3/4 of Companies not Ready for ESG Audits
Regulatory bodies in various regions, including the United States, European Union, United Kingdom, Japan, and others, are either intensifying their efforts or contemplating the implementation of mandatory ESG (Environmental, Social, and Governance) reporting rules.
The primary goal behind this drive is to offer investors uniform and comparable disclosures from companies.
According to Wolters Kluwer, Chief Financial Officers (CFOs) at multinational corporations currently have to navigate a complex web of over 600 different ESG regulations worldwide, frequently dealing with conflicting requirements.
As regulators in the United States and several other nations strive to mitigate confusion by aligning regulations more closely, they are also pushing for more comprehensive, extensive, and costly ESG disclosures.
Karen Abramson, CEO for Corporate Performance and ESG at Wolters Kluwer, noted, "For the first time in history, businesses are being compelled to provide reports that encompass both financial and non-financial data. This shift is ushering in a profound transformation in the intricacies of corporate reporting."
In March 2022, the Securities and Exchange Commission (SEC) proposed a rule that would mandate publicly traded companies to provide detailed information about their carbon emissions and those produced by their energy suppliers. Additionally, companies would be required to include in their Form 10-K reports an assessment of climate change risks and their strategies for mitigating these risks.
The release of a final rule by the SEC has been repeatedly postponed as the agency reviews an extensive record of 16,000 public comment letters. Opposition from Republican lawmakers and industry organisations, including the U.S. Chamber of Commerce, has arisen due to a requirement for some companies to assess and report on carbon emissions throughout their supply chains, involving suppliers and customers.
SEC Chair Gary Gensler acknowledged the concerns and mentioned ongoing deliberations on the final rule during testimony to a Senate committee on September 12.
Under the proposed rule, companies would also need to subject their carbon emissions and climate risk data and findings to independent audits.
KPMG reported that only 25% of companies feel adequately prepared with the necessary ESG policies, skills, and systems for an external audit. Companies that are better prepared for ESG audits tend to have actively engaged boards focusing on ESG matters, conduct regular ESG training, and establish controls for ESG data.
According to about half of the survey respondents in KPMG's research, ESG audits give companies the chance to improve their reputation, increase their market share, promote innovation, and lower operational costs, in addition to ensuring compliance with regulations.
Larger corporations generally exhibit greater preparedness for ESG audits compared to smaller ones, according to KPMG.
KPMG's findings also revealed that companies headquartered in France, Japan, and the United States are more prepared for ESG audits than their counterparts in other regions, with Brazil and China reporting the lowest levels of readiness.
Among companies unprepared for ESG audits, 58% reported difficulties in balancing the objectives of ESG audits with the profit expectations of shareholders, according to KPMG's research.
To view and compare company ESG Ratings and Sustainability Reports, visit our Company ESG Profiles page.
Source: CFO Dive
