As demand for transparency in environmental, social, and governance (ESG) practices rises, auditors face new challenges under the Corporate Sustainability Reporting Directive (CSRD). With third-party assurance now required, this article explores how technology can help auditors effectively navigate complex ESG data.
- The Evolving Role of the Auditor
- Rethinking ESG Assurance: Insights from Rotterdam
- How Technology Can Help
- How DataSnipper Simplifies ESG Audits
- Auditors in the Dark: ESG in a New Light
The Evolving Role of the Auditor
Stakeholders, including investors, customers, employees, and communities, rely on CSR reports to make informed decisions. The CSRD, therefore, specifies that ESG reports must be audited by a third-party provider. This can include traditional audit firms (mandatory in the Netherlands) as well as specialized sustainability assurance providers.
The assurance comes in two "flavors":
Limited Assurance
Limited Assurance provides a moderate level of assurance. The auditor or assurance provider conducts a review to determine whether anything has come to their attention that causes them to believe the information is not prepared, in all material respects, in accordance with the applicable criteria. The review primarily involves inquiries and analytical procedures, and the conclusion is typically phrased in terms of negative assurance, such as, "nothing has come to our attention that causes us to believe...".
Reasonable Assurance
Reasonable Assurance provides a much higher level of assurance. The auditor or assurance provider performs a comprehensive set of procedures—taking a deep dive into various systems that contain the data—to conclude whether the sustainability information is free from material misstatement. The auditor's work is broader and more detailed, including more extensive testing and verification of data. The conclusion is expressed in positive terms, such as, "in our opinion, the information is prepared, in all material respects, in accordance with..." For financial reporting, auditors typically provide this level of assurance.
Rethinking ESG Assurance: Insights from Rotterdam
Under the CSRD, limited assurance is currently the minimum requirement for most sustainability disclosures. Over time, as companies and assurance providers build more experience and capability, the CSRD envisions a transition toward reasonable assurance for more aspects of sustainability reporting. An evaluation will take place to decide on this transition. One thing is certain, however: auditors face the daunting task of auditing ESG reports without a playbook, using approaches where traditional audit methodologies fall short.
It may call for some creativity. An inspiring example can be found back in 2009. The Port of Rotterdam published an integrated report to give stakeholders insight into financial performance and sustainability. The report as a whole was signed of with one audit opinion, signed by two auditors.
“Start with the why of ESG. This is especially true in the SMB segment. Many entrepreneurs in this segment will not be motivated by the stick of regulations but will be willing to invest in smaller or bigger initiatives if the why – the commercial and strategic motives – are crystal clear.'” Patrick de Veer Founder Greenaumator
How Technology Can Help
Currently, companies lack mature data infrastructure for ESG data. The vast number of data points—often exceeding a thousand—are scattered, incomplete, and not standardized. Many companies still attempt to manage this information using spreadsheet solutions, which is unsustainable.
Technology can be a powerful enabler that drives change in this respect. Advanced data analytics, blockchain, and artificial intelligence can simplify data collection, enhance accuracy, and ensure transparency.
Automated systems can track and report ESG metrics in (near) real time, reducing the burden on organizations and minimizing human error. Blockchain technology can create immutable records of ESG activities, boosting trust and accountability within the supply chain. Additionally, AI can analyze vast datasets to identify trends, predict risks, and provide actionable insights, enabling companies to enhance their ESG performance continuously.
At the time of this writing, ERP system vendors are preparing their systems to better support the generation of specific ESG information.
Concurrently, a range of niche products are emerging in the market, offering services such as consolidating information from various group companies, providing specialized data like satellite imagery, and utilizing AI-driven tools to extract data from systems and PDFs, centralizing the results. That being said, the technology landscape is still far from mature.
How DataSnipper Simplifies ESG Audits
DataSnipper is an intelligent automation platform in Excel that boosts the efficiency, accuracy, and reliability of ESG reporting and audits. As corporate focus on sustainability grows, DataSnipper provides a comprehensive solution for extracting, validating, and analyzing ESG data.
Automated Data Extraction from Sustainability Reports
Organizations often publish sustainability reports with key ESG data like greenhouse gas emissions and energy consumption, but manually extracting this information can be time-consuming and error-prone. DataSnipper embeds these reports into Excel and uses OCR technology to extract data, eliminating manual entry and ensuring accurate, efficient capture of ESG metrics such as greenhouse gas emissions, energy consumption, waste management data, and more.
Streamlined Cross-Referencing and Validation of ESG Data
When auditing ESG, verifying the accuracy and completeness of the reported data against source documents is an essential but often challenging and time-consuming task. DataSnipper simplifies and expedites this with its cross-referencing feature, enabling auditors to link data points in Excel to the corresponding information in embedded documents.
For example, in governance and economics, DataSnipper enables auditors to embed key documents such as financial statements, board meeting minutes, governance reports, and more directly into Excel. This empowers auditors to efficiently cross-reference reported data with the specific details contained in these embedded documents.
For instance, auditors can verify the accuracy of reported revenue figures by comparing them with financial statements or sales records, validate a company's reported board diversity metrics by cross-referencing director profiles and meeting minutes, and ensure that disclosed policy influence activities align with the company’s stated policies.
In the environmental space, the same embedding and cross-referencing can be done with key documents such as renewable energy contracts, waste management reports, energy consumption records, emission reduction targets, and more.
In the social dimension, key documents DataSnipper can help with include program documentation, employee feedback surveys, training attendance records, employment contracts, payroll records, and more.
Automating Materiality Analysis
Determining material ESG issues is crucial for effective ESG reporting and audits, but it is often a complex and subjective process. DataSnipper assists in automating materiality analysis by extracting relevant data from sustainability reports, industry-specific guidelines, and stakeholder engagement documents.
By consolidating this information in Excel, DataSnipper enables auditors to assess and compare material ESG issues across different sources. This automation simplifies the materiality analysis process, enhances consistency, and allows auditors to focus on analyzing results and identifying key sustainability priorities.
Auditors in the Dark: ESG in a New Light
For a deeper dive into the evolving landscape of ESG auditing, download our whitepaper, Auditors in the Dark: ESG in a New Light. Discover how ESG is reshaping audit practices, the role of collaboration, and how to turn compliance into a strategic advantage.
