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75% of companies unprepared for coming ESG audits: KPMG

Sept. 26, 2023

As regulators worldwide begin to mandate ESG disclosures, only 25% of companies are ready for audits of their reports, KPMG said.

Dive Brief:

Three out of four companies worldwide are unprepared for regulations coming into force next year requiring outside audits of environmental, social and governance policies, KPMG said.

Although roughly half of companies (52%) subject their ESG disclosures to an audit, only 30% of those respondents say that they attain “limited” or “reasonable” compliance with coming audit standards, KPMG found in a survey of 750 companies across regions, industries and revenue sizes.

“While most companies have been doing some voluntary reporting on sustainability issues, they typically didn’t subject that reporting to the same rigor, controls and oversight that will be needed to meet the new regulatory requirements to be assured,” Mike Shannon, KPMG’s global head of ESG audit, said Monday in a statement.

Dive Insight:

Regulators in the U.S., EU, U.K., Japan and other jurisdictions are either ramping up or considering mandatory ESG reporting rules with the aim of providing investors with consistent and comparable company disclosures.

Currently, CFOs at multinational companies must navigate a maze of more than 600 different — and sometimes conflicting — ESG rules worldwide, according to Wolters Kluwer.

As regulators in the U.S. and several other countries seek to reduce confusion by better aligning regulations, they are also starting to mandate much more detailed, far-reaching and costly ESG disclosure.

“For the first time in history, businesses are being required to report on both financial and non-financial data,” Karen Abramson, Wolters Kluwer’s CEO for corporate performance and ESG, said Monday in a statement. “This shift is creating a true sea change in the complexity of corporate reporting.”

A rule proposed by the Securities and Exchange Commission in March 2022 would require publicly traded companies to disclose in detail their carbon emissions and those by their energy providers. Companies would also need to report on Form 10-K their risks from climate change and strategy for curbing such risks.

The SEC has repeatedly delayed release of a final rule as it pores over a record 16,000 public comment letters. A requirement that some companies gauge and report the carbon emissions across their supply chains — including by suppliers and customers — has triggered opposition by Republican lawmakers and industry organizations including the U.S. Chamber of Commerce.

The concern has prompted extensive deliberation over a final rule by agency staff, SEC Chair Gary Gensler said during testimony to a Senate committee on Sept. 12.

Under the proposed rule, companies would also need to subject their data and findings on carbon emissions and climate risk to an independent audit.

“Only 25% of companies feel they have the ESG policies, skills and systems in place to be ready for” an external audit, KPMG said.

Companies better prepared for an ESG audit tend to have boards engaged on ESG issues, conduct regular ESG training and institute controls for ESG data, KPMG said.

In addition to meeting compliance rules, ESG audits help a company burnish its reputation, expand market share, spark innovation and cut costs, according to about half of the KPMG survey respondents.

Larger companies tend to be better prepared for ESG audits than smaller ones, KPMG said.

Companies based in France, Japan and the U.S. are more ready for audits than their counterparts elsewhere, KPMG said. Companies in Brazil and China report the lowest level of readiness.

Fifty-eight percent of companies unprepared for an ESG audit report difficulty balancing the goals of ESG audits with the profit expectations of shareholders, KPMG said.

[CFO Dive]

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