As ESG demands higher transparency, how can companies respond to current problems and challenges?

In recent years, enterprises have faced increasing pressure to demonstrate not only their progress in environmental, social, and governance (ESG) goals, but also their effective management of climate risks throughout the organization. Today, the editor will take you to explore the trends, problems, and challenges that enterprises face as regulatory agencies and stakeholders continue to demand higher ESG transparency and assurance.

What does the constantly changing ESG trend mean

Nowadays, investors are not the only group that will demand higher standards from companies. The recent regulations in the United States and Europe reflect an increasing focus on climate risk management. For example, the climate risk disclosure rules recently passed by the US Securities and Exchange Commission require large listed US companies to outline any significant Scope 1 and Scope 2 emissions and obtain external assurance for these disclosures.

To withstand scrutiny from regulatory agencies and external auditors, enterprises must establish a clear governance structure for their ESG audits. But to achieve this, they must be able to trust the data they collect. Auditors need to understand ESG indicators and utilize GRI's assurance standards, so that when testing climate related data, they can effectively provide strategic recommendations for the enterprise.

There are significant differences in climate risk management practices among enterprises, and even many of the most complex organizations do not have an Enterprise Resource Planning (ERP) system for reporting ESG data. In addition, how auditors access sustainable development data (if they currently have access), application methods, and how they process this data are different from auditing traditional financial data.

The ASCP team can help businesses establish processes to provide assurance for ESG initiatives from scratch.

The role of an auditor is crucial in the ESG disclosure of a company

As increasing disclosure becomes the norm, the way businesses respond to climate riskswill change, and they will invest more in sustainable development than ever before. For auditors, only a portion is to obtain and trust information and ensure that the company achieves their goals. The second part, namely strategy, is equally important and has higher costs. Offsetting is evolving into an insurance tool, and any misleading strategy or execution will have significant financial impact.

Climate related impacts have already appeared in financial reports on a voluntary basis. Now, according to the regulations of the United States Securities and Exchange Commission (SEC), we will see more climate risks disclosed, and auditors will assess how these impacts are generated and how they are generated. More importantly, whether the company has made the correct judgment around climate risk and importance.

By doing so, auditors can help drive trust and establish the board's confidence in the data, which helps the board make better choices and create value.

Many companies may ask questions: How do we ensure that we have the information we need? I don't want to be accused of greenwashing. What questions do I need to ask? How do I know if I can sign these data?

In fact, ensuring the accuracy and relevance of data is key to avoiding accusations of greenwashing. Moreover, auditors will increasingly be required to provide assurance for the organization's assessment of risks and importance. The role of auditors is to enhance confidence in data and enhance the confidence of the board of directors, making them believe that they are responsible managers and making the right choices.

The climate risk strategy of enterprises should be consistent with the established framework

It is important to align the audit strategy with specific ESG frameworks, such as the Climate Related Financial Disclosures Working Group (TCFD).

The International Committee on Sustainable Development Standards (ISSB) takes TCFD further by providing more specific standards for what needs to be disclosed. ISSB serves as the foundation to help create global standard baselines. This is important for all businesses because even those without global business still maintain contact with global suppliers and other major stakeholders.

How to provide assurance for climate risk disclosure

1. Starting from importance assessment. Importance is the foundation for understanding how to prioritize methods and link them to business strategy. Use dual importance assessment (consistent with CSRD guidelines) or single importance assessment (such as SEC rules and ISSB overview) and follow indicators consistent with this method.

The statement that ESG is non-financial information is incorrect because it is financial in nature and will ultimately be reflected in finance.

2. Establish a governance structure. Once priorities are determined through importance assessment, auditors can establish the correct data governance structure for effective auditing.

Firstly, determine what data you need to collect, identify rights and responsibilities, and then prepare the report.

It should be noted that do not ignore the data source. You can take a look at the company's communication and marketing materials to see if there are any necessary basic documents.

3. Engage the board of directors. When the auditor begins the reporting process, it is recommended to involve the board of directors. Auditors need appropriate tools to simplify climate data collection, classify climate risks, and systematize reports in order to provide insights to executives and the board, as this information is crucial in their decision-making process.

Similarly, comparing a company's ESG disclosures with those of peers and competitors, and providing this information to directors in the appropriate context, will help the board provide an appropriate level of supervision.

4. Start preparing for the company's goals. Focusing solely on current climate risk plans without looking into the future may leave businesses unprepared for what is about to happen. What is your company's transition plan like? Are companies striving to achieve net zero emissions? Does the board of directors and top management of the company have the appropriate ability to achieve this goal? Enterprises should be more proactive and conscious in managing climate risks, utilizing market indicators and regulations to achieve transformation and gain value, entering new markets.