The GRI Perspective

Auditing to save the planet:
the battle against greenwashing
Issue 9 – 16 November 2022

Heroic statements on climate action and social
responsibility have long been marketing gimmicks usedby businesses. Yet with corporate sustainability taking
an increasingly prominent position in the financial worldand beyond, headlines on ‘greenwashing’ scandals are on
the rise. This is a concern that has serious ramifications
for companies and needs to be quickly addressed. A
key question is, however, how and by whom?

This also means the entire governance system forsafeguarding the accuracy and completeness of reported
data needs created or, in many cases, professionalized.

With the emergence of a new global system forsustainability reporting taking shape, for both impact
and financial disclosure, the attention is turning to thegatekeepers of information: the auditors. Inaccurate
and incomplete data undermines the credibility ofsustainability information. At GRI, we believe effective
reporting cannot be achieved without effective controls,and vice versa. We need the audit sector to deliver
the extra mile.

3. Internal audit

The four lines of defenseLooking at current developments in sustainability
reporting, it is not all that different to the introductionof international accounting standards at the beginningof this century. Disclosure of sustainability related
information – be it on enterprise value or impacts – israpidly moving towards parity with financial information.

Borrowing from the established practice in financial
reporting, the four lines of defense are:1.

Control frameworks and day-to-day controls

2. Management review
4. External audit
Throughout these steps, misstatements, omissions
or manipulation within the data gathering and reportingare dealt with. We need to see that same rigor applied
to sustainability disclosures. Businesses and otherstakeholders making investment decisions, career
choices or supply chain analysis based on sustainability
information should be able to rely on the data. Beyond
making claims to be doing good, companies must beable to back them up.
Already we have seen instances where IPO’s havefailed on the basis of inaccurate ESG data. Or evenworse, charges on misleading investors after disasters
struck. Damage to the brand, especially in times ofenergy crisis and a shortage of labor, can be severe.

State of play – sustainability assurance
For decades, auditors have played a central role inensuring accurate financial information. Past scandals
have triggered demand for stronger controls andpositioned audit as the bridge between markets andbusiness. Mandatory audits on financial data are anundisputed given.
With the transition to a reporting system where financial
and sustainability information is on an equal footing,mandatory assurance of sustainability data is only
a matter of time. In fact, the European Commission
will demand limited assurance on sustainability reports
from 2024. That means integrated reporting of financial
and sustainability information, and therefore also
integrated assurance.
For many years companies reporting with the GRI
Standards have provided voluntary audit statementson (parts of) their reports. Apparently, the forces ofcapital markets are stronger than that of regulation.
The question then is, do we need mandatory audit
regulation on sustainability reports? The short answer
is yes, to create a level playing field for all.
Research from IFAC, AICPA & CIMA shows thatthe rise in sustainability assurance is a global trend.
Yet with increased reliance by investors and otherstakeholders on these audit statements, low-quality
assurance is an emerging concern.

Tackling ‘ESG laundering’Of course, jurisdictions will always have their own
approaches, based on legislation, market conditions
or tradition, but we need the same broad foundation.
Companies and their stakeholders all benefit fromcomparable data, to assess whether
risks are mitigated and what the impact is on theenvironment, the economy and society.
GRI is committed to developing the global system
for sustainability-related corporate reporting, as we
continue our collaboration with the IFRS Foundationto achieve interoperability between the GRI Standards
and new ISSB standards, based on our distinct yet
inter-related approaches: impact materiality with GRI
and financial materiality through the ISSB. Taken
together, this will enable one set of standards forbusiness to report upon and auditors to assure upon.
Consolidating best practice on a global level is an
important stage in the professionalization ofsustainability reporting auditing. GRI therefore
welcomes that the IAASB is developing a sustainability
reporting assurance standard.
The shift to a sustainability focused economy affects
supply chains, finance flows and education systems– and proper audits are one of the main value drivers.
If business, investors and other stakeholders cannot
trust published sustainability information, from boththe financial and impact perspectives, it will be hardto demonstrate how they are contributing to a betterworld for everyone.

Greenwashing is a challenge that the auditing
community alone cannot solve. For one, because
accounting firms already face major issues in termsof capacity and capabilities of staff and technology.
On top of that, standards setters in particular have anecessary role. A multitude of sustainability reporting
standards and frameworks does not only increase
the cost of compliance but also the cost of auditing.
As discussed in a previous GRI Perspective, ranking
and rating firms would benefit from a single
comprehensive system for sustainability reporting– and the same goes for auditors.

How we can help
We recognize that effectively applying the GRI
Standards for audit purposes requires support.
The GRI Academy offers wide-ranging training
on how to apply the GRI Standards, including
the 2021 update of the Universal Standards thatcomes in to effect for all reporting from January
2023. You can also keep up to date with GRI
events that cover policy engagement, standards
developments and more.

Just imagine if audits need to be undertaken not only
for financial reports based on international and national
accounting standards, but also on sustainability datausing the GRI Standards, ISSB Standards, SEC climate
regulation, European Sustainability Reporting Standards(ESRS), the TCFD framework, and other locally set
requirements. Where would we find the audit capacity?

Get in touch
To find out more about GRI and opportunities
to engage with us, please reach out to:
info@globalreporting.org
Email us

www.globalreporting.org

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