Environmental, social and corporate governance (ESG) has emerged over the last decade as one of the most popular initiatives for organizations throughout the U.S. Yet, the rapid rise of ESG’s importance in the minds of business leaders, investors and consumers has helped sprout a new critical component: verifying the accuracy of ESG data.
The concept may sound like a simple one. Naturally, as organizations generate more data related to their ESG initiatives, their business leaders and stakeholders ultimately will require an increased level of assurance that this information is being reported accurately and consistently.
Of course, internal team members cannot be tasked with providing this verification. It simply is too difficult to achieve independence when handling audits in-house. And make no mistake about it – an examination of a company’s ESG data is an audit. And as ESG continues to grow in popularity and importance, this type of assurance procedure has become more necessary than ever.
There are three different types of assurance that an organization could seek. At the moment, virtually all the ESG assurance engagements performed at Baker Tilly fall under the first two categories.
Reasonable assurance: This is the highest level of assurance that can be attained and is usually gained through an examination or financial statement audit. This does not mean absolute assurance, but rather performing procedures to lower the audit risk (i.e., the risk that an inappropriate opinion is issued) to an acceptably low level.
Limited assurance: A lower level of assurance that results from the performance of a review engagement is limited assurance. A review requires much less rigor than an examination and an auditor’s opinion is expressed in more of a negative format (i.e., saying that nothing came to the auditor’s attention that would indicate that management's assertion is materially misstated).
No assurance: This level is more commonly known as an agreed-upon procedures (AUP) engagement. In these engagements, management tells the auditor exactly which procedures to perform and there is almost no room for auditor judgment. The final deliverable is a report that restates the procedures as dictated by management, followed by the results of an auditor’s performance of those procedures.
At the moment, large companies are leading the charge on third-party ESG audits. This makes sense since Fortune 100 companies and other public organizations are generally guiding the way on ESG in general. That said, the need for middle-market companies to dive into ESG assurance isn’t far in the future.
Naturally, there is some resistance when it comes to implementing third-party ESG audits. The concept of dedicating time and money to an examination of non-financial data is challenging for some business leaders to accept. But even in instances where CFOs and controllers are hesitant, the pressure to report on ESG data continues to mount.
There are a multitude of reasons why companies are beginning to focus resources on third-party ESG assurance, which can be broken down into internal and external motivating factors.
The verification of ESG data is going to be a revolution. Moving forward, if a company’s ESG data isn’t verified, then it won’t actually mean anything to investors, customers, board members, etc.
The business landscape will continue to see many more non-financial controllerships, which is a testament to how significant the ESG impact is and will continue to be. Controllers are going to be wearing two hats with one focused on non-financial reporting. ESG audits may not end up being side-by-side with financial audits, but they won’t be far behind.
Even if your company isn’t ready for third-party verification today, forward-thinking organizations are planning for the future. Visualize your sustainability road map through the lens of your business strategy for accessing capital or reporting to governing agencies. Consider how third-party verification can help position your company for success from a reputational, financial, operational or ESG rating perspective.
To discuss how Baker Tilly can assist with this process – either by preparing your organization from an ESG readiness standpoint, by assisting with data sources and data validation, or by conducting your ESG third-party verification – contact us today.