Key Role of Internal Auditors in Improving ESG Efforts

Did you know that the U.S. government loses $2 trillion annually due to environmental degradation?

That number is staggering, and it’s why more and more companies are planning to become environmentally sustainable. But it’s not just about the bottom line — it’s also about being responsible members of society.

Internal auditors must be prepared to audit their organizations for environmental, social and governance (ESG) factors. It’s not only good for the environment and society, but can also lead to cost savings and a better reputation for the company.

While not mandatory, regulations are likely coming soon, so it’s essential to be prepared. Your organization must meet ESG standards. The key ESG factors you should consider will include water use, energy use, waste management, air quality and carbon dioxide emissions.

By putting together a plan to audit these criteria, you can help your organization understand the full impacts of its activities on the environment. In turn, you will be able to identify areas where it needs to take action to improve its environmental footprint.

How internal audits can help drive ESG

Internal audits can provide invaluable insight when it comes to measuring ESG performance. Auditors are trained to be objective and impartial in assessing an organization’s data and operations without bias. They can then make recommendations for improvement to help the company become more efficient and eco-friendly.

Auditors can also identify potential risk areas that organizations could mitigate with better environmental practices. For example, if a company is not properly disposing of hazardous waste, an auditor can identify it and make recommendations on how to fix it.

Internal audits also serve as a verification tool for organizations looking to certify their sustainability efforts. The benefits of this certification can range from increased trust among customers and suppliers to improved public relations and a competitive edge in the market.

By conducting due diligence and verifying their sustainability practices, companies can demonstrate their commitment to environmental protection.

Key ESG audit factors to consider

When auditing for ESG, there are a few key factors to consider. While the specifics will vary depending on the company, these are some of the most essential:

Environmental factors

• Emissions and air quality. Auditors should review the organization’s emissions and air quality data. An environmental audit will help you identify potential issues or areas for improvement to reduce their environmental impact.
• Energy use. It’s important to understand how much energy the company uses and where it comes from. Are they relying on renewable sources? Are they using more power than necessary? Energy consumption is critical in determining a company’s environmental impact, so it should not be overlooked.
• Water usage. Like energy, it’s essential to understand how much water the company uses and where it is sourced. Are they conserving as much water as possible? Are they relying on renewable sources? These are all questions that need to be asked to understand a company’s water usage.
• Waste generation and management. Auditors should review the organization’s waste management practices to understand how much physical waste is generated and where it goes. This will help them identify potential issues or areas for improvement to reduce their environmental impact.
• Raw material sourcing. Auditors should also look at the company’s raw material sourcing practices to ensure they only use sustainable and ethical sources. Internal auditors’ sustainability reviews should also consider the company’s supply chain management practices to ensure all products, services and supplies are responsibly sourced.

Social factors

• Labor standards and working conditions. Auditors should look at the company’s labor standards and working conditions to make sure employees are treated fairly and in accordance with applicable laws and regulations.
• Employee well-being and safety. Auditors should also examine the company’s policies and practices regarding employee well-being and safety. Are they providing a safe working environment? Do their employees have access to all necessary safety equipment?
• Diversity and inclusion. Auditors should review the organization’s diversity and inclusion initiatives to ensure employees from all backgrounds are hired, supported and promoted. This is imperative for any company to foster a diverse and inclusive culture.
• Community engagement. It’s beneficial for companies to be involved and engaged with the communities in which they operate. Auditors should review the company’s initiatives and activities to ensure that it is actively participating in its local community.

Governance factors

• Risk management. Auditors should review the organization’s risk management policies and procedures to appropriately identify, monitor and manage all potential risks.
• Legal compliance. Auditors should review the laws, regulations and policies relevant to the organization’s operations to ensure compliance. Are there any potential risks or liabilities that need to be addressed?
• Accountability and transparency. Auditors should ensure the organization’s management is transparent and accountable for its actions. Do they have systems in place to report misconduct or unethical practices? Do they provide regular financial statements to stakeholders?
• Policy and procedure reviews. Auditors should review the organization’s policies and procedures to ensure they meet ESG standards. Are there any potential gaps that need to be addressed?

By considering all these factors, auditors can help organizations identify potential risks and create strategies to mitigate them. Ultimately, internal audits provide an invaluable resource for organizations looking to improve their ESG performance.

With a thorough audit process in place, companies can ensure they are taking the necessary steps to protect the environment and promote sustainability within their operations. Auditors can also help organizations certify their ESG efforts, thereby setting them apart from their competition and building trust with customers and stakeholders.

Internal audits play an essential role in ESG reporting, which is why companies should ensure a comprehensive audit process to guide their efforts.

Benefits of auditing environmental, social and governance factors

Auditing ESG factors provides favorable outcomes for organizations. Those that demonstrate their commitment to environmental and social responsibility have a competitive edge in the marketplace, as customers, investors and other stakeholders increasingly consider these factors when making decisions.

Additionally, auditing ESG factors can help organizations with the following:

• Reduce risk. Auditing helps organizations identify potential risks and create strategies to mitigate them. This reduces the likelihood of costly lawsuits or penalties resulting from non-compliance with environmental, social and governance regulations.
• Improve efficiency. Internal audits can help organizations understand how their operations impact ESG performance and develop plans to improve it. This can result in increased efficiency and cost savings.
• Build a positive reputation. Organizations that demonstrate their commitment to ESG factors are more likely to be viewed favorably by customers, investors and other stakeholders. This can lead to increased sales, higher stock prices and stronger relationships with key stakeholders.

Ultimately, auditing ESG factors provides many benefits to organizations. Not only does it help your bottom line, but it also allows you to demonstrate your commitment to sustainability and ethical business practices.