Facts behind the figures 

David Willans looks at the increasing importance of being able to show the evidence behind your ESG reports

What do Google, Netflix, Verizon, Salesforce, Coca-Cola, UPS, and Johnson & Johnson all have in common? Other than being public companies with fantastic name recognition, they’re all using outside auditors for assurance on their ESG information.

While these famous companies are currently hiring auditors to give their numbers more legitimacy, the practice is far from mainstream in the US. Financial reporting may be subject to rigorous, third-party auditing, but most companies publishing sustainability reports don’t subject their numbers to nearly the same level of scrutiny, or any scrutiny at all.

As of the summer of 2021, only 31 of the S&P 500 companies used public company auditors to perform assurance on their ESG reporting. Meanwhile, 235 S&P 500 companies used a non-audit firm assurance provider, and 236 sought no official assurance on ESG information.

Regulatory front

ESG assurance can be third-party certification of information provided within ESG reports, an explanatory letter from management, or independent assurance that data and analysis are accurate and reliable.

One key difference between financial and ESG audits is the common set of reporting standards for finances. In the ESG world, there is no single agreed-upon standard and little by way of regulatory roadmaps. In the US today, there’s no regulatory requirement to audit sustainability reports or ESG disclosures, so all actions are entirely voluntary.

All of this could change, especially if the SEC makes good on promises to require more disclosure about climate and other topics. In March, the SEC published proposed climate change disclosures, and public companies are already deep into the SEC’s 90-day comment period to evaluate this proposal.

To be truly useful regulatory mandates in any one country will be insufficient. Experts agree that data will need to meet the rigors of a single global, mandatory standard.

That’s still an elusive goal. According to a Reuters article from February, ‘ESG auditing is in its infancy… And efforts to create a more rigorous regime for this type of auditing will take several years to bed down as investors, companies and auditors try to get a handle on new and complex data.’

Why audit?

Much of the push for ESG audits in the US is coming from the consulting powerhouses, no great surprise there. Anyone who googles ‘ESG audits’ will quickly find links to the EYs, PwCs, Deloittes, and KPMGs of the world.

There’s also a push from activist shareholders. In a handful of shareholder proposals this proxy season, audited ESG results are front and centre. Citigroup, JPMorgan Chase, and Morgan Stanley are all facing proposals to produce audited shareholder reports, ensuring their financing doesn’t contribute to new fossil fuel supplies.

With public companies in the US beginning to sense the inevitability of audits, now seems like a good moment to get behind a framework (the Global Reporting Initiative, or GRI, is currently the most used ESG framework in North America) and to make sure the numbers provided can stand up to scrutiny.

What’s more, change might come swiftly if companies themselves start to act. Three-quarters of finance, accounting, sustainability, and legal executives are now planning to obtain assurance for their ESG disclosures in the next reporting cycle. An even higher number are looking at how they can enhance their ESG control environment.

If you’re looking at how to communicate your ESG or sustainability issues, get in touch with Bladonmore and hear how we can help.