By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publication of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021*
The Nairobi Stock Exchange (NSE) ESG Reporting in an effort to enhance credibility of reported information, recommends that organisations put in place internal controls and seek external assurances on information reported on material ESG topics. The use of external assurance for sustainability reports is advised in addition to any internal resources, but it is not required to make a claim that a report has been prepared in accordance with the GRI Standards. This is because to meet the Verifiability Principle in GRI Sustainability reporting, all an organization need to do is gather, record, compile, and analyze information in such a way that the information can be examined to establish its quality.
External assurance and Self-Assessment
The prevailing and growing trend is to seek assurance on publicly disclosed ESG information to enhance credibility of the information. This is important for decision making by investors and other stakeholders. External assurance is defined as “a process where a third-party service provider evaluates a subject matter, for example, air emissions data contained in the ESG report against suitable criteria. Suitable criteria are usually publicly available standards such as the GRI standards or a publicly disclosed organizational policy document, for example, an environmental and social management policy published on the company’s website.”
In the GRI Standards, the term ‘external assurance’ is used to refer to “activities designed to result in published conclusions on the quality of the report and the information (whether it be qualitative or quantitative) contained within it.” According to the ESG Manual, external assurance can also refer to activities designed to result in published conclusions about systems or processes (such as the process for defining report content, including the application of the Materiality principle or the stakeholder engagement process). This is not to be confused with activities designed to assess or validate the quality or level of performance of an organisation, such as issuing performance certifications or compliance assessments. Several standards exist for assurance over non-financial information with the International Standards on Assurance Engagements (ISAE) 3000 being the most used standard for assurance of ESG related information.
The ESG Manual recommends that prior to seeking external assurance services, organisations should conduct an assurance readiness self-assessment. The self-assessment process includes ensuring the process for report boundary setting and materiality assessment is documented. Results of the stakeholder engagement and materiality assessment (ideally performed annually) should be signed off by the CEO and the Board. Secondly, the organization should identify and have a clear view of the subject matter for example, health and safety incident rate, carbon footprint or diversity indicators selected for assurance. Third, there is need to ensure information relating to each subject matter is clearly referenced (using internal document management protocols) and can traced back to source data. Fourth, performance of the subject matter should be reviewed within the reporting boundary to ensure all relevant quantitative and qualitative performance data is collected, analyzed and filed in a centralized location.
In addition, as part of self-assessment process, organizations should assess the robustness of internal controls that ensure completeness, accuracy and reliability of information presented on the subject matter. Internal controls refer to the people, processes and systems relied upon to generate information on subject matter performance. Further, steps should be taken to check and test the information presented on ESG subject matter performance against the Reporting Principles. In addition, the organization should implement corrective action on gaps identified during the assurance self-assessment exercise. The ESG Manual recommends that listed companies ensure that they “pass” self-assessment before procuring external assurance services.
In terms of procurement of external assurance, it can be obtained as an extension of the financial statement audit services or by bringing on board specialized assurance providers that focus on non-financial (environmental and social) performance indicators. The benefits of external assurance on ESG disclosures include enhancing credibility, reliability, and accuracy of ESG information disclosed in the ESG report, facilitating compliance with current and emerging ESG related regulations and strengthening internal awareness of material ESG topics and strengthening of internal controls around ESG performance management. External assurance helps to demonstrate commitment to responsible investment practices as well as to positively influences the organisation’s credit, risk, regulatory and sustainability rankings.
Internal controls and management systems
On the other hand, in addition to external assurance, the ESG Manual notes that an organisation can also have systems of internal controls in place to enhance credibility of reported information. Management can further improve quality of reported information by implementing management systems that capture and report ESG performance data. As a matter of fact, material ESG topics can pose significant threats while also presenting opportunities to the listed company and its stakeholders. Therefore, organisations design internal controls to manage these risks to within their appetite and tolerance levels and capture opportunities for stakeholders. For starters, the organisation should ensure that the internal audit team is empowered to review performance of controls over these ESG issues and periodically report to senior management and the Board on their performance. Internal audit is a process that evaluates performance of internal controls over key risks identified by the organisation and provides assurance over performance of these internal controls to senior management and to the Board.
With regard to management systems, some high impact environmental and social (E&S) organisations (such as those in the energy, manufacturing, construction, and agricultural sectors) are also likely to have implemented management systems such as energy management systems and environmental management systems such as ISO 140001. The ESG Manual defines management systems as referring to people, processes and automated tools designed and working together to create efficiencies in operations and ensure predictability in process performance. These management systems are subject to annual quality assurance audits. The quality assurance protocols applied ensure accuracy, completeness, and reliability of information sourced from these systems. Organisations that have implemented environmental and social management systems benefit in that the management systems help optimize process performance, demonstrate management’s commitment to sound environmental and social management to internal and external stakeholders and significantly reduce time and costs incurred in external assurance and performing internal audit reviews.
*This article is part of an ongoing series on ESG (Environmental, Social and Governance) in Kenya by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized as one of the leading lawyers and dispute resolution experts by the Chambers Global Guide 2022.
References
NSE, “ESG Disclosures Guidance Manual,” November 2021; Available at: https://sseinitiative.org/wp-content/uploads/2021/12/NSE-ESG-Disclosures-Guidance.pdf(accessed on 10/02/2022).