Is ESG the New Sarbanes-Oxley ? Internal audit needs to be ready to help organizations report on their environmental, social, and governance risks and initiatives.

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Author: Logan Wamsley
Date: June 2021
From: Internal Auditor(Vol. 78, Issue 3)
Publisher: Institute of Internal Auditors, Inc.
Document Type: Article
Length: 2,408 words
Lexile Measure: 1460L

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No matter where you've turned in the past year, business headlines have heralded environmental, social, and governance (ESG) topics. In April, hundreds of businesses and business leaders took a stand against Georgia's controversial new voting law, enacted following a tumultuous U.S. presidential election. Earlier this year, Larry Fink, CEO of investment management firm BlackRock, called on CEOs to address climate change and align greenhouse gas reduction with science and global reporting standards. And last year, #BlackLivesMatter and similar campaigns arising from race-based killings brought social justice, equality, and equity to the forefront--even in executive suites.

These examples encapsulate how broad the scope of ESG truly is and the daunting task organizations have in addressing its related risks. Investors, politicians, regulators, and the public are pressuring businesses to hold themselves more accountable. That raises the question of whether comprehensive ESG reporting will become mandatory and have an impact on internal audit similar to how the U.S. Sarbanes-Oxley Act of 2002 changed internal audit's role in financial reporting.

Some internal auditors say it might, at least for certain companies and business sectors, pointing out that many countries already require such disclosures or at least are starting to explore them. While the U.S. Securities and Exchange Commission (SEC) hasn't required ESG reporting, "the winds are definitely changing with the new SEC chair and the Biden administration having this as a very high priority," says Steve Wang, a managing director at Protiviti in St. Louis. Wang says internal audit has a key role to play in ESG reporting; however, the level of effort needed may not be equivalent to that put into Sarbanes-Oxley compliance.

THE PRESSURE IS ON

Although ESG reporting is becoming an important resource for shareholders and regulators, it's also important for company stakeholders, including employees and consumers. In fact, it is the pressure from stakeholders and not any one government entity that has been the primary driver of change.

A good example is the business response to Georgia's voting law, an unusually vocal move by corporate America to shape the nations political discourse. "If you do not have a point of view that supports equality, and that represents justice and democracy, how will you be a company that's relevant going forward?" asks Edith Cooper, co-founder of Medley, a membership-based community for personal and professional growth in New York, and an independent board director for Etsy and Slack.

Organizational psychologist Dr. Ella Washington of Georgetown University says the public now expects greater action from organizations to address racial diversity, equity, and inclusion (DEI)--particularly from board members. "The narrative at this point has shifted because people of the Black community and their allies globally are saying, 'OK, words are great, but they're no longer enough,'" she says. "There's a clear call for action that companies are responding to, but their follow-through is what people are really paying attention to."

To wit, Jason Kilar, the CEO of WarnerMedia, explicitly named racism as a problem in the company and committed to work toward change, while...

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