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The ESG Review: Regulators to turn the screw on ESG auditing and skills

Spot checks by regulators on ESG-related information - not just what businesses may choose to share, but detail that is in the process of being audited - came onto the horizon this week with news from the UK’s Financial Reporting Council.

The notion of ESG disclosures being professionally audited is relatively new, while the prospect of bespoke risk audits is looming given the onset of the EU’s new Corporate Sustainability Reporting Directive (CSRD).

But the latest statement from the FRC is something of a shot across the bows, as it will ​“continue to pay attention” to what auditors do in checking what their corporate clients have shared about climate-related risks.

There will be targeted action by the FRC, including 'hot' or 'in-flight' reviews - internal checks at auditors as a client audit progresses, with a deliberate ESG focus where a company has made public statements.

Meanwhile, the FRC also said this week - in a timely viewpoint ahead of the principal corporate reporting season - that companies should consider what elements of ESG are most material to their shareholders and focus on them in updating on their progress in annual company or specific ESG reports. In other words, rather than leaning towards who has shouted loudest internally, or following the lead of others in their sector, they should take an objective approach to deducing what really matters most, and then report on it accordingly, and transparently.

It amounts to auditors auditing the auditors. But it is a level of regulatory scrutiny that we have not seen in the UK before, and is in response both to the growing need to substantiate and verify claims, and to the broader ongoing requirement to scrutinise the due process employed by audit firms in making their checks.

And as Responsible Investor magazine put it, in providing greater context: “The UK’s own Financial Conduct Authority has quietly pushed a number of managers to alter ESG-related fund disclosures but has yet to announce formal penalties, unlike its US and EU counterparts”.

It continued: “The firms were also told to invest in staff training and guidance to develop the technical complexity needed to assess climate and ESG considerations.” Meaning that the regulators acknowledge that this work is highly complicated, and requires scientific and technical skills.

Ultimately, the same is surely going to be true for the development and application of communicators’ skills too. Corporate and financial communications teams won’t just need to understand the regulations and reporting considerations, but some of the science behind ESG various dimensions, whether that be environmental, social or organisational. B2B and B2C communications teams won’t just need to understand how what gets shared must be genuine, verifiable and remain impactful, but must be clear on how it fits into the bigger picture of reputation promotion and protection, and in doing so will need some baseline scientific nous.

Yes, we will really have to know what we’re talking about. Which can surely only be a good thing.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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