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The Corporate Sustainability Reporting Directive (CSRD) is an EU Directive published by the European Commission (EC) which brought a major overhaul towards mandatory ESG reporting and its assurance. ESG reporting requirements came into effect as of 1 January 2024 for all those undertakings with securities listed on an EU-regulated market with the exception of micro-listed undertakings. Gradually, a vast number of other undertakings will also be subject to these reporting requirements. An important step which marked a significant advancement within this sustainability journey was the mandatory requirement by the CSRD for undertakings to obtain assurance on the ESG information presented.
Furthermore, under the CSRD, the audit committee is entrusted with the responsibility to undertake specific tasks related to ensuring the integrity of sustainability reporting and its assurance. Such tasks include:
Functions of the audit committee relating to sustainability reporting and its assurance should be performed by the existing audit committee as a whole or by a newly established committee dedicated to sustainability reporting.
Indeed, assurance serves to provide an additional professionally acceptable communication tool which demonstrates that the performance of an organisation meets the current standards. It ultimately results in undertakings gaining the trust of stakeholders by mitigating the risk of possible ‘greenwashing’ or misstatements in social and governance disclosures. At first, the assurance requirement will be limited but over time this will be transitioned to reasonable assurance. As the assurance process becomes imminent, the question of ‘audit readiness’ comes more to light.
Audit readiness for ESG assurance translates into whether the reporting undertaking is able to substantiate all the information presented in the sustainability report when the assurance practitioners scrutinise such information.Prior to being subject to the assurance process, the reporting undertaking must have a clear understanding and knowledge of its internal controls, processes, policies, methodologies and supporting evidence backing up the reported information on the chosen critical data points. The clear segregation of roles and responsibilities within the undertaking and a strong board presence should alleviate the risk of having potential gaps in reporting standards. This culminates in providing high-quality information and accurate strategic Key Performance Indicators (KPIs) to the assurance practitioners, who must look at the whole process and be able to understand the logic behind the presented information including the respective supporting documentation. By virtue of such, the assurance practitioners would be able to provide a reliable and correct audit opinion.
For many reporting undertakings, ESG reporting may prove to be a challenge, especially during the initial years. To be audit ready, reporting undertakings must:
From an audit readiness perspective, large reporting undertakings should look to formalise an ESG steering committee in which the internal auditor is a key individual. Internal auditors are experienced in auditing and building documentation so they would be able to ensure that reported ESG information is actually substantiated by an audit trail.
As has been previously identified, reporting undertakings may face several challenges before they can be deemed audit ready. Such responsibility falls on the reporting undertaking’s management. If management is unable to provide accurate and comprehensive information, assurance practitioners may encounter considerable difficulties during the assurance process including having to modify the opinion of their assurance report when considering the reporting undertakings’ readiness.
Modification of an opinion or an emphasis of matter may put a reporting undertaking in the limelight and may also influence its reputation. The auditor’s opinion is based on whether the sustainability report is prepared in accordance with the applicable reporting standards. Regulators and other intended users acknowledge that preparers have difficult challenges to overcome and thus achieving high-quality sustainability reporting from the outset is not an easy task. In turn, undertakings are urged to be transparent on how they are addressing the challenges to enhance the quality of information used in sustainability reporting over time because it's not the assurance practitioner who holds this responsibility, but it is the board of directors who is responsible for meeting stakeholder expectations with regards to sustainability reporting.
Fulfilling the requirements for ESG reporting and assurance should not be considered a tick-box exercise. The key element of being audit-ready is to invest in knowledge as there is a lot of strategic data that has to be included in the sustainability report. Moreover, it is vital to start the reporting journey as early as possible to allow time for remediation if required because audit readiness would not necessarily equate to a clean audit opinion. Thus, audit readiness should not only be the mindset at the management level but also throughout the whole undertaking.
Regardless of industry or geography, organisations face dynamic, connected challenges: from environmental degradation and human rights challenges to shifting geopolitical power and focus on inclusive growth, our ESG team can help you manage the environmental, social and governance issues that are going to transform how we live and work. We help you focus on what matters most and drive the change required to meet society’s expectations and thrive in a low-carbon economy. ESG is a data-driven discipline that can empower leaders to make positive and impactful decisions. Our services will drive you through the necessary changes for reaching the ultimate goal of being ESG audit-ready, which is strongly related to the capacity to implement systems that will digitise data-gathering processes. The following three pillars showcase our service offerings: