Today, no business can operate with profit as its sole objective. Stakeholders now reject companies that profit at the expense of the environment.  Environmental, Social, and Governance (ESG) reporting involves the disclosure of a company’s environmental impact, social responsibilities, and governance practices. This reporting not only provides stakeholders with insights into how companies manage ESG issues but also offers hope for a sustainable future. Typical ESG reports cover carbon emissions, water usage, labor practices, community engagement, and board diversity, all of which contribute to a healthier planet.

The Rise in ESG Reporting and Assurance

The popularity of ESG reporting has surged recently, largely due to the influence of stakeholders. In 2022, KPMG’s global survey revealed that 96% of the world’s top 250 companies (G250) report on sustainability, and 79% of the N100 group (the leading 100 companies in each country surveyed) do the same. This indicates the widespread adoption of ESG reporting across major global companies.

Firms are rapidly adapting to the increasing demand for ESG assurance. The Center for Audit Quality’s analysis indicates that 70% of companies obtained assurance over ESG information in 2022, up from 65% in 2021. Furthermore, the proportion of companies using their financial statement auditors for ESG assurance increased to 21% in 2022 from 18% in 2021​. This shift underscores the growing reliance on audit firms for verifying ESG data.

Role of Audit Firms in ESG Assurance

Audit firms are increasingly involved in providing assurance over ESG information, bringing credibility and trust to the process. Their role includes verifying the accuracy and completeness of ESG data, ensuring it meets relevant standards and frameworks, and enhancing stakeholder confidence in the reported information. Audit firms leverage their expertise in financial auditing to assess non-financial ESG data, bringing rigor and credibility to the process​​.

Audit firms provide assurance over ESG information through attestation engagements, which can involve either limited or reasonable assurance. Limited assurance typically consists of a review to provide a moderate level of assurance that the information is free from material misstatement. Reasonable assurance, akin to a financial statement audit, involves a more detailed examination and provides a higher level of confidence. Audit firms follow established standards, such as those set by the American Institute of CPAs (AICPA) and the International Auditing and Assurance Standards Board (IAASB), to conduct these engagements​.

Challenges in ESG Assurance

Despite its benefits, ESG assurance comes with several challenges:

1. Lack of Standardization: The absence of universally accepted ESG reporting standards leads to variability in disclosures, making it challenging to compare ESG data across companies​.
2. Data Quality and Availability: Ensuring the accuracy and completeness of ESG data can be challenging, particularly for companies that are early in their sustainability reporting journey​​.
3. Cost and Resources: The process of obtaining assurance can be costly and resource-intensive, which may be a barrier for smaller companies​​.
4. Evolving Regulations: Keeping up with rapidly changing ESG regulations and standards can be challenging for companies and auditors alike​.

Practical Steps for Audit Firms

Audit firms looking to expand their ESG assurance services can take several practical steps:

KNAV’s Opinion

ESG reporting is primarily the responsibility of companies, but auditors are responsible for providing assurance on this information. With their extensive knowledge of finances and business processes, auditors are ideally positioned to verify the accuracy of ESG data. Just as financial misreporting can lead to significant losses, inaccuracies in ESG reporting can result in environmental harm. By ensuring the accuracy of ESG reports, auditors not only enhance the credibility of the information but also contribute to sustainability efforts, helping to protect the environment and promote responsible business practices.