European Audit Committee Leadership Network, August 2018
While the practice of reporting on the environmental, social, and governance (ESG) aspects of business activities emerged decades ago, ESG reporting—also referred to as sustainability reporting or corporate social responsibility (CSR) reporting—has gathered momentum in recent years. Investors and other stakeholders are increasingly interested in understanding the environmental and social ramifications of companies’ activities, and governments are obliging by issuing more specific reporting requirements. Many companies today publish annual ESG reports or integrated reports that incorporate ESG issues.
Due to the complexity of these issues, however, questions remain about how to implement effective ESG reporting. What kinds of metrics should be reported and discussed? What processes are needed to track these metrics and ensure that they are accurate? How can boards and audit committees most effectively oversee ESG reporting?
On July 10–11, members of the European Audit Committee Leadership Network (EACLN) met near Frankfurt, Germany, to address these and other questions. Two experts joined the audit chairs for this discussion: Melanie Kubin-Hardewig, Vice President, Group Sustainability Management, Deutsche Telekom, and Nicole Richter, EY’s head of Climate Change and Sustainability Services (CCaSS) in Germany. The guests and members discussed three topics:
The demand for ESG reporting (page 2). ESG reporting is increasingly a requirement for large companies. There are new government mandates, such as the European Union’s directive on non-financial reporting, as well as mounting pressure from investors and other stakeholders. Yet companies are still assessing how best to disclose ESG information to the public. Though voluntary standards have been developed, companies and stakeholders have not agreed upon a universally acceptable approach for ESG reporting.
Challenges of ESG reporting (page 4). Reliable ESG reporting requires companies to address several challenges. They must identify the issues that are most material for stakeholders, while also tapping insights from the risk management team and others across the organization. They must establish rigorous data collection processes and controls, preferably with the assistance of the finance function. Finally, they must decide on what kind of assurance is necessary and feasible.
The role of the board and the audit committee (page 8). In many cases, the full board is ultimately responsible for approving ESG reports, given the link to strategy and the need for diverse perspectives. Drawing on its expertise in financial reporting, however, the audit committee also plays an important role in overseeing the ESG reporting process and obtaining assurance for it. Specialized ESG or sustainability committees may take the lead at some companies.