The rapid evolution of ESG markets and regulatory frameworks evolve, “internal audit functions have a key role to play” in supporting organisational risk management.

Internal audit functions esg risk management

That’s the view taken by EY’s principal for climate change and sustainability services, Shannon Sullivan in reaction to a new study into the importance of internal auditing and collaboration within ESG reporting.

Put together in collaboration with the Internal Audit Foundation, The IAA and EY, “Prioritizing Environmental, Social, and Governance (ESG) – Exploring Internal Audit’s Role as a Critical Collaborator” analyses findings from an investigation into how organisations are using their internal audit functionality to support ESG initiatives and build confidence in increasingly relied upon disclosures.

The investigation found that two-thirds of organisations have an ESG programme in place and another almost a quarter (24%) have plans to implement one.

This shows companies are listening to investors and other stakeholders, who’ve been sounding the ESG alarm thanks to climate change, diversity, equity, and inclusion (DEI) issues, and other emerging challenges.

Increasingly, boards, employees, and investors want to know how companies are driving long-term value through ESG management in the organisation’s strategy, performance, and value creation.

Brad J. Monterio, the IIA’s executive vice president of member competency and learning, said:

“Internal audit functions are a critical pillar supporting an organization’s processes and data for ESG performance and reporting.”

“Internal auditors provide the independent internal assurance needed for trustworthy ESG disclosures, and help ensure the effectiveness of continuous monitoring processes and internal controls across the organization. Their role complements that of the external auditors and builds confidence among users of ESG information for investment or other decision making,” Mr Monterio, who is also a sustainability expert and member of the International Integrated Reporting Council, added.

Impending regulation and market shifts are also driving greater focus on ESG. The US Securities and Exchange Commission (SEC) has indicated it is on the path toward regulating climate and ESG disclosures. The SEC has also created a Climate and ESG Task Force to identify ESG-related misconduct, and has shared example letters regarding climate change disclosures.

At the 26th UN Climate Change Conference (COP26) in Glasgow last year, the International Financial Reporting Standards Foundation (IFRS) announced the new International Sustainability Standards Board (ISSB), which will set recommendations for ESG reporting.

The internal audit function’s contribution to ESG efforts is influenced by, and dependent on, the organisation’s ambition, strategy, programmes, and reporting in ESG:

  • 51% of organisations that report on ESG obtain some level of assurance from their internal audit functions
  • 62% of chief audit executives (CAEs) said boards of directors are driving the organization’s focus and integration of ESG strategy and reporting.
  • 65% of CAEs indicated their internal audit functions have some involvement.

The survey also identified barriers to internal audit involvement in ESG efforts, including a lack of available data to support ESG engagements and the need to make ESG part of an organisation’s culture.

For their part, CAEs outlined two steps that would help address these issues:

  • More than half of CAEs said their organizations need greater focus on ESG-related risks on the enterprise-wide risk assessment and that boards and C-suites should mandate that their internal audit function participate in ESG efforts.
  • 44% stated that regulations and regulatory compliance requirements are needed.

EY’s Shannon Sullivan said:

“As the ESG market and regulatory landscape continues to rapidly accelerate, internal audit functions have a key role to play in supporting its organisation’s risk management and performance with controls assurance.”

“This report begins to investigate the current state of internal audit’s role and how it may advance in years to come as ESG becomes an integrated part of business to drive long-term value,” Sullivan added