Sustainability Reporting that Heightens Trust and Board Awareness
By Byron Loflin, Global Head of Board Advisory, Nasdaq and Jeffrey Thomson, retired President and CEO, Institute of Management Accountants, former COSO board member, and Senior Strategic Advisor, Competent Boards
Board members around the world face a VUCA (volatile, uncertain, complex and ambiguous) business environment, particularly with the dawn of generative artificial intelligence; it is a moment that one might find both exhilarating and terrifying. Likewise, board and executive leaders are witnessing the rapid mainstreaming of sustainability considerations into business strategies, risk analysis, enterprise decision-making, and voluntary and government-mandated reporting.
Earlier this year, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released its market-driven supplemental guidance on “Achieving Effective Internal Control Over Sustainability Reporting (ICSR): Building Trust and Confidence through the COSO Internal Control-Integrated Framework,” which can be a vital resource for board members in collaboratively working to promote and deliver effective governance with respect to sustainability external reporting and sustainable business management (SBM) enterprise decision-making.
The cover of COSO’s guidance presents a green-ish cube intended to draw reference to the COSO cube representing the Internal Control-Integrated Framework (COSO ICIF) as applied to sustainability reporting (initially focusing on climate risk and transitions to “green” fuel technologies) and overall business performance. The COSO ICIF has historically been applied to achieving effective Internal Control over Financial Reporting (ICFR) to support the Sarbanes-Oxley Act and other required external disclosure regimes. One can also imagine the cover as akin to a Rubik’s cube with many layers that helps us consider the VUCA interplay with risk, opportunity, and internal control.
As board demands in a VUCA business environment intensify, boards’ understanding and oversight of enterprise risk management (ERM) and internal control can benefit from the insights and integrated structure that COSO’s Framework provides. Whether engaged in environmental or financial reporting, the board’s role in oversight and foresight is a critical element of a future-ready board, especially its role in demonstrating a commitment to stakeholders to acting sustainably through processes, standards, and accountability, in what COSO calls the “Control Environment.”
With guidance from representatives from five major professional and finance and accounting associations on internal control over sustainability reporting, the report aims to assist companies and their leaders in establishing effective processes and controls to ensure the reliability and accuracy of their sustainability reporting. These insights align with the broader goal of enhancing corporate transparency and accountability regarding sustainability performance.
Artificial intelligence, succession and sustainability are intermingled risks in the modern boardroom. Whereas risk and controls have been board oversight responsibilities for many years, the intersection of sustainability reporting and investor expectations increases the demand for a board member’s time and attention.
The report aims to help leaders by encouraging integrated thinking and insights into a variety of scenarios a board will likely confront, which include:
- Clarity to enable the identification and assessment of risks relating to objectives.
- Better understanding of who uses sustainable business information.
- ESG and the various types of sustainable business information.
- How sustainability reporting differs from financial reporting to close competency gaps as needed (e.g., sustainable business information requires more estimation and modelling relative to financial data).
- How sustainability reporting is similar to financial reporting, which allows for the leveraging of financial resources, competencies and integrated systems.
- Better oversight of the development and performance of internal control(s).
- Suggestions for updating Audit and/or Sustainability Committee charters.
- Improved clarity of important financial and nonfinancial reporting objectives.
- Mitigation of risks to the achievement of objectives to acceptable levels.
- Measuring management’s standards and achievement of compliance.
The COSO Internal Control Over Sustainability Reporting supplemental guidance provides an integrated approach consistent with the Internal Control—Integrated Framework (ICIF) for financial reporting, structurally comprised of Components and Principles. The framework defines 17 principles that organizations should consider when designing and implementing internal controls over sustainability reporting (the same principles that apply historically to financial reporting, as noted). These principles are embedded in five core components – the control environment, risk assessment, control activities, information and communication, and monitoring.
COSO’s new supplemental guidance includes 87 points of focus that provide more of a “how to” applications focus that is based on interviews, mini-cases and illustrative examples. These points of focus serve as a practical implementation resource that can assist board members in their oversight to achieve an effective system of internal control over sustainability reporting.
Ultimately, the COSO ICSR supplemental guidance is intended to build trust and confidence in climate reporting and, more broadly, environmental, social and governance (ESG) and SBM as they evolve. Not only is an organization’s achievement of strategic goals at stake, but its very reputation and purpose are at stake as well.
Board members around the world must step up, get engaged, get educated and remain curious if they are to exercise their duties effectively and further build trust with their stakeholders in our rapidly changing VUCA business environment.
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The views and opinions expressed herein are the views and opinions of the authors and do not necessarily reflect those of Nasdaq, Inc.
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