What is an ESG Audit? Environmental, social and governance (ESG) risks are inevitable for every business. But how these issues are collected, managed and reported are what will make the difference between a company that is prepared or not.

1. What is an ESG Audit?
Environmental, social and governance (ESG) risks are inevitable
for every business. But how these issues are collected, managed
and reported are what will make the difference between a company
that is prepared or not.
Businesses will incur costs in some form or another related to
ESG issues because the environment is not an infinite resource
that can be used without consequences. Therefore, it's crucial
for businesses to take these risks into account when making
decisions about their operations, products and services. An ESG
audit is a process that evaluates the environmental and social
risks of a company's operations, products or services. The goal
of this audit is to identify any potential risk so they can be
addressed before they become problems down the road.
Each ESG audit provides insight into the company's approach
towards these issues. Conducting an ESG audit also helps
businesses look at their supply-chain risks, risk management
capabilities and transparency with shareholders.
ESG | The Report - Audit
Why is ESG auditing important?
ESG audits are important for the public, investors and the
company alike. They are necessary because more consumers are
looking for products and services from companies that have
strong environmental, social and governance practices. According
to a study conducted by Nielsen, "9 in 10 Millennials will
switch brands or retailers if that brand or retailer supports
the wrong cause." For investors, ESG audits help provide insight
into the company's approach towards these issues and how they
manage risk. This is because information about a company's
environmental risks can affect its share price, and in some
cases, it could even prevent companies from getting funding.
For the company, regularly conducting an ESG audit means that
companies are more prepared for emerging risks or future issues
that could arise. They could also provide insight into the
company's supply-chain risks and transparency with shareholders.
In turn this attracts better employees and investors.

2. What is the purpose of a sustainability
audit?
Audits are designed to help companies identify opportunities,
improve on weaknesses and track progress of ESG initiatives. ESG
audits are a type of engagement that companies conduct with
external stakeholders as well as internal departments to assess
their performance in the management of environmental and social
aspects. This process should be separate from an audit for
financial purposes because it has different objectives. An ESG
audit seeks to answer certain questions:
 What environmental issues are directly relevant to the
company?
 What are the risks associated with these issues?
 How is the business organized in terms of ESG policies,
systems and controls?
 How are these issues communicated between senior
management, employees, customers and other stakeholders?
It's important for companies to continuously review their
performance in regards to ESG issues because there are always
changes within the external environment that can affect their
operations. The company should also evaluate its performance to
make sure it's not at risk of non-compliance with any laws or
regulations.
What's the difference between an ESG audit
and a sustainability audit?
ESG audits are separate from financial audits because they have
different objectives. An ESG audit focuses on the environmental
and social risks that come with doing business while
sustainability audits focus on how companies can become more
environmentally friendly and socially responsible.
What are the components of an internal
audit?

3. The external environment is a key component that affects all
businesses. That's why it's crucial for companies to evaluate
their current performance against major ESG risks. This involves
looking at stakeholder perceptions, compliance with laws and
regulations as well as the company's policies on environmental
and social matters.
To conduct an ESG audit, it's important to use a structured and
rigorous process that aligns with international standards. The
auditors should be independent and qualified – ideally, they
should have expertise in environmental risk, sustainability or
both.
What is ESG assurance?
The assurance aspect of ESG Reporting is about how companies
demonstrate that they're serious about corporate social
responsibility and sustainability. It provides assurance that
current and future investors can place their trust in ESG data
and analysis. Some of the ways they can do this include:
 certification by a third party of the information included
in the ESG report
 publication of an explanatory letter from management
 independent assurance that data and analysis is accurate
and reliable
What does ESG mean in finance?
Environmental, Social and Governance relations to finance are
defined as "factors that are not financial in nature but may
affect the risk, performance or value of a company’s
securities." In other words, they are important because they may
affect a company's financial performance.
ESG disclosures Positive vs negative
effects

4. Negative effects might include:
 low company morale
 bad publicity (reputation)
 legal fees to protect the environment (and society) and
 fines and litigation
Positive effects might include:
 low turnover in employees
 good reputation that attracts future hires
 reduced litigation due to environmental measures taken by
the company and
 positive media coverage
Who is responsible for ESG reporting?
Not every company is required to submit an ESG report, but those
that are must comply with the requirements of their country's
regulator. In the USA, the regulator for ESG reports is the
Securities and Exchange Commission (SEC). Any company which is
listed on a US stock (exchange) must submit an annual report to
the SEC, which will be available to the public.
The European Union has similar requirements for its countries
under the Transparency Directive requirement. In the UK,
companies which issue or have publicly traded securities are
required to produce an ESG report, but this requirement is not
yet as well known as the USA's. In Canada, for example,
companies listed on a stock exchange (TSX or TSXV) must follow
securities laws and regulations as well as National Instrument
51-102 which outlines how to report ESG issues.
What is an ESG disclosure?
An ESG disclosure is a report that provides relevant information
from the company about its ESG performance. This includes how it
complies with laws and regulations related to environmental,
social and governance issues. From a more general perspective,
the disclosure is also about the company's ESG risks and impacts
on society.

5. What is the difference between CSR and ESG?
CSR stands for Corporate Social Responsibility. It's a process
by which companies work to include social and environmental
priorities in their business strategies, policies and
operations. By complying with the principles of CSR, businesses
become more responsible citizens in society. The goal of ESG is
to make sure that companies are adhering to these same
principles by understanding their impact on the environment and
society.
ESG is thus the way in which companies demonstrate commitment to
CSR, by ensuring their activities are transparently reported and
evaluated for environmental and social issues.
What is the process of corporate social
responsibility?
This can be summarized into 5 steps:
1) Identifying the main issues that the company is responsible
for (e.g. environment, society and governance)
2) Evaluating and prioritizing these issues
3) Creating CSR management systems
4) Implementing these systems throughout the company, including
training employees
5) Evaluating this program's success and creating new plans to
improve it if necessary.
What are some examples of what can be
evaluated in an ESG assessment?
Examples include:

6.  Facilities management, to ensure they are being built in an
environmentally friendly way
 The company's performance on social issues related to human
rights, diversity and labour standards
 Environmental standards, environmental management systems
and energy saving initiatives.
 The company should also have a plan for monitoring carbon
emissions.
 Recycling, water management and chemical management
 Employee satisfaction rates, including diversity of the
workforce from a social perspective.
 Companies should report on all their activities that impact
the environment and society.
 Product development process, manufacturing processes and
efforts to reduce waste during all stages of production.
 Hazardous materials used in their products or any toxic
waste produced.
 Compensation for employees, including benefits and working
conditions
 Compensation for factors like environmental damage or
community impacts
 Corporate transparency (e.g. the company's response to
freedom of information requests)
How is a company assessed for its
environmental impact?
This can be broken down into three main areas:
1) Transportation - the way the company's supply chain moves
goods to customers, including emissions from transportation
vehicles and fuel use
2) Location of facilities- how these are built will have
environmental implications, for example if water needs to be
sourced from a long distance
3) Products- are they being designed with the environment in
mind? This area also includes energy use.
What is the standardization of ESG reports?

7. The International Organization for Standardization (ISO)
recognized that voluntarily prepared CSR and ESG reports will
not be as consistent as required. In response, ISO released a
publicly available standards framework which offers an
international approach to reporting. Under the ISO 26000
guidelines, companies are encouraged to report on their ESG
principles as well as on some of the risks and impacts that
their CSR activities have had.
What are the benefits of an ESG audit?
ESG audits help companies:
1) Meet regulatory requirements for reporting environmental and
social issues:
 in the United States under SEC Regulation S-K
 in the European Union under Directive 2013/34/EU
 in Australia under ASX Corporate Governance Council's CG50
Guidelines
 in the UK under FRC's Stewardship Code
 in Canada under IIRC's Corporate Governance Guideline-2.1,
 in New Zealand under NZX's Corporate Governance Disclosure
Guideline
 and in China under PICC's Sustainable Development Reporting
Guidelines
 in India under SEBI's Corporate Governance Guidelines, and
 in Brazil under CVM Instrução 569
 in Mexico under CNBV's Recommendation on Sustainable
Development
 in Chile under CNMC Resolution N° 105
 in Norway under SSM's Guidance on environmental reporting
 in South Africa under PAS 55
2) Improve their social license to operate by identifying risks,
taking effective corrective action, reporting on progress
transparently, and communicating effectively with stakeholders
about ESG issues.
3) Gain market advantage by differentiating themselves from
their peers, building new business opportunities, and
demonstrating a commitment to high environmental and social
standards.

8. What is the value of ESG reports?
The value of ESG reporting lies in making sure that corporate
activities are sustainable and do not affect the environment or
society. These reports provide transparency and allow companies
to be accountable for their actions.
What is ESG risk?
A common example of ESG risk would be a company's operations
violating environmental laws and regulations. Another would be
the risk that the company's business model will fail to meet
changing social, economic or technological conditions.
How do we prepare for an ESG audit?
Before conducting an ESG audit, companies should:
1) Identify their stakeholders
2) Understand how these stakeholders perceive their company's
business activities
3) Identify the risks and opportunities related to ESG issues
4) Develop a plan for reporting on these issues, as well as
procedures for evaluating them regularly.
3 main components of an ESG audit?
The three main components of an ESG audit:
1) The scope: which issues are being evaluated?
2) The timeline: when is the assessment being carried out, and
which periods or time frames are being studied?
3) The methodology: this part describes how the audit will be
conducted. Companies should keep in mind that a good methodology

9. should have layers of checks and balances to ensure it's as
accurate as possible.
How many ESG reporting frameworks are
there?
At the time of this publication, there were over 50 ESG
reporting frameworks, with the Global Reporting Initiative (GRI)
being a widely adopted standard that covers a broad range of
sustainability issues.
What is an ESG KPI?
ESG refers to assessing environmental, social, and governance
factors in the performance of an investment. Environmental
factors include items such as greenhouse gas emissions or waste
generation. Social factors refer to labor practices, human
rights, diversity outreach and inclusion. Governance issues look
at who manages a corporation (shareholders may be more important
than stakeholders) and the relationship between a company and
the community where it operates.
In summary on internal auditors
In conclusion, ESG audits allow companies to evaluate their
business impact on the environment and society. This information
can be used to develop effective, long-term strategies that help
a company maintain an ethical and sustainable business model
while improving their relationships with stakeholders. As we
experience more massive weather events from the effects of
climate change, companies will be under more pressure to exhibit
their awareness and adherence to Environmental, Social and
Governance standards.
Caveats, disclaimers and ESG auditing
We have covered many topics in this article and want to be clear
that any reference to, or mention of esg reporting, internal

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with investment advice or personal opinion. Thank you for
reading, we hope that you found this article useful in your
quest to understand ESG.