Many years ago, I raised the red flag about risks of poor ESG data quality, the lack of validation and questionable assurance. Validation came in the form of the International Federation of Accountants (IFAC) June 23, 2021 report The State of Play in Sustainability Assurance. From my perspective, the headline quote is:
With investors increasingly incorporating sustainability matters into their asset allocation decisions, low-quality sustainability assurance is presenting a significant, global investor protection issue. … [and] is emerging as a financial stability risk.
Even further, the International Organization of Securities Commissions’ (IOSCO) Final Report on Sustainability-Related Issuer Disclosures highlighted
… we identified a perceived lack of clarity and consistency around the purpose and scope of assurance, together with material differences in audit processes, the profile and independence of and requirements to be followed by assurance providers of sustainability- related information. This can potentially lead to market confusion, including misleading investors and exacerbating the expectations gap.
What You Can Do
Although audit/assurance standards for ESG disclosures are generally not mandated, and IOSCO is even looking into “whether the existing assurance framework is fit for purpose or whether further standard setting enhancements are required,” companies can begin preparing for eventual mandates for audits/assurance of disclosed ESG data. We have written on this previously (more than once), and the easiest step to take right now is inviting your Internal Audit department to review ESG data collection processes, controls and monitoring.
Evaluate what controls, if any, are in place to ensure ESG data validity and accuracy. Very few companies implement ESG data controls similar to what they have for financial data. Remember that knowledgeable/experienced auditors will also assess controls and systems behind the numbers.
Leveraging internal resources can be a less threatening and intimidating way to begin the journey to external assurance.