The Ultimate ESG Audits Checklist

ESG Disclosures

According to the annual survey of sustainability professionals conducted by WSJ Pro in the spring of 2023, nearly 66% of respondents indicated that their respective companies disclosed information about environmental, social, and governance strategies. This represents a notable increase from the 56% reported in the previous year.

Reporting and disclosures in ESG initiatives are increasingly sought after by investors and stakeholders. Audit and assurance engagements, including ESG audits, are designed to meet this growing demand for credibility. Third-party assurance from independent firms results in objective reports that assess whether ESG disclosures align with chosen ESG frameworks or criteria. To guide you through the process of ESG audits, we’ve compiled a comprehensive ESG checklist below.

What is an ESG Audit?

ESG audits are systematic assessments of an organization’s ESG-related risks and disclosures. These audits serve the crucial role of verifying the accuracy of ESG data and information that a company shares with its employees, stakeholders, and regulatory bodies.

An ESG audit does not operate in isolation; it often aligns with a company’s broader compliance requirements. This alignment ensures that ESG-related controls and activities are effectively validated and provides insights into addressing gaps and mitigating risks. ESG audit requirements aim to deliver a recommended plan of action that guides companies toward sustainable, ethical, and inclusive operations.

Who Performs an ESG Audit?

• Internal Auditors: Internal auditors are employees of the organization they audit. They assess the company’s internal controls, processes, and compliance with ESG audit standards and frameworks. Internal auditors typically focus on providing insights and recommendations for organizational improvement. They help identify ESG-related risks, assess the effectiveness of ESG controls, and contribute to developing ESG strategies. Their role often aligns with the company’s risk management and governance functions.
• External Auditors: External auditors are independent third-party professionals or firms the organization hires to conduct ESG audits. They provide an objective assessment of the company’s ESG disclosures and practices. External auditors follow established auditing standards and frameworks to verify the accuracy and compliance of ESG-related data and information. Their ESG audit reports carry external credibility, which can be valuable for investors, stakeholders, and regulatory bodies. Depending on the audit engagement, external auditors may offer assurance services, including reasonable or limited assurance.

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What Do ESG Auditors Audit?

ESG auditors focus on assessing an organization’s performance in the Environmental, Social, and Governance domains. Here’s a breakdown of what they typically audit:

Environmental (E):

• Climate Change: Auditors assess the organization’s efforts to mitigate climate change, including greenhouse gas emissions, energy use, and sustainability practices.
• Resource Management: They examine the company’s resource consumption, waste management, and efforts to minimize environmental impact.
• Environmental ESG Compliance Program: Auditors verify compliance with environmental regulations and commitments related to conservation and preservation.

Social (S):

• Diversity, Equity, and Inclusion (DEI): Auditors evaluate the company’s DEI initiatives, including workforce diversity, inclusion practices, and pay equity.
• Employee Welfare: They assess employee well-being, safety, and satisfaction, including health and safety measures and employee welfare programs.
• Community Engagement: Auditors review the organization’s engagement with local communities, philanthropic activities, and social responsibility efforts.
• Human Capital: They examine human capital management, including talent acquisition, development, and retention strategies.

Governance (G):

• Financial Reporting: Auditors verify the accuracy and transparency of financial reporting, including governance structures and executive pay.
• Board Quality: They assess the company’s board of directors’ quality, independence, and oversight of ESG matters.
• Ethical Conduct: Auditors review the organization’s ethical conduct, including anti-corruption measures and compliance with governance codes and standards.
• ESG Governance: They evaluate the effectiveness of ESG-related controls, policies, and governance structures.

ESG Audit Checklist

1. Assess Your ESG Commitments

• Understand the ESG landscape within your industry and sector.
• Benchmark your company against competitors in terms of ESG initiatives.
• Utilize AI and machine learning tools to monitor ESG-related government policy and legislation changes.
• Consider the perspectives of internal and external stakeholders, including employees, customers, and investors.
• Evaluate how stakeholders perceive your company’s business activities.
• Understand the current state of your company’s ESG strategy, maturity, and risk factors.
• The format and presentation of ESG disclosures should align with the target audience’s needs.

2. Choose an ESG Reporting Format

• Select one or more ESG frameworks that align with your industry and company goals.
• Popular ESG frameworks include the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
• Ensure that your chosen framework(s) provide clear guidance on ESG topics and metrics.
• Supplement framework criteria with additional details to align with audit standards.

3. Prepare for ESG Audit

• Recognize the value of third-party assurance in enhancing the reliability of ESG information.
• Engage your internal audit function to implement consistent ESG standards and governance.
• Establish an independent internal process for ESG program governance.
• Assess the readiness for external ESG audits, including assurance readiness assessments.

• Companies should anticipate inquiries about their ESG-related processes, the use of reporting frameworks, and their data collection methods.
• Providing evidence and documentation during the audit process is often necessary.
• Auditors may offer valuable recommendations for improving controls and benchmarking.

4. Integrate ESG into an Annual Audit Plan

• Recognize the permanence and complexity of ESG reporting.
• Incorporate ESG audits into your annual audit plan alongside traditional audits.
• Be prepared for evolving regulations, especially those related to climate-related disclosures in financial reporting.
• Regularly report ESG risks and strategies to stakeholders and regulatory entities.

5. Implement Audit Software and Guidance

• Leverage technology to streamline audit processes.
• Explore cloud-based audit technology for secure, real-time collaboration.
• Invest in software solutions that offer integrated research and learning capabilities.
• Combine advanced technology with research and learning solutions to ensure audit quality and efficiency.

Top Four ESG Issues in 2023

1. Climate Change and Sustainability

• Climate change remains a top concern, impacting corporate operations, supply chains, and investments.
• Though distinct from ESG audits, sustainability audits overlap significantly and address environmental and climate-related risks.

2. Diversity, Equity, and Inclusion (DEI)

• DEI initiatives are gaining momentum, with an increased focus on the social responsibility of companies.
• Transparency in pay structures and addressing systemic inequality are crucial aspects.

3. International Regulations Expansion

• EU, UK, and US ESG regulations have expanded, affecting companies’ reporting requirements.
• Global governments are proposing regulations and legislation related to ESG disclosures.

4. Combating Greenwashing

• Governments are taking measures to combat greenwashing, the practice of exaggerating ESG performance.
• ESG audits play a critical role in detecting inaccurate data and incomplete information.

Achieving efficiency, accuracy, and consistency is essential in a dynamic audit landscape. Implementing an integrated online ESG compliance solution backed by advanced research and risk management is critical to success. Centraleyes, with its reputation for providing customized GRC solutions, can be a valuable partner in meeting your ESG and ESG audit needs. Whether ensuring compliance with a selected standard or driving your ESG program, Centraleyes has the tools to help you thrive in an ethical, inclusive, and sustainable business environment.

With ESG reporting becoming increasingly significant, adopting a comprehensive approach to ESG audits is essential for organizations looking to build trust, transparency, and sustainability into their operations.