Sustainability Reporting Standards and Their Impact on Internal Audit
In today’s complex business environment, adopting sustainability reporting standards has become important for organizations to measure, disclose, and manage their environmental, social, and governance (ESG) performance.
Unlike well-established financial reporting standards that have matured over decades, ESG reporting is still evolving.
These standards, influenced by changing priorities, regulatory frameworks, and stakeholder expectations, act as a guide for investors, regulators, and consumers to assess an organization’s long-term value and societal impact, including its stance on climate change and social responsibility.
The ESG reporting standards are complex, involving multiple global standard setters. Unlike financial reporting with the Generally Accepted Accounting Principles (GAAP) providing a unified framework, ESG reporting standards vary across regions and industries.
Notably, the European Union’s Corporate Sustainability Reporting Directive (CSRD) stands out as a comprehensive mandate, affecting about 50,000 companies globally. The CSRD aims to improve transparency and accountability in corporate disclosures by enforcing strict ESG reporting requirements.
Similarly, the International Sustainability Standards Board (ISSB), established under the International Financial Reporting Standards (IFRS) Foundation, seeks to harmonize ESG reporting standards globally.
Through consolidation and collaboration, these initiatives signify progress toward a unified framework promoting consistency and comparability in ESG reporting practices.
Commonly Used ESG Reporting Standards
Today, organizations frequently rely on established frameworks like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD).
These frameworks offer structured guidelines for reporting economic, environmental, and social impacts. By following these standards, organizations seek to improve transparency, accountability, and stakeholder trust.
Regulatory Considerations
The regulatory environment for ESG reporting is quickly changing, with more than 200 regulations being considered globally.
Regulatory bodies such as the European Union, the Securities and Exchange Commission (SEC) in the United States, and regulatory authorities in Asia are actively influencing ESG reporting through policy interventions and legislative mandates.
For example, the EU Taxonomy Regulation and the EU’s non-financial reporting standards play important roles in encouraging sustainable finance and ensuring standardized disclosures that align with environmental objectives.
As regulatory demands become stricter, organizations are under growing pressure to meet ESG reporting obligations while dealing with diverse regulatory requirements in different jurisdictions.
ESG Reporting and Its Implication for Internal Audit
ESG reporting poses both challenges and opportunities for internal audit functions. As organizations aim to improve their ESG disclosures, internal audit functions play an important role in offering assurance and guidance on ESG reporting practices.
This includes assessing risks and controls, as well as evaluating the effectiveness of ESG frameworks. Internal audit functions contribute to enhancing the reliability and integrity of ESG disclosures.
By aligning internal audit processes with emerging ESG standards and regulatory requirements, organizations can bolster their risk management practices and build stakeholder confidence in their sustainability initiatives.
Internal Audit's Role in ESG Reporting
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Strict conditions, including business licences and compliance with halal standards, must be met. Non-compliance with halal regulations could result in penalties, emphasising the importance of understanding and adhering to cultural and religious considerations.
Growth in ESG Reporting: Standards, Regulations, and Frameworks
The rise of ESG reporting reflects a growing focus on sustainability and ethical business practices. Organizations worldwide are adopting ESG reporting to showcase their dedication to environmental stewardship, social responsibility, and corporate governance.
Standards and frameworks from organizations like GRI, SASB, and TCFD offer valuable guidance to those looking to improve their ESG disclosures. However, the lack of a unified standard presents challenges for organizations aiming for consistency and comparability in their ESG reporting practices.
To overcome this issue, most companies in Malaysia choose to engage the accounting services in Malaysia for clarification and professional advice.
All in All
The implementation of sustainability reporting standards has a substantial impact on internal audit functions. As organizations manage the complexities of ESG reporting, internal audit plays an important role in providing independent assurance and guidance on ESG disclosure practices.
Aligning internal audit processes with changing standards and regulatory requirements boosts the reliability and credibility of ESG disclosures, improving stakeholder trust and supporting sustainable value creation.
Given the increasing emphasis on ESG reporting, internal audit functions need to adapt to evolving expectations and regulatory requirements. For organizations new to sustainability reporting standards, seeking professional guidance from accounting services in Malaysia is recommended.
