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  • Writer's pictureDaniel Goelzer

Ready or Not: KPMG Finds that Few Companies are Prepared for ESG Assurance

KPMG has released Road to Readiness, the inaugural report on the KPMG ESG Assurance Maturity Index. The Maturity Index, measured on a scale of 0−100, gauges “the relative maturity of a company’s ESG reporting program in order to assess its assurance readiness” – that is, readiness to obtain third-party assurance on its ESG reporting. For 2023, KPMG finds that the average ESG assurance readiness score for U.S. companies is 49.4. The averages for companies headquartered in other high-scoring countries are France (50.4), Japan (50.0), Brazil (43.1), and China (43.0).

The Maturity Index is based on survey responses concerning five areas, or pillars, of readiness for third-party assurance. The pillars are (1) governance, (2) skills, (3) data management, (4) digital technology, and (5) value chain. To measure progress on these pillars, KPMG surveyed senior executives and board members at 750 companies. The mean annual revenue of companies represented in the survey was US$15.6B.

In addition to the overall readiness scores, other findings of the 2023 report include:

  • Only 25 percent of companies believe they have the ESG policies, skills, and systems in place to be ready for independent ESG data assurance.

  • Companies with US$10 billion or more in revenue tend to be more ESG assurance ready, with an average score of 56.3, compared to companies with revenue of between US$5 and 10 billion (45.3 average score) and those with revenue under US$5 billion (41.7 average score).

  • Fifty-two percent of respondents are already obtaining some level of external assurance over their current ESG disclosures. Of those, 14 percent are obtaining reasonable assurance and 16 percent are obtaining limited assurance over ESG disclosures that will be required under “incoming regulations.”

  • At firms that are less ready for ESG assurance, 58 percent of CEOs and board members say it is challenging to balance ESG assurance goals with the shareholder profit expectations. Specific challenges to preparing for ESG assurance cited by respondents included high initial costs/inefficient budget (44 percent); lack of internal skills and experience (44 percent); lack of clarity/evolving regulations (42 percent); inadequate supplier ESG performance (42 percent); insufficient IT/digital solutions (36 percent); and lack of clear metrics/measurement tools (36 percent).

  • About half of all respondents said that ESG assurance has the potential to increase market share because assured ESG data “helps to give companies greater credibility with investors and all stakeholders potentially increasing brand loyalty.” Other potential benefits cited by respondents included increased customer satisfaction (46 percent), greater innovation (49 percent), and decreased operational costs (44 percent).

The report discusses five “critical steps” that companies are taking to become ESG assurance ready: (1) Determine applicable ESG reporting standards; (2) Build robust ESG governance and develop the right skills; (3) Identify the applicable ESG disclosures and data requirements across functions; (4) Digitize ESG data processes and ensure high quality data; and (5) Work with the value chain to collect ESG information.

Comment: ESG assurance readiness is becoming an important issue for many audit committees. As noted in this and other studies, many companies already obtain external assurance over at least some portion of their ESG disclosures. As more companies obtain assurance, investor and customer pressure on their peers to follow suit increases. Moreover, virtually all public companies will become subject to mandatory ESG assurance requirements within the next few years. Both the proposed SEC climate disclosure requirements (see SEC Unveils its Climate Disclosure Proposals, March 2022 Update) and the legislation enacted in California (see California Outflanks the SEC on Climate Disclosure in this Update) require some level of assurance over greenhouse gas emissions disclosures. In addition, companies subject to the E.U.’s new ESG rules (see E.U. ESG Disclosure Requirements Will Affect Many U.S. Companies, in this Update) will be required to obtain assurance over certain disclosures. Audit committees should be discussing with management the steps necessary for the company to become ESG assurance ready.

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