How External ESG Audits Deliver Meaningful Accountability and Transparency

Two Rivers Partners, Barbara Spitzer

Steve Maraboli, author of Life, the Truth, and Being Free, reminds his audiences that “The right thing to do and the hard thing to do are usually the same.” Indeed.

Mention “audit,” and you can almost hear the air leave the room. What gives third-party examiners giddy butterflies in the belly provides many of our folks in accounting departments with heartburn and indigestion. Why do we audit? For transparency, obviously, but also to make sure the work product of our organizations remains closely aligned with the organizational vision and mission. We audit to confirm – or challenge – whom we say we are to a discerning cadre of stakeholders. Borrowing from Maraboli, we audit because it is the right thing to do.

An ESG audit, like its traditional counterparts, provides stakeholders with transparency and a sense of fidelity to organizational vision and mission, albeit through environmental, social, and governance lenses. An effective ESG audit identifies and evaluates “potential risks as well as current shortcomings in terms of environment, social or governance factors that can affect a company’s opportunity cost, long-term growth possibilities, and eventually, its viability.” Surprisingly, many organizations have a lackluster ESG auditing process in place.

The Data

Two thousand twenty statistics compiled by NAVEX Global indicated that “88% of publicly traded companies, 79% of venture and private equity-backed companies, and 67% of privately-owned companies had ESG initiatives in place.” Citing Q4 2020 data, FactSet noted that “more than one in four S&P 500 companies cited “ESG” on earnings calls for Q4.” The data shows that more and more companies recognize that robust ESG initiatives are suitable for the planet, communities, and businesses. The rub? Reporting.

As of July 2021, 54% of S&P 500 companies published ESG data for stakeholder scrutiny. That’s excellent news. The same data pool showed that 52% of S&P 500 companies “disclosed some form of third-party assurance or verification over all or part of their ESG metrics.” The outputs were less promising when the data was culled to determine which companies used Public Company Accounting Oversight Board (PCAOB) firms for their ESG audits. In 2020, 31 S&P 500 companies – a smidge over 6% – used Public Company Accounting firms to evaluate ESG. While internal audits are good, are they enough? We still have a long way to go to create meaningful accountability and transparency.

Making the Case

As my colleagues Eric Noren and Annie Peabody argue in a 2022 article, the accountability for ESG reporting lies with the Chief Financial Officer. “As companies are increasingly judged by all stakeholders on their ESG and sustainability performance, the CFO must step up to make an effort to a systematic program across the enterprise.” As such, finance executives are best equipped to take it a step further and use ESG audits to validate the organization’s activities. Given the newness of ESG initiatives, stakeholders and the broader public need to see that the projects organizations continue to launch to address the vexing challenges of our time are working.

A sound ESG audit is also an investment in effective communication. Even when an audit reveals that there’s mitigative work to be done in ESG, the audit process communicates to stakeholders, “we intend on being very open about where we are in our ESG work.” Auditing is also an act of integrity. When done right – revisit my comments about PCAOB firms – an audit lets everyone know that the right thing will be done even when it’s hard.

So, there you have it, colleagues, a case for yoking our ESG to a process that keeps the blinds open and lights on. Be clear about what you hope to accomplish on the ESG front, and then pull in the outside experts to see how it’s going. It may be hard to invite the outside in for a close look at your ESG progress, but it’s the right thing to do.

Some things to consider:

  1. Are we capable of objectively measuring ESG effectiveness internally?
  2. How might third-party ESG assurance elevate reporting reliability and stakeholder confidence?
  3. Are we ready? What must we do to prepare for an external ESG Audit?
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