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    Efforts to mitigate the accelerating effects of climate change and address perceived historical social inequities are two powerful issues driving change globally. These movements have enhanced awareness of how all organizations impact, influence, and interact with society and the environment.

    They also have spurred organizations to better recognize and manage ESG risks (i.e., risks associated with how organizations operate in respect to their impact on the world around them). This broad risk category includes areas that are dynamic and often driven by factors that can be difficult to measure objectively, such as inclusion, ethical behavior, corporate culture, and embracing sustainability across the organization.

   Still, there is growing urgency for organizations to understand and manage ESG risks, particularly as investors and regulators focus on organizations producing high-quality reporting on sustainability efforts. What’s more, that pressure is being reflected increasingly in executive performance as more organizations tie incentive compensation metrics to ESG goals.

    Additional risk areas associated with ESG are varied and can include reliance on third-party data, potential reputational damage from faulty reporting, and the real possibility that an organization’s explicit commitments to meet specific sustainability goals could grow into a material weakness.

    As ESG reporting becomes increasingly common, it should be treated with the same care as financial reporting. Organizations need to recognize that ESG reporting must be built on a strategically crafted system of internal controls and accurately reflect how an organization’s ESG efforts relate to each other, the organization’s finances, and value creation. […] Seeking out objective assurance on all ESG-related risk management processes from a qualified, independent, and properly resourced internal audit function should be part of any ESG strategy.

Adapted from: https://www.theiia.org/globalassets/documents/ communications/2021/june/white-paper-internal-audits-role-in-esg-reporting.pdf