With nascent regulations stressing the need for ESG disclosures to be included in corporate financial reports, the role of auditors in the process is coming under scrutiny.
That was recognised this week with the Institute of Internal Auditors (IIA) in the US praising a declaration by the National Association of Corporate Directors (NACD) that recognised the importance of auditors in giving assurance to ESG data and reports.
But others in the industry have expressed concern that the task will be made difficult by the complex nature of ESG data. Auditing giant Deloitte and the Center for Audit Quality (CAQ) said in the findings of a survey this week that its members were unsure to what degree ESG declarations fell under their remit.
Krista Parsons, Audit & Assurance managing director with Deloitte’s Center for Board Effectiveness, said companies’ workloads were increasing as the corporate governance landscape evolved, and the addition of ESG made things tougher.
“The good news is most audit committee respondents recognise their primary responsibilities… The challenge in the future is maintaining this focus on their core responsibilities while addressing emerging risks and potential new areas of oversight,” she said.
The announcement also this week that data management platform Diginex had signed a tie-up with verification and testing company SGS may have given the worried auditors cheer.
The “strategic alliance” would see Geneva-based SGS provide assurance services for companies that put their ESG data onto Diginex’s platform.
Pioneering Mission
The aim of the partnership, explained Diginex Head of ESG Jessica Camus, is to provide the very assurance that would make auditors’s work easier. That made the alliance “pioneering”, Camus told ESG Insight.
“There’s been a lot of talk around greenwashing and not having clear defined standards and harmonised, consistent reporting frameworks, but there’s been very little-to-no action when it comes to data verification,” Camus said. “We know that there are a lot of accounting firms scratching their heads and trying to figure out how to operate with their clients.
“That’s what we want to offer with this combined verification service.”
Founded in 2017, Hong Kong- and UK-based Diginex focuses on small-to-mid-cap companies, enabling them to centralise their ESG data on its SaaS-based platform. Through a guided process, clients are shown what disclosure data is relevant to their them and to the most applicable reporting framework.
Clients can then opt to have their data checked by SGS, which will earn them an audit issuer assurance certificate that can be attached to their annual reports as assurance of the security and veracity of their data. They can also choose to store their activity records on a blockchain, adding another layer of security.
Deepest Pockets
Camus characterises Diginex breaking down an ESG reporting set-up that she says has priced SMEs out of the market. With rates starting at $99 per month for a single user, Camus says small companies can access the sort of data management and ESG reporting capabilities that have so far been accessible only by large, mostly listed, corporations.
“We’ve seen with digital products and with assurance services, and very much the whole ESG sphere, that is has been geared towards the guys with the deepest pockets,” she said. “That’s what we want to disrupt with our technical solutions.”
It’s a message that has impressed investors. Fitch Ventures, Fitch Group’s investment arm, last year led a $6 million funding round that took total backing to $8m. Camus said the SGS tie-up was expected to bring rich benefits to both companies and that they hadn’t ruled out a closer financial partnership in the future.
“Until then, it’s a strategic alliance with the broader objective of making independent verification a new standard in ESG, and indeed ESG reporting,” she said.
Filling Gaps
For many clients, signing up to Diginex will be their first involvement in ESG data gathering. Regulations in the process of being rolled out make no demands on smaller companies to make such declarations.
But Diginex expects the space to grow as regulators begin requiring financial institutions to report their so-called invested, or Scope Three, emissions. Those are the greenhouse gas and carbon data of the companies in which firms invest or from which they buy services.
Consequently, Diginex is training its energies on luring supply-chains companies, Camus said; they are the businesses coming under the most recent pressure.
“A lot of the SMEs that are reaching out to us are saying that 12 months ago investors were asking about their balance sheets and now they’re suddenly being asked by the same investors what their carbon footprints are,” she said.
Camus said Diginex sees its alliance with SGS as providing another means of filling gaps in the ESG data record that has led to claims of greenwashing.
“The certification element of just having trust and visibility over the data has become really critical,” she said. “Before it was just screening – it was about stock picking and screening. Now it’s all about engaging.”
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