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  • Daniel Goelzer

Audit Committees and ESG: The Journey in 2022

In Navigating the ESG journey in 2022 and beyond, a January 2022 item in the “On the audit committee’s agenda” series, Deloitte’s Center for Board Effectiveness (CBE) discusses why governance structures around ESG (environmental, social, and governance) strategy and disclosure should be a priority for public companies and their boards. According to CBE, “In recognition of the important role ESG plays in driving long-term value creation, more and more boards are focused on and are disclosing how their governance structure is evolving to consider ESG more intentionally.” While audit committees are not likely to have primary board level oversight responsibility for ESG, they have an important role to play. CBE offers some suggestions as to how audit committees fit into the board’s approach to ESG governance and provides some questions committees should be asking.


As background, CBE summarizes recent ESG developments: Investor expectations regarding climate and other ESG issues are already high and continue to increase. The SEC is likely to propose ESG disclosure requirements in the areas of climate change, cyber risk governance, board diversity, and human capital management early in 2022. See The SEC’s Agenda – ESG Tops the List, July 2021 Update. In addition, the IFRS Foundation has created the International Sustainability Standards Board. See IFRS Foundation Announces the International Sustainability Standards Board and Consolidation with CDSB and SASB, November-December 2021 Update. Other standard-setters are also enhancing their involvement in ESG, including FASB and the Commodity Futures Trading Commission. See How Does ESG Affect Accounting and Financial Reporting? July 2021 Update. CBE concludes, “With the pace of the ESG developments expected to accelerate rapidly in 2022, company management and boards should be focused on enhancing governance structures and the control environment around managing, and overseeing, ESG risks and opportunities and delivering high quality disclosure.”


In light of these trends, CBE recommends that boards develop governance structures, policies, and practices for overseeing ESG accountability and strategy, including appropriate delegations to committees. This appears to be happening. According to CBE’s research, “there was a marked increase in 2021 in the percentage of S&P 500 companies disclosing in their proxies the primary committee(s) overseeing ESG relative to last year (from 72% to 86%).” These proxy disclosures reveal significant variation in the committees that oversee ESG. The data for 2020-2021 indicates that 53 percent of S&P 500 boards utilize the nominating and governance committee for primary oversight. (The CBE notes that some companies have changed the nominating and governance committee’s name in light of its “broader committee purview” -- e.g., to Nominating, Environmental, Social, and Governance Committee.) Thirteen 13 percent of the S&P 500 assign responsibility to an ESG/sustainability committee, while seven percent indicated that the full board has primary ESG responsibility, and an additional seven percent identified multiple committees. Only one percent of the S&P 500 reported that the audit committee had primary ESG oversight responsibility.


In CBE’s view, despite rarely having primary ESG responsibility, the audit committee has several important roles in ESG oversight, including:

  • “Audit committees should understand whether there are appropriate internal and disclosure controls and procedures for the metrics disclosed, whether in an SEC filing or a separate sustainability report. This includes working closely with other committees to understand how ESG risks are identified and prioritized and how materiality is defined.

  • “The audit committee should understand the companies’ ESG program— its interconnectedness across the pillars of “E”, “S”, and “G” and the related goals and metrics—and how management considers ESG strategies and the impact they may have on the financial statements.

  • “As the development of companies’ integration of ESG into strategy and disclosure objectives continues to evolve and marketplace standards become more established and authoritative, the role of internal audit and the value of assurance as a tool to drive trust and confidence in ESG performance will become central. Assurance can provide a strong signal to investors and other stakeholders regarding the quality and reliability of disclosures. Audit committees should take the lead in overseeing the assurance engagement. The committee may consider inquiring with management about engaging with public company auditors on how to evolve and mature its ESG programs to meet the increasing demands of the market and regulators.”

Further, CBE suggests that the audit committee consider ten ESG questions:

  1. Where does the primary ownership and oversight responsibility for ESG reside on the board, both overall and in terms of its various components (e.g., climate, diversity, talent, cyber)? Does the full board understand where and when these elements are being discussed at the board and committee level?

  2. How does the company identify and assess ESG risks and opportunities and evaluate its materiality to the business?

  3. For ESG risks that are material to the business, how are they integrated into enterprise risk management?

  4. How is the company remaining informed of developments in ESG legislation and regulations in all the relevant jurisdictions for the business? And how is the company preparing for anticipated shifts in regulatory requirements (i.e., SEC rulemaking)?

  5. How is progress against ESG commitments measured and monitored?

  6. How confident are management and the board in the company’s ability to anticipate disruptive environmental and societal trends?

  7. What processes and controls are in place to address evolving ESG risks and related disclosures?

  8. Has the audit committee reviewed the company’s sustainability report prior to issuing and has management walked through the key assumptions made and the basis for the metrics and goals disclosed?

  9. Have management and the audit committee considered the potential impacts of climate-related or other ESG events or conditions on the financial statements? If the company discloses climate-related information in the annual report that contains or accompanies the financial statements (such as in the MD&A) are those disclosures consistent with the audited financial statements?

  10. Has management engaged with public-company auditors on how to evolve and mature its ESG program to meet the increasing requirements of the market and regulators?

Because of its ESG role, audit committees should “consider adding ESG matters as a standing agenda item in 2022, understand the company’s disclosure process, and regularly assess the company’s progress, risk oversight, financial statement implications, and the integration of ESG considerations into the core business strategy.”


Comment: The CBE’s perspective on the audit committee’s role in board ESG oversight is consistent with other commentary on this issue. See, e.g., The Audit Committee’s Role in ESG Disclosure: Part II, September-October 2021 Update. Audit committees that are not already doing so should focus on what ESG disclosures the company is making, how the information is collected, the applicable controls and procedures, and how these disclosures impact financial reporting. And, as CBE emphasizes, the audit committee’s role needs to be considered in the broader context of the board’s ESG oversight governance structure.

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