ESG Audit : Definition and How to Prepare for ESG Audit

In today’s corporate landscape, failing to address Environmental, Social, and Governance (ESG) audit standards isn’t just failing to fulfill obligations but also failing to keep up with global standards. A lack of attention to ESG audit standards is a sign of incompetent administration in your company.

In a time when responsibility and transparency are essential, failing to align with ESG expectations could damage years of hard-earned trust and your company’s reputation in the blink of an eye. Are you willing to take the chance of failing an ESG audit?

Understanding an ESG audit component is essential for the sustainability of your business. Lucky for you, this article contains everything you need to know about ESG audits. Please read this article as we take a little journey to understand ESG audits and how you, as the business owner, prepare for them.

Understanding ESG Audit

ESG audit is an assessment of an organization’s risks related to environmental, social, and governance domains. It also offers a level of certainty regarding the accuracy of an organization’s environmental, social, and governance reports.

CSR and sustainability are frequently related to ESG audits. However, these three aspects have differences, and here we provide a brief explanation of the differences between these three aspects:

• ESG audit: a system for measuring and reporting a company’s impact on the environment, society, and governance, with a focus on data and financial performance. ESG audit is driven by data and focuses on investor assessment.
• Sustainability: is the larger goal of achieving long-term, balanced growth while considering environmental and social impacts. Sustainability Report is focusing on long-term and resilience.
• CSR: company’s ethical practices and voluntary efforts to contribute to societal wellbeing, usually through philanthropy or community projects. CSR is focusing on ethical, voluntary, and community-focused.

Why is ESG Audit Essential?

As your company grows, ESG audits have become increasingly important. Investors and the general public rate your company’s transparency and accountability based on its impact on environmental, sustainability, and governance aspects.

Therefore, a company can choose to disclose or not disclose their report depending on their purpose of doing an ESG audit. According to Auditboard.com, disclosing ESG audit reports can build trust and demonstrate a commitment to responsible business practices.

With the emergence of the work-from-home trend since the COVID-19 pandemic, a company could do an ESG audit to help them determine whether working remotely is beneficial for the environment and people’s health, as well as reducing their company’s emissions and fossil fuel consumption.

Components of ESG Audit

An Environmental, Social, and Governance (ESG) audit assesses a company’s performance in these three crucial areas. Several ESG audit requirements must be fulfilled to evaluate how well a company complies with ESG guidelines. Here are the main components of an ESG audit.:

1. Environmental

The company’s environmental impact is the primary focus of this section. The audit will evaluate how well the business manages environmental risks and sustainability through its policies, procedures, and performance. For example, over a five-year period, a corporation may set a waste reduction target of 30% less paper use. To do this, an audit would evaluate whether they have implemented digital systems, paperless procedures, and staff training initiatives.

2. Social

The social component assesses how the business handles its connections with suppliers, customers, workers, and the general public. In the labor practices area, an ESG audit will assess how companies protect workers’s rights, including diversity and inclusion programs, and ensure fair pay and safe working conditions.

3. Governance

This aspect focuses on business ethics, transparency, and the internal governance framework. According to the ESG audit, shareholders are given fair opportunities to vote, suggest resolutions, and discuss ESG-related matters with the board.

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Key Performances Indicators of ESG

Each of those three components of the ESG audit has its key performance indicator to measure if they are up to the standards of ESG. Here are the key performance indicators from each component:

Environmental

Environmental KPIs track how well a business is doing at reducing its environmental effects and advancing sustainability. They evaluate the company’s energy conservation, emissions reduction, and natural resource management. Here’s are the indicators of the environmental aspect::

• Carbon footprint (CO2 Emissions)
• Energy consumption
• Water usage
• Waste management and recycling rate
• Biodiversity and land use

2. Social

A company’s relationships with its workers, clients, suppliers, and local communities are the main emphasis of social KPIs. They measure how well the business is doing at advancing diversity, social justice, and well-being. Indicators of social aspect are:

• Employee health and safety
• Employee diversity and inclusion
• Labor standards and human rights
• Customer satisfaction and engagement
• Community engagement and impact

3. Governance

Governance assesses a company’s compliance with regulations, leadership, and business ethics. It guarantees that the business is run responsibly, openly, and morally.
Several indicators of governance aspect are:

• Board diversity and independence
• Executive compensation alignment
• Anti-corruption and ethical Conduct
• Shareholder rights and engagement
• Regulatory compliance

How to Prepare for ESG Audit

There are a few steps that must be fulfilled in doing an ESG audit and business annual report to ensure that the company meets the standards and regulations set by the Monetary Authority of Singapore (MAS) as the regulator in Singapore. Here are the steps in an ESG audit that a company must fulfill:

1. Pre-audit plan and audit scope

Determining the purpose of conducting an ESG audit, for example, to evaluate efforts to comply with existing regulatory standards. This stage also involves determining the scope of the business units being audited, such as labor practices.

2. Data collection and document review

Collecting and analyzing previous ESG audit reports as well as documents regarding company policies to ensure compliance with existing regulations in Singapore, such as Code of Conduct for ESG Rating and Data Product Provider that was introduced in 2023.

3. Risk analysis

Identification and assessment of the risks that the business may encounter in the areas of corporate governance, the environment, and society that might become potential threats to the business in the unforeseen future.

4. Data validation and analysis

Conducting an accuracy and completeness check of the ESG data held by the company and comparing the company’s performance with international reports such as the Global Reporting Initiative (GRI).Then, identify the differences between the company’s ESG practices and the regulations in Singapore.

5. Involvement with stakeholders

Data collection regarding the company’s ESG practices and performance from internal sources such as employees and management, as well as data collection in the form of feedback from suppliers, consumers, and the community.

6. Preparation of the final ESG audit report

The last step before submitting the ESG audit report is assessing the quality and transparency of the ESG audit report that has been prepared and then presenting the ESG audit report sample to senior management or the board of directors for feedback and approval.

7. Collection

Collecting the final ESG audit report results and submitting them to the relevant authorities in Singapore, specifically the MAS, and ensuring that the report is available to the public and accessible through the company’s website or other communication media.

8. Follow-up and supervision

After the ESG audit report is completed and submitted, the company continues to monitor and maintain the implementation of the improvements made in the report and schedules regular audits. Most companies do regular audits on a yearly basis.

The Monetary Authority of Singapore (MAS) offers a thorough “Code of Conduct for ESG Rating and Data Product Providers.” for a reliable and thorough ESG audit checklist in Singapore. The audit checklist that goes with this paper is intended to help users assess how well ESG data suppliers adhere to the Code of Conduct. The checklist covers key areas such as:

• Methodology transparency: Ensuring that ESG rating and data suppliers disclose their processes transparently.
• Data quality and integrity: Evaluating the accuracy and dependability of the supplied ESG data.
• Conflict of interest management: Assessing the procedures put in place to handle such conflicts of interest.
• Governance and oversight: Examining the governance frameworks that manage data products and ESG ratings.

HashMicro as Your Digital Solution for More Efficient ESG Audit

HashMicro ESG Software is an innovative ERP software designed to assist businesses in better managing, monitoring, and improving their sustainability performance. In comparison with other ESG software, this system provides unique features that enable businesses to integrate technology to improve business processes.

By integrating ESG data into your business processes, HashMicro ERP makes this relatively easy and eliminates the heavy burden associated with reporting. How is your reporting improved by this system? It’s very easy because HashMicro ERP has the following features:

• Track ESG data with ease: Get real-time insights on sustainability goals using innovative BI tools like Pivot, KPI Scorecard, and Custom Dashboards.
• Keep finances transparent: Automate financial reports, monitor expenses, and meet ESG compliance without manual work.
• Reduce waste & optimize resources: Manage inventory efficiently, cut excess waste, and ensure suppliers follow sustainability standards.
• Improve workplace ethics: By handling payroll, employee records, and fair labor policies in one system for better accountability.
• Access ESG reports anytime: Use mobile-friendly dashboards to monitor key data wherever you are, no delays, no hassle.

With ERP-integrated systems and Hashy AI as your personal artificial intelligence, you can easily access and manage your data, allowing you to gather all the data you need for an ESG audit report smoothly and without any obstacles.

Conclusion

Understanding and preparing ESG audit reports is a challenge for all business owners because information about ESG is not exactly common knowledge in society. With the help of HashMicro ERP, your business will easily collect all the data you need for your ESG audit report.

ESG audit is important for enhancing sustainability and corporate social responsibility. ESG audit reports demonstrate a company’s dedication to ethical business practices, compliance, and sustainability initiatives. Stricter ESG laws in Singapore require companies to conduct structured reporting.

Conducting an ESG audit manually will cost you a lot of time and money and only add another burden on your back. Simplify your business operations with integrated ERP software by joining our free demo now. You will feel the improvement in your business operations with just one click away.

FAQ about ESG Audit

• What does ESG stand for?

  ESG stands for Environmental, Social and Governance. This is often called sustainability. In a business context, sustainability is about the company’s business model.

• How to determine a company ESG score?

  ESG scores are determined by the companies themselves but validated by third-party organizations such as MSCI and Sustainalytics.

• Who conducts ESG audits?

  Who conducts an ESG audit? An ESG audit is usually carried out by external auditors or specialised consulting firms with expertise in sustainability and corporate governance.