In recent years, the significance of Environmental, Social, and Governance (ESG) compliance has surged, prompting organizations to integrate these elements into their core strategies. With evolving guidance, increasing stakeholder demands, and stringent regulatory mandates, the era of taking a “soft approach” to sustainability reporting is over. Internal audit services have become indispensable in navigating these changes, ensuring ESG compliance, and delivering accurate reporting that helps organizations meet their obligations while enhancing their reputation and operational efficiency.

This article explores how internal audit services support ESG compliance and reporting, focusing on their role in risk management, process optimization, and enhancing transparency.

ESG Compliance and Reporting

ESG Compliance and Reporting refers to the process by which organizations adhere to Environmental, Social, and Governance (ESG) standards and disclose relevant information to stakeholders. It demonstrates a company’s commitment to sustainability, ethical practices, and corporate governance.

The ESG Framework and Its Growing Importance

Governments and regulatory bodies across the globe are implementing stricter ESG requirements. India has actively promoted ESG initiatives through robust frameworks, including the SEBI-mandated Business Responsibility and Sustainability Reporting (BRSR). This framework emphasizes standardized ESG disclosures and applies to the top 1,000 listed companies since FY 2022-23. The Companies Act, 2013, also reinforces ESG compliance through provisions like Section 134 for sustainability reporting and Section 135 mandating CSR spending for eligible companies.

Other key frameworks include the National Guidelines on Responsible Business Conduct (NGRBC), aligned with global standards like the UN SDGs, and environmental laws such as the Environment Protection Act, 1986, and Energy Conservation Act, 2001. SEBI’s Listing Obligations and Disclosure Requirements (LODR) and Extended Producer Responsibility (EPR) under the Plastic Waste Management Rules, 2016, further ensure accountability in governance, resource management, and waste lifecycle responsibilities.

Organizations that fail to adhere to ESG norms may face boycotts, lower employee retention, and reduced access to capital. Thus, ESG compliance is not just a regulatory necessity but a strategic imperative.

Need for Internal Audit in ESG Reporting and Compliance

The growing importance of environmental, social, and governance (ESG) reporting presents a valuable opportunity for internal audit to play a more strategic, advisory role within organizations. As ESG guidance, stakeholder expectations, and regulatory mandates continue to evolve, senior executives and boards are increasingly turning to internal audit for its unique perspective, independence, and objectivity. This role becomes even more critical as organizations face mounting pressure from investors, customers, suppliers, and partners to provide accurate, data-backed ESG reports.

Internal audit is essential in ensuring the credibility of ESG disclosures by leveraging its deep understanding of internal controls and organizational processes. With the growing demand for reasonable assurance in sustainability reporting, internal audit’s involvement is crucial in delivering trustworthy, reliable ESG disclosures and ensuring compliance with evolving regulations.

The Critical Role of Internal Audit Services in ESG Compliance

Internal audit services are integral to the ESG compliance ecosystem. These services help organizations identify gaps in their existing frameworks, implement industry best practices, and ensure transparency in ESG reporting. ESG compliance often requires navigating a complex web of environmental laws, social expectations, and governance codes. Internal audit firms in India, such as BCL India, provide tailored solutions that align with an organization’s strategic objectives while meeting regulatory requirements.

Risk Identification and Assessment

Internal auditors are uniquely equipped to identify ESG-related risks, such as environmental liabilities, supply chain vulnerabilities, governance deficiencies, or risks of material misstatement in financial statements arising from ESG-related matters. By integrating ESG risks into overall risk assessments, they ensure that these issues receive the same level of attention as traditional business risks.

Through comprehensive risk evaluations, internal auditors help organizations prioritize ESG concerns, assess the potential financial impact, and allocate resources effectively. This proactive approach enables companies to address potential risks early, mitigating them before they escalate into more significant challenges.

Ensuring Regulatory Compliance

With the constant evolution of ESG regulations and standards, internal audit plays a crucial role in ensuring organizations stay compliant with these changing requirements. Internal auditors help organizations adhere to key frameworks, while conducting regular audits to verify that the company’s operations align with ESG standards. This proactive approach minimizes the risk of regulatory violations and ensures ongoing compliance with both current and emerging ESG regulations.

In addition, internal audit helps organizations assess their readiness to comply with emerging regulatory requirements, providing guidance and recommendations for adjustments when necessary.

Data Accuracy and Integrity

The credibility of ESG reporting relies on the accuracy and reliability of data. Internal auditors play a crucial role in evaluating the systems and processes used to collect and report ESG information, ensuring it is accurate, consistent, and complete. This includes assessing data collection methodologies, verifying sources, and validating calculations and conversions.

Their role extends to scrutinized areas such as diversity, equity, and inclusion (DEI) programs, gender pay equity, and other ESG-related matters that may have a financial impact. By ensuring the accuracy of data used to measure progress toward sustainability goals, internal auditors help organizations avoid errors that could harm their reputation, stakeholder trust, or financial statements.

Internal Audit Benefits in Enhancing ESG Compliance

Internal auditors are instrumental in improving the quality of ESG reports, which are essential for attracting investors and maintaining stakeholder confidence. Their contributions to reporting include:

Verifying ESG Metrics

Internal auditors validate key ESG metrics such as greenhouse gas emissions, water usage, employee diversity, and community engagement. This verification process ensures that the reported figures accurately reflect the company’s ESG performance and that no critical information is overlooked.

Aligning with Global Standards and Improving Reporting Practices

Internal audit firms in India assist businesses in aligning their ESG practices with global standards such as ISO 14001 for environmental management and ISO 26000 for social responsibility. They also help organizations align their ESG reports with recognized frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). This ensures compliance with global standards while enhancing the credibility and transparency of the company’s ESG disclosures.

Providing Assurance on ESG Controls and Governance

The Institute of Internal Auditors (IIA) emphasizes that internal audit functions offer independent reviews of ESG risk assessments, responses, and controls, providing assurance on their effectiveness. They also support the credibility of ESG disclosures through third-party assurance, validating the accuracy of reported data. Internal auditors leverage their expertise in governance and ESG regulations to help businesses build robust ESG frameworks that align with best practices and regulatory standards.

Strengthening Stakeholder Communication

Transparent and accurate ESG reporting is key to building trust with stakeholders. Internal auditors ensure that organizations communicate their ESG efforts clearly and effectively, demonstrating a genuine commitment to sustainability. This fosters long-term relationships with investors, employees, and other stakeholders.

Internal Audit Process for ESG Compliance

A brief overview of the internal audit process for ESG compliance including key steps during the review, as well as the handling and submission of report findings.

• Planning: Define the scope of the audit, identify key ESG risks, and establish objectives based on applicable regulations and frameworks.
• Risk Assessment: Assess ESG-related risks and their integration into the organization’s overall risk management strategy.
• Data Verification: Review the accuracy, reliability, and completeness of ESG data, including reconciliation of reported data with source documents.
• Internal Controls Evaluation: Assess the design and effectiveness of controls governing ESG activities and reporting.
• Bench-marking: Compare the organization’s ESG practices with industry peers and recognized standards.
• Review of Findings: Analyse discrepancies, gaps, or weaknesses in ESG compliance and reporting processes.
• Recommendations: Provide actionable insights and strategies to improve ESG compliance and reporting.
• Report Submission: Deliver a detailed report summarizing findings, risks, and recommendations to management and stakeholders.
• Follow-Up: Monitor the implementation of recommendations and ensure continuous improvement.

Why Partner with Internal Audit Firms in India for ESG Compliance

Local Expertise

• Deep understanding of Indian regulations, including the Companies Act, 2013, and RBI guidelines.
• Tailored solutions for businesses operating in India.

Industry Knowledge

• In-depth knowledge of sector-specific ESG risks.
• Ability to provide customized solutions for different industries (e.g., real estate vs. IT).

Comprehensive Services

• End-to-end ESG compliance services, including risk assessments, audits, and reporting.
• Holistic approach to managing ESG compliance effectively.

Internal audit services are indispensable for organizations striving to achieve ESG compliance and excellence in reporting. From assessing risks to ensuring regulatory adherence and enhancing transparency, these services provide comprehensive support for ESG initiatives.

Internal audit firms such as BCL India, bring the expertise and tools needed to navigate the complexities of ESG compliance. By leveraging internal audit benefits, businesses can not only meet their ESG obligations but also build a strong foundation for sustainable growth. In a world where ESG is no longer optional, internal audits are the key to staying competitive and credible.