Interest in environmental, social, and governance (ESG) matters has grown significantly during the COVID-19 pandemic. And that momentum may continue under the Biden administration. Currently, about 90% of large public companies voluntarily publish so-called ‘sustainability reports’ that communicate performance on ESG matters, according to a recent report published by the Center for Audit Quality and the American Institute of CPAs.
However, the information that sustainability reports provide is not based on U.S. Generally Accepted Accounting Principles (GAAP), and there are not currently any mandatory attestation requirements for sustainability reporting. An external audit can help ensure transparency and reliability when reporting on ESG matters.
The term “sustainability” encompasses a broad range of nonfinancial issues that may affect a company’s financial condition and performance. Media attention on ESG matters has increased public awareness and prompted concerns about how sustainability issues could impact value or increase a company’s risk of litigation.
A sustainability report communicates the company’s sustainability goals and how the company plans to meet them. It focuses on the following three areas:
1. Environmental: This component address how the company manages risks related to climate, natural resource scarcity, pollution, and waste. For example, a company may discuss the size of its carbon footprint, efforts to replace fossil fuels with renewable energy sources, and overall use of natural resources.
2. Social: This section covers such issues as workplace, health and safety, and consumer product safety risks. Over the last year, interest in human capital issues — such as diversity and inclusion policies — has grown dramatically.
3. Governance: This includes information on boardroom diversity, executive compensation, critical event responsiveness, and corporate resiliency. It also may address policies and practices on lobbying, political contributions, bribery, and corruption.
During the pandemic, stakeholders may have specific concerns about how your company is handling such issues as public health and safety, supply chain disruptions, strategic resilience, and human resources. Stakeholders want assurance that companies are engaged in responsible corporate governance in their COVID-19 responses. Sustainability reports can showcase good corporate citizenship during these challenging times.
Without independent, external oversight, stakeholders may view sustainability reports with a significant degree of skepticism. That is where audits are helpful.
Many organizations — such as the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the Task Force on Climate-related Financial Disclosures — have developed standardized sustainability frameworks. External auditors can verify whether sustainability reports meet the appropriate standards. If not, they can adjust them accordingly.
We Can Help
ESG factors can affect risk and return. Most companies agree that sustainability information is an important part of their communications with lenders and investors. In some cases, financial statement disclosures that are required under GAAP might not provide enough information to satisfy stakeholder concerns.