In the European Union, United Kingdom, and United States, the regulatory tide is increasingly shifting from voluntary climate-related disclosures to mandatory disclosures and assurance. Concurrently, the rise of greenwashing fraud has added additional pressure on corporations disclosing sustainability data. Research by ESG data firm RepRisk reveals greenwashing by banks and financial services firms around the globe increased by 70% between 2022 and 2023. The penalties for greenwashing can range from loss of investor and consumer confidence to financial penalties. Notably, Deutsche Bank-owned firm DWS was fined $25 million by the SEC in 2023 for making misstatements regarding its ESG investment process.
Similar to the arrival of Sarbanes-Oxley compliance in 2002, many enterprises are now scrambling to wrap their heads around these new disclosure requirements and strategize how they can integrate ESG into their existing audit, risk, and compliance programs. In AuditBoard’s 2024 Sustainability and ESG Guide, we explore the multifaceted challenges businesses face in complying with new and upcoming ESG reporting and assurance requirements — and dive into their solutions. Download the full guide here, and continue reading for tips and best practices to leverage when planning and scoping your ESG program in 2024.
Scoping Your ESG Compliance Program In 2024
Below are the major ESG-related compliance deadlines affecting businesses in the United States, European Union, and United Kingdom in 2024 and beyond.
Sustainability Frameworks and Standards: What to Know
Due to the broad scope of ESG, businesses often leverage a combination of frameworks, standards, and ratings to guide their sustainability reporting and compliance efforts. For example, airline group Ryanair leverages SASB, GRI, TCFD, CDP and Sustainalytics ratings, along with the National Institute of Standards and Technology (NIST) Framework, and makes disclosures according to the EU Taxonomy regulation, according to its 2022 Sustainability Report.
Some frameworks and standards require companies to apply the principle of materiality in order to determine what they will disclose. Within the sustainability world, there exists the concept of single versus double materiality when it comes to reporting disclosures:
- Single Materiality: traditional financial materiality, where a disclosure is considered material if it can affect the company’s bottom line — i.e., what is material to the business, aka “outside-in.”
- Double or Impact Materiality: a disclosure is material if it is material from an “impact” perspective (e.g. affects employees, customers, vendors, environment), a financial perspective (e.g. investors, creditors), or a combination of both — what is material to society or the planet, aka “inside-out.”
Performing a Materiality Assessment
Performing an ESG materiality assessment allows the business to identify and assess material topics to disclose and create a reporting strategy. Before beginning a materiality assessment, executive leadership should form an ESG steering committee. This important group of individuals will lead the essential research and development to determine what materiality means for your business, as well as oversee implementation of ESG strategy and risk management. As such, the steering committee might include an individual who also sits on the financial disclosure committee, or even be a subcommittee or working group within the financial disclosure committee.
Determining Single Vs. Double Materiality
A company’s choice to approach its ESG program from a single or double materiality perspective is foremost influenced by regulatory requirements and alignment with sustainability frameworks and standards. Another useful resource to consider is the SASB Materiality Map, which identifies and ranks sustainability issues likely to affect the financial condition or operating performance of companies across different industries.
Steps to Performing an ESG Materiality Assessment
- Research and benchmark against your industry and peers. Research the frameworks, standards, and ratings that apply to your company and its peers. See Chapters 1 and 2 for links to resources.
- Define materiality for your business. When you have gathered enough information, define what materiality means for your business. The determination of a single or double materiality approach should take into account your company’s jurisdiction, future regulations, and what industry peers are doing.
- Identify potential material topics. Create a list of material topics, indicating which topics fall under single or double materiality (if pursuing double materiality).
- Interview key stakeholders. In addition to board members, executive management and business process owners, key stakeholders may also include investors, employees, customers, regulators, and external audit consultants.
- Analyze and rank material issues by priority. Following your stakeholder engagement, compile your results in a materiality matrix to help visualize, organize, and rank key issues by priority and ESG topic.
- Determine material topics to disclose. Leverage your materiality matrix to engage in conversations with executive leadership and the board to determine the following:
- What material topics to disclose
- Sustainability objectives
- How sustainability objectives relate to overall business strategy
What Should Your ESG Team Look Like?
While the ESG steering committee can help develop a vision and strategy, only a cross-functional team can deliver it. Two rising roles in ESG program management include the ESG program manager and ESG Controller. In our experience, ESG Program Managers often have backgrounds in internal audit, risk, rating agencies, academia, or sustainability. ESG Controllers may have a background that combines financial oversight, deep understanding of ESG metrics, and experience with both the operational and financial aspects of reporting efforts.
With the ESG steering committee, program manager, and controller leading the way, the following is an example of how other business groups may fit into an ESG program. While the breakdown of roles and responsibilities will vary based on resource availability, industry-specific requirements, and the materiality of different ESG factors, this table echoes common practices we see. For a more detailed breakdown of ESG roles and responsibilities, download the full 2024 Sustainability and ESG Guide here.
The future of more responsible sustainability and ESG reporting starts with informed and proactive steps today. For more insight on navigating the challenges of new and upcoming ESG disclosures, Auditboard’s 2024 Sustainability and ESG Guide provides actionable solutions to ensure a resilient and effective ESG program. Seize the opportunity to stay ahead—download the full guide to uncover essential tips and best practices for shaping your ESG strategy in 2024.