Internal audit’s role in ESG reporting

IN MANY discussions and forums on environmental, social, and governance (ESG) issues, large institutional investors are escalating their requests for greater corporate transparency. Investors are keen to know how companies are addressing ESG risks and opportunities because they provide insights to the ability to adapt to the ever-changing business environment. This resulted in a surge of ESG-related data collection and eventual disclosures in the form of a sustainability report.

In his 2022 letter to chief executive officers (CEOs), Larry Fink, the chairman and CEO of BlackRock, said: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients… These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders. It’s also why we ask you to issue reports… because we believe these are essential tools for understanding a company’s ability to adapt for the future.”

A 2019 Harvard Business Review article, The Investor Revolution, noted that shareholders were getting serious about sustainability. ESG issues have traditionally been of secondary concern to investors, the article said. “But in recent years, institutional investors and pension funds have grown too large to diversify away from systemic risks, forcing them to consider the environmental and social impact of their portfolios… To respond to this shift in focus, companies must publish a statement of purpose, provide investors with integrated financial and ESG reports.”