Article Search By: Pn. Nurfarah Hanani (Pegawai Kewangan)

Article By: Mary Lee Siew Cheng, CFIIA

Source : Article by Members, IIA Malaysia 

ESG (Environment, social, and governance) disclosures and practices have become a global buzzword. During the Covid 19 pandemic, ESG was fuelled by conscious consumerism, and many companies began to make pledges to reduce greenhouse gas emissions (GHG) and focus more on ESG investments. The capital market is becoming more demanding, and investors' expectations are shifting to demand greater transparency and accountability in the ESG investments of the companies. Although reporting on the ESG performance is the board's responsibility, the internal auditor (IA) of Malaysia's top 200 listed companies plays an instrumental role in providing assurance over the ESG reporting processes and controls.

As regulators tighten their grip on sustainability and ESG reporting, companies turn to professional firms to draft robust ESG strategy disclosures. Companies are tempted to demonstrate ambitious ESG strategy by making misleading disclosures. This can be seen in the case of Tesla, which was removed from the S&P 500 ESG Index due to its failure to cover a broader ESG lens and its ambitious plan to achieve net-zero emissions by the year 2050 .( Internal Audit's Role in ESG Reporting: Independent Assurance is Critical to Effective Sustainability Reporting, 2021) As the external auditor has no responsibility for the ESG information in the financial statement audit, the IA would serve as a check and balance on the ESG information’s quality, relevance and reliability.

Regulators have not specified on how and what should be reported for the ESG reporting, though there are various ESG frameworks that a company can choose to follow. IA plays an advisory role to the ESG board committee on the source and selection of data as well as determining ESG metrics and targets to benchmark the data. IA also considers the material assessment of ESG risks and opportunities in the company, as this varies by industry (2021, Internal Audit's Role in ESG Reporting: Independent Assurance is Critical to Effective Sustainability Reporting.

Most companies are reporting within the Corporate Social Responsibility realm. ESG reporting is voluntary and unregulated for the non-public listed companies. However, ESG affects all stakeholders in all businesses, regardless of size. Therefore, ESG reporting is critical for all business sectors. There is a need for an independent professional body to oversee the country’s initial implementation of ESG reporting. The Institute of Internal Auditors would be ideal for assisting in the initial implementation of ESG reporting, which is crucial to revitalising the country's economic growth.

Internal audit is critical in reducing the financial and reputational impact of ESG fraudulent reporting and providing greater assurance on ESG reporting. The top 200 listed companies in Malaysia are realising the important role of internal auditing in ESG and are incorporating internal auditing into their ESG function. However, the most significant impact of the internal auditor’s role is to ensure that best ESG reporting practices are in place to generate reliable and creditable ESG information for companies to be rated in the FTSE Russell ESG Ratings, thus making Malaysia a preferred investment destination.

Date of Input: 24/10/2023 | Updated: 30/10/2023 | muhammad.isam