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On the Frontlines: Stakeholders Have the Last Word on ESG

Blogs Jeffrey Ridley Feb 21, 2022

The importance of stakeholder engagement in ESG reporting.

Last November, I was invited by the School of Finance at Higher School of Economics University in the Russian Federation to give a virtual lecture for its sustainable finance learning program. I spoke on the meaning of stakeholder value to 40 strategic corporate finance students who were living in countries on three continents. Not surprisingly, each of the countries represented have IIA member affiliates that represent professional internal auditing.

I did not find out if any internal auditors were in my class. Nevertheless, what I researched and discussed in my lecture has many links to professional internal auditing today. Stakeholder value has been around globally since business began. In its simplest form, stakeholder value is about engagement with others inside and outside the organization, promoting purpose and results, and managing supply chains.

Today, it is no longer in its simplest form — relationships are global. Richard Chambers, our immediate past president and CEO, recognizes this in his book "The Speed of Risk," and my title is partly borrowed from one of its chapters. In his book, Richard describes how internal audit needs to engage with primary, secondary, and tertiary stakeholders in assessing risks and reporting. My lecture emphasized that this same type of stakeholder engagement is now essential for all organizations when it comes to reporting on the environmental, social and governance (ESG) value and quality they create. It is also now essential for all professional internal auditors to evaluate this quality and value when reporting the results of their auditing and consulting.

But back to my lecture. I focused on stakeholder value as a measure of stakeholder engagement. This concept has its own standard, the "AA1000 Stakeholder Engagement Standard," published in 2015 by AccountAbility. This standard should now be part of all ESG practice, assurance, and reporting and in every professional internal auditor's briefcase. Developed internationally, it "…obliges an organisation to involve stakeholders in identifying, understanding and responding to sustainability issues and concerns, and to report, explain and answer to stakeholders for decisions, actions and performance." Throughout the standard, the terms "value" and "quality" are frequently attributed to optimal stakeholder engagement and how it is practiced and reported. Best practice is seen in a commitment to the standard's principles and the principles of good governance — accountability, integrity and openness. Also mentioned is the need to know who your stakeholders are, including their profiles, influence, and expectations before engaging — good advice appropriate for professional internal auditors as well as organizations.

During my lecture, I mentioned stakeholder engagement walking hand in hand with international organizations. The United Nations' "Transforming Our World: The 2030 Agenda for Sustainable Development" is not only for business analytics in companies in the private sector but for organizations in all sectors. The International Organization of Supreme Audit Institutions (INTOSAI), representing public sector audit with 196 global members, advises in its ISSAI 100 standard that materiality considerations may include "… stakeholder concerns, public interest, regulatory requirements and consequences for society."

The IIA is now an associate partner with INTOSAI and is providing internal audit input on this standard with its 2021 white paper, "Internal Audit's Role in ESG Reporting."  Further, the recently formed Value Reporting Foundation created by The International Integrated Reporting Council and the Sustainability Accounting Standards Board is now involved with the International Financial Reporting Standards and will integrate with the new International Sustainability Standards Board (ISSB). ISSB will address the needs of international investors for "… high quality, transparent, reliable and comparable reporting on climate and other environmental, social and governance (ESG) matters."

As professional internal auditors, we must be ready to be involved in these developments and the practices they will promote.

Jeffrey Ridley

Visiting Professor, Birmingham City University, University of Lincoln, and London South Bank University

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