ESG audit standards, process & examples
Understand ESG auditing, how to conduct one, and the guidelines to apply.
What is an ESG audit?
An ESG audit, also known as an environmental, social, and governance (ESG) assessment, is a systematic evaluation of a company's performance in managing ESG risks and opportunities. It assesses the organisation's impact on the environment, its social responsibility initiatives, and its corporate governance practices.
The mandatory status of ESG audits is still evolving, with varying requirements across different jurisdictions.
In the European Union, the Corporate Sustainability Reporting Directive (CSRD) adopted in 2023 mandates ESG reporting for large companies and listed companies with over 500 employees or €200 million in consolidated turnover.
The CSRD requires companies to disclose both quantitative and qualitative information on their ESG performance, and these disclosures must be audited. More on this below.
Are ESG audits mandatory?
The ESG auditing process
A 15-point checklist
1. Planning and scoping
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Establish the scope of the audit: Determine the specific ESG areas to be assessed, considering the company's industry, size, and risk profile.
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Define the audit objectives: Clearly outline the goals of the audit, such as risk identification, opportunity assessment, or performance improvement.
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Identify relevant stakeholders: Determine who will be involved in the audit process, including management, employees, external stakeholders, and regulatory bodies.
2. Data collection
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Review company policies and procedures: Analyse ESG-related policies, procedures, and internal controls to assess the company's commitment to ESG principles.
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Interview key personnel: Conduct interviews with relevant managers, directors, and employees to gain insights into ESG practices and challenges.
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Collect ESG data: Gather relevant data from various sources, including sustainability reports, environmental management systems, and third-party certifications.
3. Data assessment
4. Reporting and recommendations
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Prepare an audit report: Compile the findings of the audit into a comprehensive report that clearly communicates the company's strengths, weaknesses, and areas for improvement.
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Provide recommendations: Offer actionable recommendations for the company to address ESG risks, optimise opportunities, and enhance its overall ESG performance.
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Communicate findings to stakeholders: Share the audit report and recommendations with relevant stakeholders, including management, investors, customers, and employees.
5. Monitoring and action
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Establish a monitoring plan: Develop a plan to track the company's progress in addressing ESG risks and implementing recommendations.
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Implement corrective actions: Take appropriate actions to address identified ESG issues and improve the company's overall ESG performance.
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Integrate ESG into decision-making: Integrate ESG considerations into the company's strategic planning, risk management, and operational decision-making processes.
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Evaluate compliance with ESG standards: Assess the company's adherence to relevant ESG standards, such as GRI guidelines, UN Global Compact principles, or industry-specific frameworks. More on this later.
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Identify ESG risks and opportunities: Identify potential ESG risks that could impact the company's operations, financial performance, or reputation.
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Analyse ESG performance: Evaluate the company's ESG performance against its own goals, industry benchmarks, and peer group comparisons.
ESG audit standards by region
Depending on where the company is based, there may or may not be a mandatory requirement to follow certain sustainability standards. Here are the most important ESG audit standards relevant to each region:
Europe
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Global Reporting Initiative (GRI): The GRI Standards are widely used by companies around the world to report on their ESG performance.
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Task Force on Climate-Related Financial Disclosures (TCFD): The TCFD is a group of international experts that developed voluntary climate-related financial disclosure guidelines. The TCFD Recommendations are increasingly being used by companies to disclose their climate-related risks and opportunities.
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European Sustainability Reporting Standards Board (EFRAG): The EFRAG is a European organisation that is developing a new set of sustainability reporting standards (ESRS) that are expected to be mandatory for large European companies.
The Corporate Sustainability Reporting Directive (CSRD) introduces a number of new requirements, including:
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A wider scope of reporting: The CSRD requires companies to report on a wider range of ESG issues than the previous Non-Financial Reporting Directive (NFRD). This includes issues such as climate change, human rights, and social governance.
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Quantitative and qualitative reporting: The CSRD requires companies to report both quantitative and qualitative information on their ESG performance. This means that companies will need to provide both numerical data and information about their policies and practices.
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Double materiality: The CSRD requires companies to report on both the material impacts of their business on ESG issues and the ESG impacts of ESG issues on their business. This means that companies will need to consider the risks and opportunities that ESG factors pose to their business.
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Auditing of ESG disclosures: The CSRD requires the audits of ESG disclosures to be conducted by independent auditors. This is a new requirement that is not currently in place under the NFRD.
Mandatory ESG audits
and reporting in Europe
United States
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Sustainability Accounting Standards Board (SASB): The SASB is a non-profit organisation that develops industry-specific sustainability disclosure standards. The SASB Standards are used by companies to report on their ESG performance in specific sectors.
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International Integrated Reporting Council (IIRC): The IIRC is an international organisation that developed the Integrated Reporting Framework. The Integrated Reporting Framework is a holistic approach to reporting on a company's ESG performance and financial performance.
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Sustainable Investments & Responsible Businesses (SIFMA): The SIFMA is a trade association that represents the asset management industry in the United States. SIFMA has developed a set of ESG disclosure standards for asset managers.
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Asia Sustainability Reporting Initiative (ASRI): The ASRI is a regional organisation that develops sustainability reporting standards for Asia-Pacific companies. The ASRI Standards are based on the GRI Standards and are adapted to the specific needs of companies in the Asia-Pacific region.
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China Sustainable Finance Industry Alliance (CSFIA): The CSFIA is a Chinese organisation that develops sustainability guidelines for Chinese companies. The CSFIA Guidelines are based on the GRI Standards and the TCFD Recommendations.
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Sustainable Finance Committee of Singapore (SFC): The SFC is a government-led committee that develops sustainability guidelines for Singapore-based companies. The SFC Guidelines are based on the GRI Standards and the TCFD Recommendations.
Asia
Middle East
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Sustainable Finance Initiative for the Gulf (SFG): The SFG is a regional organisation that develops sustainability guidelines for Gulf Cooperation Council (GCC) countries. The SFG Guidelines are based on the GRI Standards and the TCFD Recommendations.
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Sustainability Initiative for the Middle East (SIM): The SIM is a regional organisation that promotes sustainability in the Middle East. The SIM has developed a set of sustainability principles that are used by companies in the region.
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Africa Sustainability & Governance Initiative (ASG): The ASG is a regional organisation that promotes sustainability and good governance in Africa. The ASG has developed a set of sustainability principles that are used by companies in the region.
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Sustainability Reporting Awards for Africa (SRAA): The SRAA is an awards program that recognises companies in Africa for their sustainability reporting practices. The SRAA Guidelines are used by companies to prepare their sustainability reports.
Africa
ESG audit examples
Environmental audit examples
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Scope 1 emissions: Assess the company's direct greenhouse gas emissions from its own operations.
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Scope 2 emissions: Evaluate the company's indirect greenhouse gas emissions from its purchased electricity, heating, and cooling.
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Scope 3 emissions: Examine the company's broader indirect greenhouse gas emissions, such as those from transportation, waste disposal, and activities in the supply chain.
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Energy efficiency: Review the company's energy consumption, identify potential energy saving opportunities, and evaluate the effectiveness of energy conservation programs.
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Water usage: Assess the company's water consumption, identify potential water saving measures, and evaluate the effectiveness of water management practices.
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Waste management: Evaluate the company's waste generation, recycling, and disposal practices, and identify opportunities to reduce waste and improve waste management efficiency.
Governance audit examples
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Corporate governance structure: Review the company's corporate governance structure, including the board of directors, executive compensation, and corporate social responsibility reporting.
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Risk management: Evaluate the company's risk management practices, including identification, assessment, mitigation, and monitoring of ESG-related risks.
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Anti-corruption: Assess the company's policies and procedures to prevent bribery and corruption, including due diligence, whistleblowing mechanisms, and compliance with anti-corruption laws.
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Sustainability reporting: Evaluate the company's sustainability reporting practices, including adherence to ESG reporting frameworks, disclosure of ESG metrics, and transparency in reporting.
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Executive accountability: Review the company's mechanisms to hold executives accountable for ESG performance, including ESG targets, performance metrics, and compensation tied to ESG achievements.
Social audit examples
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Labour practices: Assess the company's labour practices, including labour conditions, wages, working hours, health and safety standards, and employee engagement.
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Human rights: Evaluate the company's commitment to human rights, including fair labour practices, freedom of association, non-discrimination, and ethical sourcing.
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Community engagement: Review the company's engagement with local communities, including social responsibility initiatives, community impact assessments, and stakeholder engagement strategies.
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Diversity, equity, and inclusion (DEI): Evaluate the company's efforts to promote DEI in its workforce, supply chain, and business practices.
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Indigenous peoples: Assess the company's interaction with indigenous communities, including respect for cultural heritage, environmental and social impacts, and consultation and consent processes.