In today’s market, where a company’s brand value is paramount, no business can afford to face allegations of greenwashing. Companies are increasingly coming under the scrutiny of stakeholders, investors, customers, and regulators regarding their ESG practices. Businesses are not only navigating the complex world of sustainability but also seeking to reassure all their stakeholders about their commitment to it.

In other words, just like in financial discourse, we do not accept a company's claims at face value and require auditors to provide assurance. Similarly, regulators and stakeholders want comparable assurances from companies' sustainability disclosures.

The Role of Audit in ESG: Identifying and Verifying

1. Understanding the ESG Audit Process

Audits play an important role in today's ESG landscape by providing a systematic strategy for finding and validating the correctness and validity of ESG-related data given by businesses. An ESG audit differs from a financial audit in that it examines the company's policies, procedures, and performance in relation to attaining its sustainability goals, rather than just quantitative data.

This process typically includes:

• Data Collection: Gathering data on environmental impact, social responsibility, and governance practices from various data clusters that an organization might have.
• Data Verification: Evaluating the accuracy and reliability of data reported to the CSO and stakeholders by data owners from different departments and locations of an organization.

2. Need for Independent Verification

Stakeholders are increasingly demanding more transparent and rigorous audits of corporations' ESG claims. Whether conducted by a consulting firm or a non-profit, ESG audits should be fully independent of the company whose disclosures are being validated, ensuring the accuracy and credibility of the information being conveyed.

Until now, most companies have audited their sustainability disclosures voluntarily. However, as regulators become more stringent about a company’s sustainability data, they are introducing mandatory assurance requirements for ESG disclosures.

For instance, the European Union’s Corporate Sustainability Reporting Directive (CSRD) and SEBI’s Business Responsibility and Sustainability Reporting (BRSR) standards are mandating assurance in the coming years. This shift demonstrates that the role of an ESG auditor is no longer a formality for companies but is becoming an integral part of their overall ESG journey.

Assurance: Meaning and Importance

Defining Assurance within the ESG Context

Assurance is the independent audit and examination of a company's declarations and claims about ESG and sustainability. This is often done to boost the confidence of stakeholders such as investors, customers, and regulators.

A company can opt for one of two types of assurance, depending on its compliance requirements and voluntary objectives.

Limited Assurance

• It is the most basic level of assurance for ESG reporting, in which the independent auditor gathers adequate evidence by analyzing analytical techniques, questioning management, and evaluating internal controls, but without substantial testing or site visits. 
• It offers a lower level of confidence than reasonable assurance but is less expensive. Limited assurance is ideal for instances involving a low risk of major misstatement, such as small enterprises with few emissions sources.

Reasonable Assurance

• It is the greatest level of ESG assurance currently accessible. It entails more detailed testing, such as site visits to check emissions sources and data, control tests, data verification, and an assessment of underlying assumptions and methodologies.
• Reasonable assurance certainty increases confidence that the ESG report is devoid of material misrepresentation. This level of assurance is more expensive and suitable for scenarios involving a larger risk of substantial misstatement, such as big corporations with numerous sources of emissions.

What Are the Benefits of Getting Assurance?

Obtaining assurance on ESG reporting offers lots of benefits that extend beyond basic compliance. Here are some of the key advantages:

1. Compliance with Regulations

Assurance services help businesses comply with legal and regulatory standards, which is particularly important for industries with stringent reporting requirements, like the pharmaceutical sector. Noncompliance can result in serious sanctions, reputational damage, and a loss of stakeholder trust.

2. Enhanced Credibility

Assurance provides independent verification that ESG-related data and other disclosures are correct and dependable. This increases the legitimacy of the organization, making it more appealing to investors, banks, and customers.

3. Improved Decision-Making.

Assurance gives credible information to stakeholders and board members, allowing them to make educated decisions. Investors, lenders, and management can make strategic decisions based on precise data, which leads to improved financial performance.

4. Building Trust

Assurance gives stakeholders trust that the disclosed ESG data truly represents the company's performance and commitments. This trust is vital for building long-term partnerships with investors and customers. It also plays an important role in improving the organization's reputation and retaining its competitive edge.

5. Attracting Investment.

Investors are more likely to work with businesses that have undergone assurance processes. Independent verification of ESG-related data, sustainability targets, and regulatory compliance gives investors confidence that the organization is aligned with their green investment objectives.

6. Greenwashing Risk Mitigation

Companies can reduce their risk of being accused of greenwashing by ensuring that ESG disclosures are accurate and supported. This not only preserves their brand but also creates a true commitment to sustainability, aligning their practices with stakeholder expectations and lowering the possibility of consumer and regulatory backlash.

Conclusion

Auditing and the concept of assurance definitely lie at the center of addressing the trust gap in ESG reporting. Auditors will also have a very significant role in the independent verification and improvement of ESG disclosures as the demands for accountability and transparency from stakeholders continue to increase. Through gap identification, limited and reasonable assurance, and building trust with stakeholders, we will drive not just compliance but also businesses toward sustainability and responsibility.

In the future, strong auditing and assurance frameworks will be even more important for ESG disclosure. Companies that integrate auditing and assurance as integral parts of their ESG strategy will have an edge in those emerging fields where trust, transparency, and accountability are top-most priorities.

At Oren, we believe that now is the right time to put ESG assurance on track and help our clients do so hassle-free! No matter where you are on your ESG journey, Oren has a solution for you. Contact us today to speak with our panel of experts, tailored to your industry.