Baker Tilly’s Considerations for Integrating the Sustainability Function With Compliance, Internal Audit, Accounting and IT
Authored by Benjamin Martin
While sustainability is now mainstream at many companies, corporate sustainability teams still largely operate separately from core business functions. Because of this, sustainability teams often face challenges persuading other decision makers to support their efforts. Sustainability initiatives are often encumbered by ill-defined governance and the constant need to defend the business case for sustainability. But as sustainability regulations create concrete risks for companies, sustainability teams require more authority and cooperation to meet these stringent requirements and avoid the fines and reputational damages for not complying. The need for investor-grade sustainability disclosures demands the attention of the accounting, legal, internal audit and technology organizations to be successful. At this critical inflection point for sustainability reporting, it is high time that sustainability teams have a seat at the table and integrate processes with the larger corporate reporting process.
At Baker Tilly, we partner with clients of all sizes, industries and maturity to quickly integrate sustainability with relevant corporate functions ahead of key regulatory milestones. This integration is nuanced, requiring advisors with interdisciplinary backgrounds to support systems integration, map workflows that avoid duplication and communicate effectively across multiple team vernaculars. As companies have limited time to complete these integrations, here are a few considerations to support sustainability teams with this crucial step.
Integration of sustainability with compliance
One of the greatest challenges facing companies is a fundamental question – who is responsible for determining the applicability of sustainability-related rules and regulations for the organization? Compliance teams are equipped to flag relevant rules but may lack context to determine if and how the company needs to change sustainability reporting. Sustainability teams can be great partners with compliance to address this landmark shift in reporting.
1. Champion policy monitoring and scoping. Sustainability regulations are in constant flux, with new developments that extend timelines and shift requirements. Compliance teams have a large scope of responsibility, so tasking the sustainability function to monitor sustainability-related regulatory changes can be hugely helpful. Keeping the organization abreast of rule developments and the timing of workflows is naturally suited to the sustainability team and can help put other teams at ease about the program management of meeting these highly intersectional rules. Regularly reporting to the board and senior leadership teams on regulatory developments to the board and the team’s approach for meeting these rules is a great way to increase the team’s integration and responsibilities.
2. Prepare for any outcome. While some regulatory processes for sustainability reporting are still being finalized, many companies are focusing on the most stringent rules to best prepare their organizations for long-term reporting readiness. Companies subject to relevant European Union (EU) directives (such as the Corporate Sustainability Reporting Directive known as CSRD) are charging ahead with the preparations for these requirements, recognizing that other rules nest within the scope of these requirements. Domestically, the U.S. Securities and Exchange Commission (SEC) along with the California Climate Accountability package and other state sustainability regulations have unique reporting requirements as well. This drives the needs for companies to appropriately resource and test their reporting systems to meet a web of requirements. Smaller companies that may only be subject to local jurisdictions can also take this approach, as the frameworks that underpin draft rules provide clear guidance. Organizations can leverage frameworks like TCFD and the GHG Protocol, which provide all the tools needed for companies to meet reporting obligations.
3. Engage with the process. Many organizations express frustration with the uncertainty surrounding rule guidance that makes it hard for companies to act with confidence. With general consensus that regulation of sustainability disclosures will continue to increase across jurisdictions, sustainability teams can work with their government affairs colleagues to actively participate in the regulatory process to reduce confusion and inefficiencies. By leveraging trade organizations and other means of policy engagement, organizations can help shape guidance that is appropriate, material and feasible for their operations while working to create policy that provides more certainty long-term. This approach is particularly sought out for industries that have significant supplier dependencies and where aligning reporting requirements across the value chain is a top priority.
Integration of sustainability with accounting and internal audit
Sustainability teams are the stewards of large datasets of non-financial data. But as reporting will need to be included in financial filings and undergo external review, the accounting function is the natural partner to enhance sustainability reporting and integrate data streams into the company’s central accounting architecture. Here are some ways the sustainability team can help facilitate this critical integration:
4. Take stock of what resources and procedures already exist. If acting independently, accounting teams tasked with sustainability reporting might assume that there is no work being done to date. Rapid requests for new systems and advisory support can be common and this often duplicates efforts already well-underway by the sustainability functions. Sustainability teams can help educate their accounting colleagues by providing a current state of sustainability reporting systems and procedures. This includes an end-to-end look at the process for greenhouse gas emissions calculations, materiality assessments, HR and safety data and other systems that feed sustainability reports. This will help onboard the accounting function to this type of non-financial data and provide insights for how to incorporate this information into SEC filings and other relevant disclosures.
5. Seek out internal audit as your best collaborator. Many sustainability professionals are just starting to learn about the types of documentation and controls they’ll need to perform assurance. Some teams are endeavoring to learn about this through trial and error, but internal audit will be able to provide much clearer insight into this maturity. These teams can quickly recommend ways to improve reporting integrity throughout the sustainability reporting process. In addition, internal audit can reduce redundancies by integrating sustainability workstreams into areas overseen by internal audit. This includes assessing materiality of sustainability topics through an enterprise risk process and leveraging financial reporting systems to better track data flows. By tapping into the intellectual capital of an internal audit function, sustainability teams can quickly and more cost effectively meet their reporting requirements.
6. Identify and engage your external audit partner for sustainability data. Sustainability teams may have some familiarity with third party assurance, but likely not to the extent needed to meet new regulations. Before the sustainability and accounting teams create any new systems or procedures, it is likely a good idea to meet with an external auditor to understand their expectations when conducting limited assurance over sustainability disclosures. Understanding the documentation needed will help inform where there are gaps and what needs to be enhanced. In addition, to your current financial statement auditor, consider engaging another CPA firm to help with reporting readiness. By leveraging other CPA firms to improve reporting maturity, organizations can leverage a more cost-effective plan to meet limited and ultimately reasonable assurance of sustainability disclosures while maintaining considerations for independence.
Integration of sustainability with information technology
New regulations require significant volumes of data to be collected, stored, transformed and reported. An analog system of record will create inefficiencies across the entire process and will likely risk non-conformance with many sustainability rules. Sustainability teams can partner with their IT organization to ensure they have the right systems and tools in place to ensure a successful reporting transformation.
7. Prioritize system interoperability. When seeking out systems to store, track and analyze ESG data, no one provider yet has a true end-to-end solution. Organizations need to evaluate multiple tools and determine what will work best for their own use cases. First, assess what systems are already in place and be clear on needs with the IT team before beginning a sourcing process for new technology and/or software. This includes walking the internal IT team through a typical data collection process so they can understand the request clearly. Because the market is still quite fragmented, interoperability is a key consideration and should be a priority for any team needing to aggregate data from several sources. In addition, consider the level of support the sustainability team will receive from the technology or software provider as almost all tools will have significant customization, implementation, user requests and other support needs that may not be clear upon initiation. Organizations typically start with a thematic-based solution – say climate reporting – to get a handle on data collection for a singular, high-priority topic. The right tool can help ensure data collection is coordinated and accurate before leveraging other reporting solutions or other use cases.
8. Focus on data governance. Before jumping headfirst into a procurement process for ESG and sustainability solutions, we recommend that organizations start with a mapping exercise to understand the flow of data and who should be included in each step of the process. Ultimately, users are the points of failure within a data collection process and need to be brought in on the workflow and the tool before any automation can occur. Starting with a worksheet-based process is how all teams begin, and it is important to get the governance of data right before adding complexity to the process through digital solutions. This includes having detailed documentation for data sources, owners and approvers so that automation can expedite an already established process.
In summary, there are many ways sustainability teams can add value in a regulatory context. With a renewed mandate to keep the organization compliant with sustainability rules, there are many partnerships in the organization that will improve coordination and drive a successful reporting process.
Should you or your team need any support with these integrations, Baker Tilly’s ESG and sustainability services support clients of all sizes with sustainability reporting readiness, assurance, digital transformation and strategy services that can help your organization quickly prepare for enhanced reporting requirements.
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