Common Gaps Auditors Find in ESG Reports & How We Can Avoid Them

ESG Reporting and Why Auditors Review ESG Reports

Consumers, investors and other business stakeholders have been placing their wallets in businesses that care about sustainability. A recent study by demonstrates how consumer spending experiences a boost when brands are committed to ESG frameworks. A brand that does not take ESG (Environmental, Social, and Governance) goals seriously is an easy pass. Financial materiality is crucial, but it is increasingly assessed alongside broader sustainability-related risks and impacts.

This is precisely where ESG auditors come in and play a fundamental role. Responsible for the verification of data shared by businesses in their ESG reports, auditors assess, verify, and provide reasonable assurance of regulatory compliance in the ESG reporting of companies. 

Common ESG Reporting Challenges Identified By Auditors

Being conscious of the most common ESG reporting challenges can be useful for companies in avoiding errors in their reporting exercise:

1. Data Collection and Management

ESG reporting requires businesses to undertake large-scale data collection based on factors involved in each pillar of ESG goals. Since data has to be extracted from multiple systems, software and departments, inaccuracies and gaps can easily crop up. 

2. Compliance With Regulatory Frameworks

The existence of multiple regulatory frameworks and ESG guidelines can lead to complications in compliance. Companies, especially those operating multinationally, might have to comply with multiple regulatory frameworks as a result, which adds time and cost to an already lengthy process.

3. Integration in Corporate Strategy

Accurately representing ESG reporting through visual graphs and simplified assessments is necessary to pique the interest of stakeholders and investors. Additionally, the combined impact of sustainability strategies undertaken by a business needs to be adequately demonstrated. Businesses tend to face challenges when translating ESG numbers into actionable plans in disclosures. 

Data Quality, Consistency, and Traceability Gaps In ESG Reports

Gaps in the data collected by organisations and their traceability, along with inconsistencies, contribute to compliance issues in ESG reports. 

1. Quality of Data

A large-scale exercise, the collection of data from diverse sources and multiple locations, can make systematic organisation of data difficult. 

Solution: Use automation for the compilation of collected data. Enforce unified procedures for data collection, classification and reporting. 

2. Lack of Consistency

Errors in the entry of data, especially when manual data collection is involved, lead to inaccuracies and inconsistencies. The result is a report that cannot be relied on and eventually gets flagged for non-compliance. 

Solution: Train your sustainability teams in following unified enterprise-wide procedures for manual entries. Carry out periodic checks and verifications to spot gaps and inaccuracies.

3. Gaps in Traceability

When data collection teams fall short in documenting sources or keeping track of data trails, traceability becomes hard. As a result, verification at later stages becomes impossible, leading to poor compliance. 

Solution: Lay out standardised guidelines for data collection and storage across your enterprise. Ensure stringent compliance by sustainability teams.

Gaps Related To ESG Regulatory Compliance and Disclosures

Passing an ESG audit with ease is no easy matter when companies have to keep up with frameworks and regulations that keep changing frequently.

1. Limited Visibility into Scope 3 Emissions

While data collection for the first two categories, Scope 1 and 2 emissions, is easy, data on Scope 3 emissions is difficult to collect due to no direct involvement of the company in generating them.

2. Evolving Regulations

Regulations for ESG reporting are an evolving phenomenon. This requires keeping up with trends and updates in regulations. It can be equally time-consuming, complex and costly for businesses. 

3. Lack of Transparency

A lack of clarity about methodologies or performance metrics used in ESG reporting can contribute to gaps in transparency and legal implications for businesses. 

Challenges In ESG Reporting Related To Governance, Controls, and Documentation

Gaps can arise in ESG reporting due to issues in governance, controls and documentation:

• Lack of board oversight. When management oversight and involvement of the board are absent during risk analyses, reporting suffers. 
• Weak internal controls. When internal controls are poor and reviews are not carried out frequently, it adversely affects the quality of ESG reporting. Assessments get flagged for errors and omissions become common.
• Unreliable documentation. When disclosures are inconsistent, and data is not documented well, it might lead to miscommunication. This affects the reputation of your brand and distances investors.

How Organisations Can Avoid Common ESG Reporting Gaps

Using certain best practices in ESG reporting for your business can help avoid errors and ensure ESG regulatory compliance. Here’s how organisations can avoid reporting gaps:

1. Industry-specific Framework

Pick frameworks or regulatory guidelines that align with your industry. For example, financial institutions should resort to adapting the ESG framework of SASB (Sustainability Accounting Standards Board) for reporting.

2. Use of Automation

Data compilation and assessments can be automated to a large extent to increase efficiency and make reporting more accurate. Use AI tools to compile data from diverse sources and standardise them. They are also highly useful in spotting gaps and inconsistencies.

3. Training Sustainability Teams

Train your enterprise personnel frequently in data collection and reporting. Such periodic exercises ensure that they work in alignment with the procedures and frameworks followed by your enterprise in ESG reporting. 

4. Periodic Reviews

Reviewing ESG reporting exercises, from the data collection stage to execution of sustainability strategies, can enable you to monitor progress and make refined decisions. 

ESG Reporting Challenges Specific To India and Local Regulations

The BRSR (Business Responsibility and Sustainability Reporting) framework serves as the key regulatory framework for ESG reporting in India. Businesses in India use other global frameworks for ESG reporting as well.

However, ESG reporting in India is yet to overcome several challenges:

• ESG reporting is relatively new in India. Gaps in awareness and understanding about effective reporting and integration into strategy persist. 
• ESG reporting for large-scale industries in India is relatively easier than for small-scale ones. Small businesses and SMEs cannot afford the short-term financial loss that goes into building long-term financial sustainability. 
• Data collection, assessment, verification and audits go into credible ESG reporting. Such a multi-stage exercise requires dedicated sustainability teams which are trained periodically. For most businesses, it is a hefty burden. 

Key Takeaways: Improving ESG Reporting Quality

• ESG auditors and assurance providers act as independent third parties assessing the credibility and consistency of ESG disclosures.
• Challenges in ESG reporting continue to persist due to the evolving nature of regulatory frameworks and complex reporting requirements. 
• Gaps in analyses can arise due to poor data handling, lack of trained personnel, absence of periodic reviews and lack of management oversight.

Make sure that your organisation’s ESG performance is up to the mark with Oren’s materiality assessment. Zero in on high-impact aspects of your business’s activities and formulate reports that are credible and compliant. 

Frequently Asked Questions (FAQs)

Q1. What are the most common ESG reporting challenges?

Some of the most frequently occurring ESG reporting challenges are those arising from poor data collection, the existence of multiple regulatory frameworks and a lack of management oversight.

Q2. Why do auditors flag gaps in ESG reports?

Auditors verify and flag gaps in ESG reports to pinpoint sustainability matters where businesses aren’t reporting credibly or are failing to comply with legal frameworks.

Q3. How can companies improve ESG regulatory compliance?

Companies can improve compliance with ESG regulatory frameworks by automating data collection processes, using industry-specific frameworks, and carrying out periodic reviews.

Q4. What data issues commonly affect ESG reporting quality?

Errors and inconsistencies in the collection of data, as well as poor documentation hampering traceability, affect ESG reporting quality.

Q5. Are ESG reporting challenges different in India?

ESG reporting challenges in India are largely similar to those faced by businesses worldwide. However, small businesses and SMEs suffer disproportionately due to resource constraints.

Q6. How can organisations prepare better for ESG audits?

Businesses need to prepare better for ESG audits by ensuring credible sourcing and storage of data from the very beginning, and ensuring compliance at every stage.