Traditionally, businesses have only had to concern themselves with the auditing, monitoring and reporting of financial material. But this is no longer the case, and governance must expand rapidly to include strict and comprehensive assessment of non-financial issues, right across the ESG and sustainability spectrum.

Not only does compliance with international regulations on ESG and sustainability standards, such as the European Union’s Corporate Sustainability Reporting Directive (CSRD), demand it, but key stakeholders—investors, customers, and employees—are placing increasing relevance on transparency and accountability on these non-financial issues too.

In the vanguard

Audit committees must be at the front line of this reform, expanding their scope beyond strict financial reporting and accounting to include environmental, social, governance and sustainability impact.

Unfortunately, audit committees are ill-equipped to handle these new criteria and processes.

They have rightly been composed of individuals with strong accounting and financial backgrounds, such as certified public accountants (CPAs) and former chief financial officers (CFOs), and these experts unsurprisingly don’t have the knowledge, skills or tools required to deal with non-financial metrics.

Just as you would expect audit committee members to be abreast of accounting regulations, they will soon be expected to be able to identify the top five places in the company where a security accident is most likely to occur, or what the ‘double materiality’ concept in the CSRD means for their business. Yet you can’t expect an accountant to know climate science or decarbonisation strategies, any more than you would presume an environmental expert to be au fait with the International Financial Reporting Standards.

Luckily, it is not all doom and gloom, and there are some simple solutions.

First, companies must upskill the current members of their audit committees, supplying them with the appropriate tools to tackle non-financial metrics and reporting.

This can be done via training programmes on key ESG and sustainability frameworks, including the Task Force on Climate-related Financial Disclosures (TCFD) or the Global Reporting Initiative (GRI), and workshops on emerging sustainability trends and technologies.

Second, and most importantly, they must bring on board actual ESG and sustainability experts. Individuals with backgrounds in areas such as corporate social responsibility (CSR), social impact and data analytics, will ensure that committees possess the skills to oversee non-financial reporting successfully.

External experts, such as ESG analysts and sustainability consultants, can also provide invaluable guidance, shedding light on best practices for measuring and reporting non-financial performance.

This will enhance the understanding of non-financial metrics within audit committees, allowing them to better evaluate progress on ESG and sustainability, bridging the knowledge gap and enabling the expansion of oversight responsibilities.

Fresh perspectives

Diversifying will also bring fresh perspectives. These are vital, given the multifaceted nature of ESG and sustainability, which encompasses topics as varied as corruption, slavery, bribery, security incidents and water consumption.

However, for non-financial ESG and sustainability issues to be effectively embedded into audit committees, they must first also constitute part of the business-wide strategy.

This responsibility falls onto executives and board members. They will need to understand how their business impacts ESG and sustainability issues, and how improving or reducing this impact can provide value to the business—then set clear objectives and direction towards improvement.

Only once this has been accomplished can audit committees begin their work, and integrate ESG and sustainability within their responsibilities.

They will need clear reporting expectations. The metrics to be used, the frequency of reporting, and the standards to follow must be established, allowing consistency and comparability across reporting periods, and against other companies.

As a consequence of this, audit committees will be able to evaluate data quality in a more efficient manner, just like they presently do for financial data.

Monitoring progress will then inevitably be much easier, as potential areas for improvement can be more easily identified, as well as identifying potential risks and overarching company goals.

Adapting to the new world of ESG and sustainability reporting is not just a matter of compliance: it’s a business imperative.

Companies that successfully navigate these tricky waters will be in a better position to attract investment and drive up stakeholder trust. And audit committees need to lead the way towards driving corporate sustainability and create long term value. Those that fail may soon be victims to reputational damage, regulatory scrutiny and financial underperformance.

Scott Lane is a lawyer and CEO of Speeki, an ESG and sustainability reporting consultancy