Audit committees play an ESG role (even if separate ESG committee formed)

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– Audit committees will play a role in ESG reporting even if a company forms a separate ESG committee.
– That’s because the audit committee oversees internal and disclosure controls.

Even if ESG matters are primarily within the bailiwick of the nominating & governance committee – or better yet, a standalone board committee dedicated to that topic – the audit committee will always have a role to play. That’s because the audit committee is primarily responsible for oversight of internal and disclosure controls. This committee typically also drives the bus for oversight of risk management.

This excerpt from this Deloitte memo further explains:

The audit committee plays a significant role in how companies tell their story and communicate ESG disclosures. Committee members should understand how ESG risks are identified, prioritized, and serve to inform disclosure objectives and practices.

They should also understand how materiality is defined when identifying ESG metrics for disclosure, the framework being used to tell the ESG story, the internal controls in place around associated metrics, and how those metrics are included on the company’s website and/or disclosed (i.e., in a separate sustainability report or integrated in an SEC filing).

While 90% of the S&P 500 provide some form of sustainability or ESG disclosure, investors and broader stakeholders are still asking for more high-quality, consistent, and reliable ESG disclosures in accordance with recognized standards. Utilizing recognized Standards, such as the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI), or other recognized sustainability frameworks, such as the Task Force on Climate-Related Financial Disclosures (TCFD), can help provide consistent and meaningful disclosure.

In addition to the oversight of the disclosures, a significant component of an effective governance structure is assurance on ESG/Sustainability information—which is a process whereby an independent practitioner assesses and provides an opinion on the reliability of the ESG information. The market may use ESG data provided by companies as well as third-party providers in investment decisions. Assurance can play an important role in signaling the quality of the information to the market and give decision-makers more confidence in the quality and reliability of ESG information.

However, currently, only 29% of S&P reporting companies obtained external assurance on their sustainability or ESG reports as of 2019. As recently noted by The Center for Audit Quality (CAQ), US public company auditors play a critical role in the flow of reliable information for decision-making and could be consulted by companies considering how to evolve their ESG programs to meet the increasing demands of investors and other stakeholders.