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The Audit Committee’s Role in ESG Disclosure: Part II

What is the Audit Committee’s Role in ESG Disclosure, December 2020 Update, discussed a blog post in which Wes Bricker, PwC chair and assurance leader, and Paula Loop, the leader of PwC’s Governance Insights Center, offer thoughts on the role of the audit committee in oversight of environmental, social, and governance (ESG) disclosure. In September, the Governance Insights Center issued The audit committee’s role in sustainability/ESG oversight which outlines in more detail PwC’s view of the audit committee’s role in ESG disclosure oversight.


In a survey, a majority of directors reported that their board had assigned ESG oversight to the full board. In PwC’s view, it may nonetheless be desirable to assign specific aspects of ESG to specific committees. In this regard, “the audit committee has a critical role in helping companies develop investor grade ESG disclosures.” PwC describes four facets of the audit committee’s ESG disclosure oversight role and suggests questions the audit committee could ask to gauge management’s progress in each area.


Overseeing ESG Disclosures


In response to demand from investors and other stakeholders, many U.S. companies make voluntary ESG disclosures, often in a sustainability report. In approaching ESG disclosure, management faces several challenges, including determining which ESG information is financially and socially material to their company’s operations and performance; choosing the most appropriate places to make the disclosures (e.g., a sustainability report, a regulatory filing, or on their corporate website); and ensuring that disclosure is consistent across platforms.


PwC suggests that, in overseeing management’s process for determining ESG disclosures, audit committees ask the following questions:

  • What has management identified as the company’s ESG risks and opportunities?

  • Which ESG frameworks or standards are they using? Why have they chosen a particular framework?

  • What types of ESG information are key stakeholders asking for, and how is management planning to address them?

  • How is management preparing for increased regulatory disclosure requirements?

Overseeing ESG Processes and Controls

PwC states that the ESG information a company discloses should be collected, consolidated, and disclosed with the same rigor as financial information. Often, however, this is not the case. “Some companies are realizing they don’t have the technology systems and information gathering processes in place to comply with the demands for greater ESG disclosure.” Appropriate disclosure controls and procedures for ESG metrics “need to be designed, documented, and tested to ensure they operate as intended” and “cannot be developed overnight.”


To oversee ESG processes and controls, PwC suggests that audit committees ask the following questions:

  • How is the company collecting ESG information?

  • What are the data collection policies?

  • What controls are in place to ensure that ESG information is reliable and complete?

  • What additional resources may be necessary to implement new ESG processes and controls?

  • How is the disclosure committee involved in the process?

  • What is internal audit’s involvement? What are their findings and recommendations?

Overseeing Financial Statement Impacts


Investments in technology, research, and development to meet corporate ESG objectives will impact the financial statements. “For example, as car companies make net zero commitments, they may need to develop new or transform existing manufacturing plants to build electric vehicles.” The audit committee should pay close attention to how such investments are reflected in the financial statements. Audit committees will also need to monitor accounting for new types of assets, such as carbon offsets.


Regarding the financial reporting implications of ESG investments and commitments, PwC suggests the following audit committee questions:

  • How will the company’s ESG commitments impact its financial statements?

  • Has management communicated its forecasted projections and necessary investments in financial statements?

  • How is management keeping up with regulatory changes in these areas?

  • What is the plan for evaluating the return on sustainability investments?

  • Has management considered the impact of strategy changes on the valuations of existing assets and their useful lives?

Overseeing ESG Assurance


Currently, 29 percent of S&P 500 companies obtain some form of third-party assurance for some or all of their ESG disclosures. See The S&P 500 Are (Almost) All in on ESG Disclosure, August 2021 Update. Further, the European Commission recently adopted a requirement that companies subject to the EU Corporate Sustainability Responsibility Reporting Directive obtain limited assurance over their ESG disclosures. PwC anticipates a shift to mandatory ESG reporting that may require assurance in the U.S.


To oversee ESG assurance, the audit committee may want to ask the following questions:

  • Have investors or other stakeholders requested assurance over the ESG reporting? If so, have they indicated what level of assurance they prefer?

  • If the company includes ESG information in its SEC filings, has management considered whether some level of assurance would increase confidence in the disclosures?

  • How is management keeping abreast of new and emerging regulatory assurance requirements?

Comment: As stated in several prior Updates, given the increasing investor and regulatory emphasis on ESG disclosure, it seems inevitable that these issues will become an important aspect of the audit committee’s work. Audit committees that are not already doing so should focus on what ESG disclosures the company is making, how the information is collected, and how these disclosures impact financial reporting. Controls and procedures are an especially important area because, as PwC suggests, ESG disclosures are often not subject to the same types of controls that govern other company disclosures. PwC’s analysis of the audit committee’s ESG disclosure oversight role and its suggested questions could be a useful tool for audit committees in assessing management’s ESG disclosure progress.

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