, but what role will that be? What are the challenges? What does this mean for sustainability and how does Emex rise to the challenge?
The Role of the External Auditor
More and more businesses are turning to external auditors to validate their sustainability data, spurred by looming regulations, investor concerns about data accuracy and the possibility of new global reporting standards.
What do the auditors think?
EY’s Assurance unit says that auditors are at a pivotal turning point with the rise of sustainability reporting. PwC will also be investing $12 billion to build out its ESG service lines. KPMG estimates that 49% of the world’s largest companies have had sustainability data audited in the last year. Deloitte have seen that out of the 86% of S&P 500 companies who provided sustainability reporting in 2018, 30-40% have had an assurance provider engaged to review sustainability statements – a trend that is only growing.
The large-scale investment by the Big Four in their ESG assurance practices indicate that they believe we have reached a critical turning point.
The challenge here for organisations is twofold:
- 1. Enhancing the quality of the data reported and preparing for more regular reporting cycles
2. Understanding and interpreting which standards to report against
Each is considered below:
Data Quality and Reporting Cycles
According to BlackRock, poor data quality is one of the biggest obstacles to adopting ESG investing. A focus to improve data quality is crucial as it underpins the validity of the metrics.
Sustainability is a new business function and ESG reporting an even newer concept. Most businesses have not invested in systems, processes, or people sufficiently to be able to provide stakeholders with mature and robust data. Data is currently gathered from a variety of disparate tools and systems and the production of reliable and regular data is at best challenging and at worst, impossible.
We believe that organisations cannot manage what they do not measure. That is why we think organisations need to urgently address the systems, infrastructure and personnel deficits in sustainability departments. Organisations must also ensure that efforts to manage sustainability are not rendered useless or meaningless because of failures to build them on solid foundations.
Regular reporting and greater disclosures will be truly meaningless if the baseline data is materially inaccurate.
Sustainability data and reporting in the future will have equal ranking with financial reporting and will be relied on by stakeholders to make business and investment decisions. To ensure reports are adequate, external auditors will be required to provide assurance to stakeholders that:
- 1. Disclosures are consistent in requirements and format with whatever reporting standard the organisation is reporting against; and
- 2. Organisations have adequate systems, processes, and procedures in place to ensure that sustainability data is materially accurate.
What This Means for Sustainability
Regulation will mean that the involvement of auditors could ease concerns investors have about the quality and accuracy of sustainability data that companies self-report. As The IFRS plans the launch of global sustainability standards at the UN’s COP26 summit in November, global standards will undoubtedly boost confidence with the knowledge that an external lens is more likely to correct mistakes in the data.
Fundamentally, quality data disclosures can only happen if businesses have the right architecture to support and strengthen the data collection and management process of ESG matters. Software is needed to enable data capturing against framework rapidly and accurately, and Emex foresees the frequency to change from annual data collection to quarterly or monthly.
How Does Emex Rise to the Challenge?
“Reporting rules and requirements cannot be met overnight and waiting for the day of reckoning can cost a business dearly in social capital and trust, to say nothing of possible fines and penalties. Equally, pledges and promises will ring hollow unless they are matched with a pragmatic assessment of the systems and processes that are needed to achieve them. It’s a journey, not a box-ticking exercise,” says Emex's CEO, Richard Wall.
That journey can begin with us here at Emex. We can provide the guidance and system to firstly, implement reporting frameworks such as GRI, SDG, SASB and CDP to record your environmental, social and governmental data against. Deploy this across all areas of your organisation to collect live sustainability data through automation. If you are seeking a more effective system to improve data collection, we can also support you here. We have experience in migrating client data and setting reporting frequencies based on your business or strategy requirement.
Secondly, utilise our powerful analytics to gain a comprehensive understanding of your business operations and impacts. Search for specific indicator codes, set meaningful KPIs and targets based on your data, and closely monitor the progress towards these. Our analytics can also highlight improvement opportunities and draw attention to areas of risk needing action.
Finally, report your disclosures, impacts and risks in clear format for all internal and external stakeholders. External auditors will assure the accuracy and quality of your sustainability data, also endorsing your position with shareholders and relieving any concerns about the reliability of the metrics.
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