Becoming Ready for ESG Assurance

Meeting environmental, social, and governance (ESG) performance goals is a growing imperative for all company stakeholders, from regulators and investors to customers and employees. With that in mind, many firms have been voluntarily reporting and publishing ESG data. At the same time, gaining outside assurance over the ESG information that a company discloses is becoming more important: the EU rolled out the Corporate Sustainability Reporting Directive (CSRD) in January 2023, and the International Sustainability Standards Board (ISSB) followed with sustainability disclosure standards in June. In the coming months, the US Securities and Exchange Commission (SEC) will be issuing standards as well.??

Most global companies will need to comply with one or more of these standards. That will require them to do more than gather, measure, and report appropriate ESG metrics. These standards often encourage, or in some cases require, that ESG data be assured by a credible and trusted external third party.??

ESG shareholder activism is also building. According to RBC Capital Markets, ESG campaigns doubled between 2016 and 2021—and the number is still climbing. Institutional and individual investors seek verified ESG data to guide their investments in ESG mutual funds and ETFs. Some stock exchanges now encourage or even require companies to provide ESG data. And customers, suppliers, and employees increasingly consider ESG issues before buying from or working with companies. Third-party assurance helps to eliminate greenwashing and build trust.?

How to become assurance ready?

However, obtaining third-party assurance requires that companies have the systems and processes in place to not only collect the needed data, but also to ensure it is as accurate as possible. To help companies prepare, KPMG asked ThoughtLab to collaborate on creating the KPMG ESG Assurance Maturity Index. To do so, we surveyed senior executives with ESG knowledge at 750 companies across industries, global regions, and revenue sizes.??

Based on the results, we created an ESG assurance maturity framework and helped us gauge the relative progress made by respondent companies. Our analysis shows that many companies are still far from ready for ESG assurance. Many do not currently collect—much less report—much of the data that regulators now or will soon like to see. Moreover, quality checking of ESG data and testing of processes and controls is inadequate at most firms.?

We found that publicly traded firms, which must disclose more ESG information to the public, are more prepared than privately held firms. Since bigger companies tend to be publicly held, it follows that they are more prepared for ESG assurance: firms with over $10 billion in revenue are far ahead of others, according to the study. More than half of ESG assurance-mature organizations have revenue over $10 billion.??

The maturity framework, and the key findings from this survey, offer companies insights into the progress peers are making to prepare for ESG assurance requirements. The practices of the most advanced organizations—which we designated as leaders—offer a roadmap for others that want to become ready for ESG assurance. We found that ESG leaders take five key steps to prepare.?

1. Build effective ESG governance. Leaders make ESG a top management and board responsibility and establish effective reporting policies and processes.?
2. Develop ESG skills and teams. Leaders do more to build internal skills, both to manage ESG data collection matters and to track and disclose ESG information. They set up dedicated ESG teams and train general staff to ensure effective and accurate ESG data reporting.??
3. Set and track ESG metrics across functions. Leaders set and break down ESG targets for operational functions. They define, collect, and report ESG key performance indicators, and implement robust processes and controls for all types of ESG data.??
4. Digitize ESG data processes. Leaders use advanced digital tools and technologies to collect, store, analyze, report, and manage ESG data. They integrate ESG data with financial data reporting systems.?
5. Work with suppliers to meet ESG goals. Leaders ensure that their suppliers are in line with their ESG policies by setting, monitoring, and enforcing both broad and specific contractual requirements.??

ESG assurance is not just about complying with regulations. Companies that are out in front in preparing for ESG assurance understand its value, believing that it will yield broader business and strategic benefits. More than half of leaders, for example, expect to see greater market share, improved profitability, and improved decision-making from having their ESG data independently assured.?

To learn more, download the full report here:? KPMG ESG Assurance Index.