24 Jan 2024

Audit Committee Dialogue Summary: Transition planning and the changing sustainability reporting landscape

Chapter Zero recently 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 second session focused on transition planning and the changing sustainability reporting landscape. These are two topics that are critical for Audit Committees to keep ahead of, and you can find the key takeaways from the second session below.

Audit committee chairs and members engaged in dialogue on learnings from current practices in:

  1. Corporate transition planning
  2. Challenges and opportunities committees face in the changing sustainability reporting landscape.

Key themes arising from the discussions are captured below.

1: Transition planning

Strategic priorities: Achieving net zero targets depends greatly on organizations aligning their business strategy, operations and funding with decisive climate action. Audit committees have a definite role to play in supporting the development of the financial case for this alignment, as well overseeing associated metrics and targets. Attendees agreed that embedding clear, relevant, and comprehensive transition thinking into an organization’s strategy helps guide and activate committees’ sense of responsibility in delivering net zero commitments.

Resourcing and expertise: Audit committee members shared that in-house capacity can be a significant limitation to meeting transition plan reporting guidance. Attendees explained how by now, the imperative of transition planning is well-acknowledged on audit committees, but that there is a perceived lack of background knowledge or expertise. Attendees acknowledged that lack of expertise does not prevent them from asking the necessary questions and continuing to push for proactive transition thinking, in parallel to an upskilling process.

Engaging with regulatory bodies: Coming from various stages of transition planning maturity, attendees discussed the challenges involved in engaging with regulators. Particularly in terms of standardizing metrics used to evaluate corporate climate transitions, attendees felt that there was generally insufficient engagement with policy-making. Early policy engagement allows consideration of industry insights prior to and throughout regulatory decision making. Attendees upheld the need for market leaders to act on their responsibility to lead regulatory engagement that productively advances the policy agenda for transition planning.

Making assumptions: Transition plans are future-focused and often require assumptions to be made across long-term timescales. In order to contribute meaningfully to the development of long-term planning, attendees discussed the criticality for audit committees to understand where, why, and how these assumptions have been made, so that they may ensure targets balance ambition with realistic objectives that fit their organization’s strategy.

Exploring new business models: Attendees agreed that transition planning is a pathway to shift perspectives on reporting from being mainly a compliance exercise, towards an exercise in business development and organizational growth. Successful transition planning requires an innovative approach to how assets are valued and managed across an organization’s value chain. Market leaders have immense capacity for transformative business that may inspire more widespread corporate climate leadership.

2: The changing sustainability reporting landscape

Managing different reporting regimes: Managing reporting regimes across different jurisdictions is a significant challenge many committees face. This is compounded by the numerous indices and metrics for measuring corporate performance that exist. Such an environment is challenging to navigate. Considering that an increasing amount of reporting data is machine-readable, remaining up to date with trends in disclosure requirements, regulation, and technologies—and filling gaps where needed—must be prioritized by committees. Instances of unsolicited data measurement, in particular ESG ratings, were raised as a concern to audit committee members, warning of the material and reputational consequences of insufficient mitigation of the associated risks.

Working with third parties: Representing various business sectors, attendees spoke to the challenges in involving external expertise and support on reporting. Common concerns revolved around uncertainty on how external companies gather, assess, and manage data. Attendees spoke to the unique balancing act this engagement often requires, especially in instances where multiple third parties are involved. Managing these relationships, while challenging, may also encourage committees to look inwards and determine how reporting responsibilities may be better met in-house and what resources and mechanisms are required to internalize these capabilities. Regardless of the role of third parties, committee members agree it is important for them to be well-informed and engaged in reporting processes.

Data assurance: The expectation to meet all reporting requirements can often feel unrealistic to boards. In recognition of the UK’s approach of ‘comply or explain’, it was suggested that in circumstances where compliance is prohibitive, committees should be welcoming of opportunities to explain, helping prevent them from reporting data they lack confidence in for the sake of compliance—which may have adverse impacts on reputation. Within this, audit committees should be intentional with what they approve for publishing, to ensure that disclosures are backed up by internal confidence in data and its strategic alignment to the goals of the organization. Grading information based on the level of assurance obtained (eg no assurance, internal audit, limited or reasonable assurance) is one possible way to make clear the level of confidence in reported information to investors and stakeholders, as well as a progressive way to address gaps as the reporting landscape continues to evolve.

Enhancing sustainability oversight and integration: Attendees discussed strategies to strengthen sustainability oversight within the organization. Key points included appointing a member of the Corporate Responsibility/Sustainability Committee into the Audit Committee to deepen understanding, utilizing quarterly audit papers featuring a sustainability dashboard to identify performance trends and outliers, conducting training sessions to address sustainability-related questions and prepare management. Attendees suggested having a dedicated Responsible Business/Sustainability Committee, as the absence thereof places significant responsibility on the Audit and Risk Committee.

Strategies for addressing scope 3 GHG emissions: Attendees emphasized the importance of addressing Scope 3 GHG emissions and understanding the supply chain, particularly in the built environment where this is where the majority of emissions lie. They discussed the need to work towards achieving net zero emissions and engaging with suppliers to influence change. Strategies included directly engaging with suppliers to understand their carbon footprint and advocating for government support. Concerns were raised about the challenges of managing emissions from numerous small suppliers worldwide. Despite the complexity, attendees stressed the importance of innovation in tackling Scope 3 emissions effectively.

Addressing gaps in sustainability reporting expertise: Attendees highlighted challenges in the sustainability reporting landscape, noting a desire for more comprehensive training among directors. They expressed concerns about reliance on young consultants and emphasized the need for upskilling within firms to meet demand. Training sessions and sustainability certifications were acknowledged as valuable for addressing concerns and preparing management, but the lack of expertise within organizations remained a significant hurdle.

Top tips coming out of the discussions

Top tips Description
Focus on what is relevant to your organisation Prioritise what is relevant and material to your organisation, considering sector-specific nuances and market leaders. Ensure executives understand that transition planning and reporting serves strategic alignment and value to investors, with the board responsible for making it meaningful to stakeholders.
Focus on quality data for effective decision making Prioritise gathering the information essential for effective decision-making, regardless of its immediate availability, instead of relying solely on easily accessible data. Ensure key data quality controls are in place, such as sign-off statements, ensuring that management and suppliers have diligently investigated and evaluated the information they provide, enhancing both its relevance and quality.
Strategic oversight for transition planning success Ensure the audit committee's role in transition planning extends beyond risk management to a strategic perspective. Emphasise continuous focus and persistence in integrating targets into daily decision-making. Ensure adaptability of models, set clear milestones, and consider grading data to manage uncertainty effectively. This approach fosters a proportionate, strategic and integrated approach to transition planning.
Align sustainability reporting with business value Transition sustainability reporting from a compliance exercise to a strategic business endeavour by focusing on identifying opportunities alongside threats. Collaborate with executives to emphasise the business relevance of sustainability, allocating adequate resources accordingly. Prioritise materiality and the company's mission, highlighting threats to the business model and strategies for mitigation. Promote integration of sustainability into financial disclosures to underscore its importance to investors and align with capital market expectations, with audit committees playing a pivotal role in board education on this matter.
Audit Committee Dialogue

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The first session of this series with A4S focused on external reporting requirements and internal audit and assurance controls. 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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