I’m a recovering non-financial auditor and I suffer from the “prove it to me” syndrome when it comes to ESG/climate claims and data. But companies are pretty inconsistent about how or if they use internal controls/data validation for ESG reporting. Regulators around the world are now starting to take a closer look at ESG claims too – and you might need some skeptics like me on your own team.
Recently, The Guardian reported that the Australian operations of US energy company Peabody:
“repeatedly submitted incorrect greenhouse gas emissions reports to the Australian government … due to calculation errors, poor record-keeping and inconsistent data collection and analysis.” Those emissions reports “were used to help fulfill Australia’s international obligations under several treaties, including the Paris climate agreement, and as part of the government’s annual projections of future emissions.” Errors were identified across the company’s seven Australian operations: “The total error was large – when added up, out by more than 51% of the total emissions from the site – but the under- and over-reporting largely cancelled each other out. It meant the submitted total was 5.4% lower than what it should have been.”
The enforcement actions undertaken by the Australian government don’t indicate a fine and appear to be limited to engaging an external consultant/auditor to:
- conduct a comprehensive review of the facilities over which Peabody has operational control and any internal documents which describe the design, implementation and internal controls relevant to the preparation and presentation of emissions reporting;
- prepare a Reporting Improvement Plan to improve the quality of Peabody’s emissions reporting;
- conduct an annual review of the Plan’s implementation
- conduct (i) a reasonable assurance audit regarding its reporting of at least one facility under its operational control per reporting year until 30 June 2024; and (ii) limited assurance audits of all other facilities under Peabody’s operational control (including those that come under Peabody’s operational control after the undertaking comes into effect) by 30 June 2024; and
- add all corrective actions for audit findings to the Reporting Improvement Plan.
That scrutiny should be a wake-up call to all companies – especially those with operations in countries that have committed to international treaties that require them to reduce nation-wide emissions. Yet, most other companies haven’t taken that step with their ESG data, according to the January 2022 edition of the FTI Consulting Resilience Barometer®, a survey of senior executives from more than 3,300 large companies across G-20 countries. Here’s an excerpt:
“66% [of respondent companies] reported they lack sufficient expertise to manage the increased scrutiny from a broad range of stakeholders, including regulators, customers, employees, local communities and shareholders… and nearly one-third of respondents are experiencing or expect to face ESG-focused investigations in the next 12 months.”
Moreover, some guidance on ESG reporting is coming from PR firms, who are skilled at design & communication but often remain silent on data validation and non-financial auditing. In my opinion, a well-designed report that is substantively inaccurate is just “lipstick on a pig” – and regulators and your stakeholders will catch on sooner or later. I’m not the only one who is beating this drum! This ESG Investor article talks about the need for scrutiny of Net Zero plans:
The primary problem with the phrase ‘net zero’ is the first word, which introduces a fog of uncertainty and has encouraged many organisations to promise carbon offsetting in the future instead of reducing emissions today… a promise on carbon offsetting in the future will be empty if there is not sufficient availability of credible schemes. However, as we are all becoming better informed we will begin to refuse to accept poor net zero plans. Customers, shareholders, and voters will no longer be bamboozled by carbon jargon. A more forensic and sophisticated analysis of net zero plans will be inevitable… The wild west of net zero carbon plans will inevitably come to an end. As the clock ticks towards 2050, forensic scrutiny of net zero plans will increase and improve. This will prove uncomfortable for companies, industries, and even governments that continue to use the camouflage of carbon jargon.
That is already starting to happen – not just in Australia and Europe – but in the US, as well. Last December, the SEC took action against EV company Nikola (including a $125 million dollar fine) for public statements made by the now-former CEO about a number of sustainability-based product claims that had not been validated and were determined by the SEC to be fraudulent. In the second half of 2021, the SEC sent comment letters to issuers about climate disclosures made within SEC filings. Other organizations have picked up the drumbeat too: this past summer, the International Organization of Securities Commissions (IOSCO) and the International Federation of Accountants (IFAC) each published their own findings on ESG disclosures, addressing data validation/assurance.
What This Means
Companies that have taken their first steps toward ESG and climate disclosures may want to move to the Big Leagues (or at least Triple A). Stepping up internal controls for climate data is a big step down that path, and also will help you manage third party and regulatory exposures.
To do that – at a minimum – engage your Internal Audit group, augmenting the team with internal technical experts and if necessary bringing in external consultants/auditors, as I’ve written about previously. Regardless of whether they are internal or external, make sure the people working on this effort have experience in emissions calculations and understanding their context. Having some who can “gut check” the big picture to see if it makes sense can be a big help.
PracticalESG.com Advisory Board member Dan Goelzer offered his thoughts on Audit Committee oversight for ESG information not long ago.
With validated data in hand and a governance structure in place, you can feel more confident in telling your story directly and with fewer distractions – ready to step to the plate and swing away.