Internal control over sustainability reporting

Sustainability reporting

Managing the upsides and downsides of sustainability reporting is a key topic for the boardroom – both to protect against regulatory breaches, and to build trust and confidence in all stakeholders. Pressure to conform comes from many directions, not least the Corporate Sustainability Reporting Directive (CSRD), investors, staff and customers. The reporting of sustainability information must therefore be appropriately controlled, to ensure it is reliable, accurate and complete. The demands on organisations, and the individuals who lead them to get this right, are only set to increase.

The perils of greenwashing are understood by most boards, albeit to varying degrees (see Promising the earth). A key aim of the CSRD is to improve and enforce sustainability reporting and to ensure disclosures meet assurance standards. European Sustainability Reporting Standard (ESRS) 2 in particular requires companies to report on their governance processes and controls including very specifically the main features of the risk management and internal control system over sustainability reporting. Not only do organisations run the risk of fines and prosecution as a result of wrongful reporting, they also risk losing valuable equity through share price impacts and investor withdrawal as a result of reputational damage if they fail to take sustainability reporting seriously.

Team effort

Managing sustainability reporting requires close cooperation between many teams and stakeholders within a business. It is a multidisciplinary topic involving all aspects of governance, operations, internal audit, internal control, finance, compliance, and reporting. Inevitably, Finance teams are becoming more involved in this area because of their expertise and entrenched familiarity with disclosures subject to audit and assurance review processes. The parallel between Finance and Sustainability collaboration doesn’t stop at reporting though. Without a comprehensive system of internal control as the means to achieve enduring reliability on information outputs, much effort can be wasted attempting to manage data from disparate business sources. The lessons from Internal Control over Financial Reporting (ICFR) can be usefully applied to Internal Control over Sustainability Reporting (ICSR), as advocated by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) – the leading authority on internal control. A key component within the latest COSO report is the 2020 Intangible Asset Market Value Study by Ocean Tomo, reaffirming that 90% of the market value of S&P 500 organisations is attributable to intangible assets. Confidence in sustainability reporting falls squarely into that class of asset, and affects investor ratings and the ability to secure green financing – it’s a competitive imperative.

Achieving transparency, comparability and reliability

Adequately adapting the internal control environment together with a committed governance framework and a retuned internal audit function is a winning formula. Sustainability and ESG should ultimately become an integral part of the internal control environment that underpins both reporting and the development and application of key business policies, processes, and best practices.

The requirement to have internal control over sustainability reporting is incontrovertible; in our next article, we’ll set out the best way to build your framework. In the meantime, if you’d like to discuss any of the themes raised in this article, or for support with any aspect of your sustainability journey, please contact Shirley Tewary or Erwin Engels.