Strengthening confidence in sustainability reporting

UNDER the Singapore Exchange (SGX) listing rules starting from Jan 1, 2022, companies listed on the exchange – or listcos – are required to obtain an internal assurance on their sustainability reporting processes by their internal audit (IA) functions.

The objective of this sustainability internal review is to enhance the trustworthiness of the listco’s sustainability reporting process. It should be conducted in accordance with the globally recognised International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors (IIA).

We propose adopting the Control Self-Assessment (CSA) approach, given that it is a cost-effective and well-accepted methodology for listcos to conduct sustainability internal reviews.

For a start, the sustainability internal review process aims to provide an independent assurance to the listco board that the company’s:

• governance structure is effective in providing effective risk management and internal oversight of the sustainability reporting process;
• internal controls over sustainability risks and reporting requirements are adequate, operating effectively and efficiently, and in line with the relevant IA standards as well as applicable laws and regulations; and
• data governance practices on sustainability information for disclosures purposes are trustworthy.

To achieve the above, the IA team should be prepared to address numerous questions in performing the sustainability internal reviews. Those questions can require careful assessments of sustainability controls, governance structures, management of data, metrics, mapping against sustainability requirements and an assessment on the adequacy of reporting and IA.

At the start, IA may not have sufficient sustainability literacy to address all those questions. It could collaborate with the team from the sustainability department or its equivalent, and external resources to collectively provide internal assurance on the sustainability reporting process using the CSA approach.

CSA and its advantages

CSA is a structured approach where the sustainability team completes a self-assessment questionnaire to provide material information on the significant sustainability risks and opportunities, and the way in which the sustainability reporting process operates. It covers governance, strategy, risk management and metrics and targets. The IA team reviews the completed self-assessment and communicates the results to the board.

CSA is a well-accepted, cost-effective methodology for a listco to develop and build-up its in-house sustainability internal review capabilities. When carried out properly, it fosters a clear understanding and more effective assessment of key sustainability risks and opportunities in achieving the listco’s overall business objectives. Most importantly, the independent and objective assurance results from the sustainability internal review enable listco boards to confidently meet their sustainability governance responsibilities.

The following are key steps in the CSA process:

SEE ALSO

SGX RegCo will consider costs, benefits for ESG disclosure requirements: chairman

Market for assurance on ESG disclosures is burgeoning, but hurdles to perfection remain

SGX rolls out mandatory climate reporting for financial, energy issuers from 2023

• IA trains the sustainability team on the CSA approach: The training should ensure that the sustainability team has a common understanding of CSA and the value it plays in providing internal assurance over the sustainability reporting process.
• IA and the sustainability team co-develop the CSA questionnaire: IA, management and the sustainability team determine the scope of the review based on the areas where the board wants assurance. The questionnaire should follow guidance provided by sustainability reporting frameworks and standards adopted by the listco.
• The sustainability team completes the CSA questionnaire, and IA reviews it: The sustainability team conducts a self-assessment of the adequacy of internal controls over the sustainability reporting process, identifies potential areas of weakness, non-compliance, and/or opportunities to improve processes. The sustainability team, with IA guidance, also documents the key processes and identifies the key control points as evidence to support the responses to the questions.
• IA reviews sustainability governance and internal controls: The review should be based on the framework developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
• The sustainability team and IA sign off on the sustainability internal review: Results of the CSA must be communicated to the board. As SGX does not require a separate statement on the sustainability internal review results, it is recommended that the form of the internal assurance be guided by the IA standards on communicating results. Communication of results may vary in form and content, depending on the expectations of the board and management. It may be in the form of an opinion on controls around specific areas – such as governance or operations – or an overall opinion. Favourable or not, the opinion must include the conclusions, recommendations and action plans which are supported by sufficient, reliable, relevant, and useful information.

Beginning the journey

The global regulatory landscape for sustainability reporting is fast evolving and the disclosure requirements will get increasingly stringent. We urge listco boards to begin conversations with IA teams about their preparedness on sustainability reporting assurance. The board and management can motivate the IA team to step up and build up its sustainability literacy by providing sufficient resources, budget and training.

Listcos may also consider engaging external service providers to complement the skill sets of the in-house IA and sustainability teams to assist in data gathering and in developing the CSA questionnaire. This way, listcos have the flexibility to kick-start the CSA approach with in-house IA and sustainability teams, bolstered by co-sourced or outsourced resources.

The CSA approach offers a cost-effective and quick way for listcos to start building and deepening their institutional capability on sustainability internal reviews. It is not about being perfect right from the beginning, but to progressively improve and deepen the practice.

Uantchern Loh is chief executive officer of Black Sun Asia-Pacific. Goh Puay Cheh is a former executive director of the Institute of Internal Auditors Singapore.