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Starting Here: On the Path to Assuring Sustainability Data


Esg2In terms of intangible accounting, there are no assets or liabilities more ethereal than those related to environmental, social and governance issues. Mother Nature does not send monthly balance sheets. An organization’s diversity and inclusion committee cannot easily sell its access to deeper talent pools on the open market. And yet, gaps in management structures can wreck value beyond any analysis.

As a result, an organization must account for these concepts with hard data to help manage and improve these often overlooked risks and assets. Furthermore, just as it can with an organization’s financial data, regular auditing (or “assurance” as it’s known by the CPA profession when covering subject matter other than financial statements) can strengthen environmental, social and governance data’s accuracy, collection process and reporting.

The environmental, social and governance assurance landscape

In 2014, more than 2,600 reports were produced applying the Global Reporting Initiative framework for sustainability reporting. And while the proportion of assured reports has been slowly growing, less than half of the reports published that year were assured.

ESGgraph

Looking forward, trends favor greater external assurance. According to a survey of CFA Institute members, 69% think it is important that environmental, social and governance disclosures be subject to some level of independent verification. In addition, a recent AICPA study projects that corporate expenditures on various forms of sustainability verification and assurance will grow by an average of 11 percent between 2013 and 2017.

The benefits of starting now

While it is still unclear when environmental, social and governance data assurance will become standard practice, organizations should begin preparing for that very possible eventuality. Forward-looking companies can start by building their capacity to use internal auditors to review environmental, social and governance data and processes. Beyond helping to prepare an organization for an external audit, an internal review system can also:

  • create a more robust reporting process that brings together team members not typically engaged with environmental, social and governance reporting
  • provide more timely sustainability metrics to help strategic planning
  • improve overall credibility inside and outside the organization

This is especially true for a system built on multiple reviews per year, instead of the annual cycle that is most common for sustainability reporting. The bottom line: a more credible process leads to more credible data.

The first steps

Elevating the management and verification of environmental, social and governance data in a manner similar to financial data is likely to be resource intensive, requiring a level of scrutiny most environmental, social and governance data does not currently receive. External assurance is the ultimate target in bridging any trust gap between reporter and stakeholder. However, there are several intermediate steps that corporations can take before engaging with an external auditor that will help provide greater credibility. These minor changes leverage the expertise that already exists within an organization given its experience preparing financial and legal disclosures.

The Institute of Internal Auditors (IIA) has created a model with three internal layers of assurance that build on one another to increase credibility. The layers are:

  1. Senior management, which implements procedures, collects data, and monitors the process.
  2. Senior risk management, financial management, and compliance, which define and develop the process to collect and report data.
  3. Internal auditors, which provide independent assurance of a credible and consistent process of data collection.

These internal layers can improve the data collection process and documentation of the process while maintaining a consistent process across the board.

Looking ahead

For sustainability data to gain full credibility and utility for business leaders and investors, it’s essential that it ultimately receives the same rigorous scrutiny as other major business disclosures. In fact, treating financial and environmental, social and governance data in a similar fashion may someday be the norm.

While your organization may not be ready to seek third-party assurance on your environmental, social and governance data, taking small steps now can position you to eventually implement a more comprehensive approach and reap the advantages of early adoption when the time is right for a more extensive investment.

KT Michaelson, Director of Analytics, Framework LLC. KT’s work and writing focus on transparency, risk and opportunity assessment and climate. Framework LLC is a specialty management consultancy that helps leading global companies maximize performance by developing strategies and practices for managing financial, social and natural capital sustainably.

For information on CPA provided assurance, check out this AICPA brochure illustrating the many benefits.

Leaf graph image courtesy of Shutterstock.

 

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