Audit Committee Dialogue
11 Oct 2023

Audit Committee Dialogue Summary: External reporting, internal audit, assurance and controls

In 2023, Chapter Zero organised a series of two roundtables for Audit Committee Chairs and members in partnership with Accounting for Sustainability (A4S) to explore forward planning, effective communication, and an understanding of emerging requirements for Audit Committees to drive climate action on boards.  With expert input from A4S, the first session focused on external reporting requirements and internal audit and assurance controls. These are two key topics that continue to evolve and are critical for Audit Committees to keep ahead of, and you can find the key session takeaways below.

Topic 1: External Reporting

Prioritization: Audit committees must ensure that climate action is a priority on the agenda. This is achieved by educating management on what success looks like in the long term, the steps that need to be taken to achieve this, and how progress will be measured. To provide robust and effective reporting over climate and using it strategically rather than as a compliance exercise, it is necessary that the company culture fully embraces the net zero journey. The audit committee, board, and company should view action towards net zero as an opportunity; it is detrimental to view it simply as an external reporting requirement and a way to appease investors. There is an opportunity now for organizations to link this firmly with their purpose.

Incentivisation: Short-term remuneration targets could be used to incentivise management and hold them accountable, in addition to long-term ones. Pinning them to interim milestones will help improve the accountability and transparency of management teams in admitting that achieving certain targets is not possible unless certain trade-offs are made. Depending on the organization, bonuses can enable goals to be more transparent and comparable.

Communication of risk: Engagement with the board is necessary to ensure that they understand the material threats to organizational assets and how they should be actively factored into financial planning. Audit committees could find it beneficial to approach the communication with the board from a risk management angle, using risk maps, highlighting risks to assets, increased costs of insurance, reputational risk (for example because of greenwashing) etc.

Data quality and materiality: Data is not solely used for external reporting purposes; it is also crucial for internal decision-making. The integrity, quality, consistency and source of data appear to be key areas of consideration. Audit committees and chairs need to consider the veracity and robustness of reported data. The first step is to understand how the data has been gathered and then reviewing sources, estimates and assumptions used. A large amount of data can be unhelpful, therefore it is necessary to focus on what is most material and important to stakeholders. Double materiality assessment can help bring the focus needed. In fact, double materiality assessments are seen as beneficial for bringing together the financial and environmental impact components of corporate sustainability reporting.

Being concise: Attendees concurred that too much information into annual accounts puts their readability and usefulness at risk. Committees should therefore aim to make reports concise, focusing on data that matters most and that is used for internal decision making.

Monitoring use of technologies: Concerns were voiced around the impact of AI on reporting due to the increased susceptibility of reporting via the use of certain words to appease the automated system used by investors thus defeating the objective of reporting. Attendees also cited the challenges of working with proxy agencies to fulfil reporting requirements, as the agencies have inconsistent understandings of and approaches to evaluating environmental and social performance. Members highlighted that this inconsistency can be a hindrance to good reporting and contribute negatively to internal understandings of climate-related ambitions. Monitoring and managing the use of such technologies is important.

Topic 2: Internal audit/assurance and controls

Costs and materiality: There are concerns on the amount of data that organizations are expected to provide assurance on, citing rising costs of assurance and demand for management’s time. As a result, the scope of reporting and assurance should, to the extent possible, focus on decision-useful information only. The materiality assessment process is key to identify areas of priority and define scope. Audit committees are encouraged to go back to basics and assess what areas are most material to focus assurance efforts. Audit committees could look to engage with investors, asking them what drives the need for assurance and test the materiality assessment with them directly. Finding out what is important to investors will help uncover the most material risks that organizations should focus on. A double materiality assessment, considering both financial and impact dimensions, has often proven beneficial to organizations in considering other stakeholder groups that use such disclosures (e.g. suppliers).

Discovering internal gaps: Undertaking internal gap analysis with regards to internal resources and capabilities helps uncover the most appropriate actions that organizations and audit committees should take. A commonly identified gap was depth of expertise, which led to pragmatic actions of either bringing in external expertise or upskilling their internal team, for example through A4S's Academy.

Transparency of strategy: It is helpful to make it clear to stakeholders how far down the journey organizations are by communicating what is internally assured and what is externally assured. Taking accountability and being transparent is important.

Regulation push-back: There were concerns about mandatory reporting (e.g. the Corporate Sustainability Reporting Directive or CSRD) prescribing the disclosure of large volumes and granular data not used for internal decision making, with the risk of diverting resources away from the most material and impactful data. This disclosure burden can dissuade organizations from looking beyond minimal reporting requirements, limiting the scope for more transformative climate transition planning. As a profession, there appears to be the need to identify the material and impactful information needed and be prepared to engage with standard setters and regulators to provide such insights and information for the development of sensible regulations.

Top tips coming out of the discussions

Top Tips Description
Focus on the most material issues when reporting Engage with stakeholders to understand the most material issues to your company to provide focus to reporting and strategy.
Ensure data integrity Data integrity is critical to meaningful sustainability reporting. Audit committee members should look to understand how, when, and why data is being collected and reported, in order to be well-equipped to recognise any existing gaps, as well as hands-on solutions to the organisation’s reporting challenges.
Establish interim milestones and targets As part of developing the organization’s internal capabilities, audit committee members can determine interim milestones and targets help management align strategic corporate financial planning with real-time climate action. This may enable more pragmatic reporting outcomes and help hold executive teams accountable to delivering climate-positive outcomes.
Shift your mindset away from requirements Audit committees and their members are in a good position to promote the mindset that sustainable business can and should be business as usual upwards to the management level. Reporting and assurance requirements should be seen, to the greatest extent possible, as a strategic opportunity to provide decision useful information to the management and beyond.

 

Audit Committee Dialogue

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The second session of this series with A4S focused on transition planning and the changing sustainability reporting landscape. You can explore the key takeaways through the link below.

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This event summary was developed in collaboration with Accounting for Sustainability (A4S) and the Centre for Climate Engagement.

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