The Institute of Internal Auditors (IIA) recently published a paper describing the role internal auditors can have in ESG reporting, asserting that independent assurance is critical for organizations to provide effective sustainability reporting. Similar questions can be asked with respect to additional ESG risk management areas such as risk assessments, measurements, and analytics monitoring and reporting portfolio and capital management risk data and systems and risk operating model, people, and culture. In addition, auditors can assess risk strategy and appetite, considering whether climate strategy and risk appetite are consistently cascaded throughout the organization and whether climate-related risks are being considered in new products and services. For example, in assessing governance and policy, internal auditors can consider whether the organization has created a governance structure and culture that support effective climate risk management and whether information on climate risk is being reported to the board. Given their broad purview across the enterprise, internal auditors can assess an organization’s ESG risk from multiple perspectives and help connect dots. This approach can help highlight the extent to which ESG-related activities are being identified, considered, and documented throughout the business. Internal audit can also adopt an integrated approach, incorporating assessment of ESG risk areas into broader audit plans to provide a pulse check on the business. More focused ESG reviews can provide a deeper dive into specific ESG areas, such as where stakeholders have heightened concerns or where risk appetite may be low. Standalone reviews can help to highlight policies, controls, and responsibilities with respect to ESG strategies and tactics as of a particular point in time. ”ĮSG considerations can be factored into internal audit approaches in several ways. “ role includes validating the effectiveness of ESG-related controls and activities to help organizations manage those risks and foster resilience. With their ability to anticipate risks, advise senior leaders and the board of directors, and provide assurance, internal auditors are well positioned to act as catalysts for furthering an organization’s ESG goals while helping to identify potential obstacles. 1 Although an independent audit of ESG reporting is not currently required, internal audit functions are increasingly involved, performing assessments of the underlying internal control framework supporting publicly available information and validating the completeness and accuracy of the data used in reporting. In June, SEC Chair Gary Gensler said in prepared remarks that he had instructed SEC staff to develop recommendations for mandatory company disclosures on climate risk and human capital. Similar initiatives are underway at the Commodity Futures Trading Commission, the Federal Reserve Board, and other regulators abroad.Īccording to an analysis by the Center for Audit Quality (CAQ), 95% of S&P 500 companies provide detailed ESG information publicly ahead of regulatory requirements. In March 2021, for example, the SEC requested public input on climate change disclosures, a common early step in the development of new regulations. Regulators in many jurisdictions have also increased their focus on ESG risks with initiatives related to climate change, executive pay, diversity and inclusion, working conditions, human trafficking, and product content, among others. These jurisdictions have mandated or encouraged greater disclosure of sustainability practices and risks, and several major stock exchanges are instituting similar requirements.
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