How Internal Auditors Can Overcome ESG Challenges? Deloitte Explains

Environmental, social and governance (ESG), a set of standards used to measure a company’s behavior, is in an evolving stage in India, according to Deloitte.

ESG has gained greater significance amongst investors, policymakers, and other key stakeholders globally due to the pandemic and new regulatory requirements and it is increasingly used by socially conscious investors to screen potential investments, the global consultancy firm said.

“Leaders across businesses, government, and regulatory bodies alike are realizing the importance of ESG for an enterprise,” Himanish Chaudhuri, partner at Deloitte India said in a statement. “Organizations that can effectively integrate their ESG strategy into their business strategy and risk practices will unlock the potential value that the ESG agenda has to offer.”

Chaudhuri noted that internal audit is a key lever in an organization’s ESG strategy through its role in providing an independent and objective assurance, insights, and advice on the ESG agenda.

Large organizations have already adopted ESG standards into their audit plans, but small companies are still in nascent stages, Deloitte said.

Therefore, internal auditors including ESG checkpoints in their audits would be helpful as high ESG performance may translate to better access to capital, talent and business opportunities, it added.

Multi-Fold Challenges

There are, however, certain multi-fold challenges for internal audit functions starting out with their ESG journey, Deloitte said.

These include:

• Lack of a uniform framework can be a challenge to internal auditors on how to check and report the results of their ESG strategies.

• ESG topics, such as climate change, decarbonization have not been a part of audit plans earlier and can be a challenge to review.

• Data required to review ESG reporting are often minimal, unavailable, or scattered across multiple departments and its collection can be a challenge for auditors.

Mitigating Challenges

To mitigate some of these challenges, Deloitte recommends the followings:

• Internal auditors need to be familiar with various terms such as green house gas (GHG) calculation frameworks.

• Internal auditors need to engage with experts within their teams to be able to better understand and review the underlying documents.

• Internal auditors need to gain expertise in testing various IT systems and reading relevant nonfinancial data to overcome the challenges of dependency on various departments.

Supporting ESG Efforts

Deloitte said keeping in mind the internal audit skillset, internal auditor assistance can be useful in developing various facets of the ESG framework and build-in the necessary governance and control aspects.

The consultancy firm said internal auditors can be made responsible for review of the following aspects in ESG:

Evaluate organization’s current ESG maturity

• This will identify the possible improvement areas/opportunities. Internal audit can raise awareness about ESG priorities and its implications, at the board and senior leadership levels. This may help the board to develop its ESG strategy and goals.

Ensure proper governance structure & oversight

• Internal audit can review roles and responsibilities assigned within the organization to execute their ESG strategy and monitor ESG issues.

Validate ESG risk management goals

• Internal audit can ensure that the goals set are realistic, measurable, included in the company’s strategic objectives, and discussed regularly at board meetings.

Collaborate with enterprise risk management (ERM)

• Internal audit can assist the management by mapping risks and incorporating them as part of their risk registers.

Ensure documentation of ESG policies & procedures

• Internal audit can review ESG policies and procedure manuals, which helps the company to communicate its strategy, goals, and activities to be undertaken to mitigate ESG risks.

Perform risk assessments

• Internal audit can determine whether ESG measures are significant to an organization and aligned with investors, customers, and other stakeholder expectations.

Evaluate ESG risk management framework

• Internal audit can review a company’s existing frameworks and standards to ensure they are reasonable, being followed, consistent with industry recommended frameworks and regulatory expectations, and comparable with similar entities.

Evaluate design & operating effectiveness of control activities

• Internal audit can identify and evaluate key controls needed to mitigate ESG risks and identify gaps or material weaknesses across core business functions in an organization.

Review ESG financial & non-financial reporting metrics

• This is done to avoid unsubstantiated claims that could adversely impact an organization’s reputation.

Collaborate with legal & compliance department

• Internal audit can work together with the legal and compliance department to validate that ESG reporting disclosures comply with applicable regulations.

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