July 1, 2020
Published: The CAQ
As investors increasingly make decisions based on company-reported environmental, social, and governance (ESG) information, audit firms can enhance the reliability of this reporting, according to the Center for Audit Quality (CAQ). In a new report, The Role of Auditors in Company-Prepared ESG Information: Present and Future, the CAQ outlines how investors are using ESG information and the evolving, more prominent role of auditors in advancing the reliability, comparability, and relevance of this reporting.
Like the audits of financial statements and internal control over financial reporting, third-party assurance from a public company audit firm enhances the reliability of ESG information presented by companies to investors and other stakeholders. A McKinsey & Company study found that nearly 7-in-10 investors (67%) said that sustainability audits should be as rigorous as financial audits.
“Auditors bring the independence, expertise, and experience necessary to enhance the reliability of ESG reporting as this information plays a heightened role in investment strategies,” said Julie Bell Lindsay, CAQ Executive Director. “Auditors have long played a role in the reliability of traditional financial information, and they can do the same with ESG information.”
COVID-19 has further accelerated the focus on ESG information. Investors are increasingly seeking information on public company ESG practices in response to COVID-19, especially employee health and work environments. Moreover, most ESG funds across all asset classes performed better than non-ESG funds during the first four months of the year, according to data from Morningstar Direct.
The CAQ report examines the type of information companies often capture, the myriad of reporting standards and frameworks for presenting ESG information, and highlights current examples of audit firms assuring company-prepared ESG information.
“There are a number of reporting frameworks in place to help public companies present ESG information, but they are not broadly adopted nor do they use consistent metrics and disclosures,” continued Lindsay. “Ultimately, a globally accepted system, built from existing standards and frameworks, that can be adapted to the market needs in different jurisdictions would help support companies in presenting comparable and relevant ESG information.”
As market stakeholders consider the future of company-reported ESG information, the CAQ outlines key questions board members should consider when discussing ESG reporting with management and investors, including what the company has done to date and where it hopes to go. Similarly, the CAQ urges investors to consider how companies’ ESG information was developed, whether it is standardized, and whether it is reliable.
The full report can be found here.