On the Frontlines: Internal Audit’s Role in ESG Assurance 

How will regulation impact the risk around ESG assurance?

I think it’s important to note the growing requirements to publicly disclose ESG elements, including those to maximize positive impacts on the environment and society and minimize negative impacts on them (such as reducing carbon dioxide emissions). As disclosure requirements are strengthened, there will be more risks involved in complying with them. As such, operational improvements to minimize negative impacts should be carefully designed and implemented. Likewise, a value-creation story and related business strategy and model, as well as impact management, should be carried out to maximize an organization’s positive environmental and societal impacts. However, implementing these strategies and going public with them adds risk. Goals may not be achieved, and the company could come under scrutiny. Internal auditors should provide assurance over ESG strategies and disclosures, with a deep understanding and due professional care.

How can internal auditors effectively provide assurance on disclosed sustainability information?

In my presentation, I propose a framework to audit sustainability reports, particularly positive sustainability reports. There are two key tasks for internal auditors: a review of the value-creation story, including the business strategy and model, and a review of impact management, including monitoring and reporting on key performance indicators. The framework for these practices is still at an early stage, and internal auditors can revise it after applying it to a real audit. The framework should evolve naturally over time.

How can internal auditors help organizations avoid the risks of greenwashing and confidently report their ESG initiatives to the public without the need for green hushing?

Greenwashing, impact washing, and sustainability washing are terms we hear a lot these days. All of them have to do with exaggerating the organization’s ESG performance. Meanwhile, green hushing happens when an organization keeps quiet about its sustainability goals — even if well-intentioned — to avoid criticism. Most of these negative scenarios are caused by a failure of impact management. The organization’s performance against KPIs should be carefully monitored and disclosed with a robust impact management strategy and policy. Internal auditors can help management establish such a policy and give insight on how to implement it. Internal auditors know both the business context and the case for sustainability, and they must find the right balance between the two.

Hiroshi Naka will be presenting a session on “Positive Impact Disclosure and Auditing for the Evolution of ESG Investment” at The IIA’s 2023 International Conference on July 11.