Environmental, social, and governance (ESG) is the new “must have” framework for every company to succeed. It covers a wide range of issues, from climate change to equity and inclusion, to production, financial and governance that face the planet. ESG auditing helps to determine the accuracy of a company’s ESG-related data that is disclosed to different stakeholders, such as employees, regulatory authorities, investors and customers.
Auditing has become crucial at a time when concerns about ESG greenwashing have increased so much, especially over the last few years. About 44% of investors are concerned about greenwashing when making investment decisions. So, are your company’s ESG efforts carefully planned and reported? Keep reading to learn more about ESG auditing and the best financial and other sustainability practices to adopt for your company.
What is ESG Auditing?
This is the process of assessing the risks that an organisation or business faces in relation to environmental, social, and governance impacts. It works just like financial auditing, but in this case, you will assess the company in regard to its sustainability performance. It can be done internally by your company's management or by a third party auditors specialised in ESG reporting/ disclosures or ESG matters for companies in your industry. In most cases, ESG audits are designed to align with companies’ risk management, insurance and compliance needs.
To make sustainability management and ESG auditing more effective, it is prudent to ingrain them into your company’s operations. Furthermore, they should be made part of the regular internal undertaking of your company. This makes it easier for your business to align its operations with both local and global stakeholders' needs.
The following are the three main risks of interest when carrying out ESG auditing.
- Environmental risks: This involves reviewing a company’s potential for water, air, and soil pollution because of its operations. The data you collect should be comprehensive to ensure you report every indirect risk of your operations.
- Social Risks: These risks are related to a company's reputation, the well-being of customers, and employee welfare.
- Governance risks: Your ESG auditing will not be complete without factoring in the governance-related risks, such as executive pay and fraud prevention, of your company.
ESG Auditing: Important Areas of Focus
With more countries, trading blocs, sustainability standards boards and individual authorities releasing new policies or laws on ESG, sustainability is a central area of focus for most organisations. For example, Hong Kong Stock Exchange (HKEX) requires all companies to run more sustainably and follow its guidelines for ESG audits and disclosures.
The EU has also passed multiple ESG-related laws, such as Taxonomy Legislation, which companies must follow to be considered sustainable.
So, what areas should you focus on when doing ESG audits?
Climate Change
Climate change is one of the major concerns for most of your company’s stakeholders, from consumers to investors. The recent scientific revelation that the world is at the edge because of the rapid rise in surface temperatures has intensified the call for more efforts to use every available method to cut down global warming and risk of climate change. So, how effectively is your company’s focus in addressing climate change and promoting sustainability?
Closely check the company’s carbon footprint and determine if it is declining or not. Remember that the audit should scrutinise all types of greenhouse gases, including Scope 1 emissions, Scope 2 emissions, and Scope 3 emissions for your company. If your company has a plan for cutting down its carbon footprint, is it working?
Diversity and Equity
The social aspect of a company is crucial in making the organisation's focus on sustainability complete. Stakeholders expect companies to be as inclusive as possible in their management and operations. They anticipate companies to be more accountable in recruiting and retaining the best staff from different backgrounds.
Another aspect when it comes to diversity is transparency in pay structures to address inequalities in employment history. ESG audits should tell stakeholders that your business is working towards enhancing equity both internally and externally.
If the plan adopted by your company is falling short, ESG auditing should also highlight the challenges.
Supply Chain-Related Issues
The supply chain challenges not only slow or stop the manufacturing of products by companies but also impact those working in such facilities. When COVID-19 struck in 2020, it exposed how vulnerable businesses are when major supply chain lines are disturbed. The recent Russia-Ukraine conflict has further demonstrated emerging supply chain issues that impact almost every aspect of companies' operations.
ESG auditing can help to identify key areas of vulnerabilities and predict the relationships between possible catastrophes and related challenges in the future. This is why more capital markets are demanding that listed companies craft plans for addressing future challenges.
Why You Should Have the Right ESG Plan for Your Company
As you can see, there are many areas that your company can focus on during ESG auditing. As a company’s manager or leader, you need to have a clear plan for ESG reporting. If you have a good plan, it makes it easy to pinpoint the areas that stakeholders want addressed. You will also be able to pick material topics to help improve sustainability both internally and globally.
If you have a clear ESG reporting plan, ESG auditing will also be pretty easy and straightforward. We must also indicate that your plan should strictly follow ESG principles, including materiality, neutrality, and accuracy. These will make it easy to avoid your work getting labelled greenwashed.
A good ESG plan for your company should also be guided by an appropriate sustainability framework. The framework will be an important item during ESG auditing because it will demonstrate how specific results were achieved. It also helps you to stay within the prescribed course for sustainability and make comparison with other companies in your industry easy.
When we talk about ESG auditing and sustainability, it is important to appreciate that you need to have the right software. With the right ESG management software, you are able to gather accurate data and execute your plans for sustainability effectively. The app makes it possible to automate data collection, simplify its analysis and prepare high-quality reports for your stakeholders.
ESG auditing is a crucial process that every company should carry out regularly to meet the demands of the emerging market. It allows you to not only understand the company's current status but also enrich its current plans for sustainability. If you find it challenging to do an ESG audit, consider working with a qualified ESG consultant. At Diginex.com, we have the best experts for ESG auditing insights and reliable ESG management software for your company.
Contact us now for all your ESG auditing and other needs.
