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Risk Trends in 2024 and Beyond: Environmental, Social, and Governance (ESG)

Risk Trends in 2024 and Beyond: Environmental, Social, and Governance (ESG)

Synopsis
5 Minute Read

2023 saw the introduction of new sustainability disclosure and reporting standards and new legislation to mitigate the use of forced and child labour in Canadian supply chains.

The increase in ESG-related regulation makes it essential for organizations to align with these standards and anticipate future environmental, social, and governance requirements.

While the focus so far has been on the environment and social issues, organizations must also be prepared for increased scrutiny on governance issues, including:

  • equity, diversity, and inclusion (EDI) in senior leadership positions and representation on boards
  • transparency around corporate donations, and
  • executive compensation

At the same time, they cannot lose sight of federal net-zero targets (and the need to respond to related legislation) and ongoing social issues.

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Edward Olson, CIA, CPA, CA
Partner, Enterprise Risk Services & Leader, Environmental, Social & Governance
Mary Larson, MBA, ICD.D, GCD.D
Leader, Consulting – Organizational Renewal
Insight
Confidence Whitepaper Enterprise Risk Internal Audits and Controls Environmental Social Governance
This insight is one of 15 risks in our 2024 Risk Trends Report. Navigate back to the main page for the full list of risk trends that you should be monitoring for in the year ahead.

Are you getting the balance right?

In 2023, the International Sustainability Standards Board (ISSB) issued two new standards related to sustainability disclosure and reporting (IFRS S1 & S2). This year also saw new Canadian legislation (Bill S-211) related to organizations’ responsibility to mitigate the use of forced labour and child labour in their supply chains. These measures are only the beginning of what is likely to be an onslaught of ESG-related regulation and legislation in the years to come.

It is imperative that organizations not only be proactive in aligning with these standards but also anticipate the environmental, social, and governance requirements around the corner. It’s clear that ESG is not a passing trend, nor is it likely to be a partisan issue that waxes and wanes with the election cycle. Electors want to see businesses take more accountability for the impacts of their business decisions. Governments are responding by drafting laws with sharper teeth, and many organizations are at risk of being caught unprepared.

Most of the focus to date has been on the environment and, to a lesser extent, social issues such as the above-mentioned problem of indentured servitude and human trafficking. In time, we will see more and more focus on the social and governance elements of ESG.

Organizations have an opportunity to get ahead of the conversation. Equity, diversity, and inclusion (EDI) is one area of focus that organizations will want to be paying attention to in the year ahead (social) — especially as it relates to representation on boards and senior leadership positions (governance). It’s also foreseeable that transparency around corporate donations, sustainability reporting, and executive compensation will continue to gain traction as a new area of focus for the ISSB.

At the same time, it would be ill-advised to lose focus on the environmental pillar, considering the record-breaking heat this summer and the unprecedented number of wildfires. If anything, pressure will only increase for organizations to quantify, report, and curtail their greenhouse gas emissions.

Related risks

  • Rising costs and complexity related to increasing regulatory requirements and disclosures
  • Physical impacts of climate change, pollution, biodiversity loss, and water scarcity
  • Increased accountability for supplier and contractor practices throughout the supply chain
  • Occupational health issues, unsafe working conditions
  • Inadequate community engagement, particularly with Indigenous Peoples
  • Lack of diversity, biased decision-making, unequal opportunities, and suboptimal organizational culture
  • Corruption and fraud
  • Compensation practices: Board and C-suite
  • Increased scrutiny on taxes and foreign investments

""Key questions to ask

  • Has your organization set realistic and defendable ESG targets that are respectable in relation to peers in your industry?
  • Have you assessed the impact of inaction or insufficient progress in driving ESG-related changes?
  • Are you confident you can trust the integrity of the data used to calculate your ESG metrics?
  • Are any of your targets going to be difficult or even impossible to achieve? If yes, you must determine if you want to continue with this target.
  • Do you know how your employees or external stakeholders view the ESG targets of your company? Are they content or disappointed? Is there a risk that this could harm the culture or perception of your organization?

""Red Flags

  • Lack of climate change mitigation, environment, and biodiversity strategies and detailed plans
  • Weak governance architecture around emergency and incident preparedness
  • Increased reports of harassment or discrimination, unwanted turnover, challenges in hiring, low/declining engagement scores
  • Lack of rigorous EDI strategy (linked to corporate strategy) or failure to deliver on the strategy
  • Links with suppliers or contractors involved in human rights abuses, lack of supply chain transparency
  • Increased health and safety violations
  • Lack of community engagement, lawsuits, public protests, negative media coverage
  • Material increase in whistleblower tips (i.e., corruption and bribery)
  • Lack of clarity around responsibility for fraud prevention

Internal Audit Project Opportunities

Environmental

Carbon Footprint Audit
This audit assesses the organization's carbon emissions across its operations, including direct emissions (Scope 1), indirect emissions from purchased energy (Scope 2), and other indirect emissions along the value chain (Scope 3).
Energy Efficiency Audit
This audit reviews the organization's energy consumption patterns and identifies opportunities for energy efficiency improvements to reduce greenhouse gas emissions.
Waste Management Audit
This audit evaluates the organization's waste generation, disposal practices, and recycling efforts to identify ways to minimize waste and its environmental impact.
Water Usage Audit
This audit assesses the organization's water consumption and identifies strategies to conserve water resources.
Green Procurement Audit
This audit examines the organization's procurement practices to ensure environmentally sustainable sourcing and supplier selection.
Sustainable Supply Chain Audit
This audit reviews the environmental impact of the organization's supply chain activities and identifies opportunities for sustainability improvements.
Environmental Compliance Audit
This audit assesses the organization's compliance with environmental laws, regulations, and permits relevant to its operations.
Environmental Management System (EMS) Audit
This audit evaluates the effectiveness of the organization's EMS, such as ISO 14001, and its implementation of environmental policies and procedures.
Renewable Energy Usage Audit
This audit reviews the organization's utilization of renewable energy sources and progress toward renewable energy targets.
Carbon Offsetting and Compensation Audit
This audit assesses the organization's efforts to offset or compensate for its carbon emissions through initiatives such as reforestation projects or investing in carbon credits.
Climate Change Resilience and Adaptation Audit
This audit examines the organization's strategies for adapting to climate change impacts and building resilience against climate-related risks.
Reporting and Communication Audit
This audit evaluates the organization's transparency in reporting its environmental performance and progress toward carbon footprint reduction targets.
Environmental Training and Awareness Audit
This audit assesses the training and awareness programs provided to employees regarding environmental sustainability and carbon reduction efforts.
Green Building and Infrastructure Audit
This audit reviews the environmental impact of the organization's buildings and infrastructure, including energy-efficient designs and sustainable construction practices.
Environmental Performance Monitoring and Measurement Audit
This audit ensures that the organization has appropriate metrics and systems in place to monitor its environmental performance regularly.

Social

Diversity and Inclusion Audit
This audit assesses the organization's efforts to promote diversity and inclusion, ensuring fair employment practices and equal opportunities for all employees.
Employee Welfare and Well-being Audit
This audit reviews the organization's initiatives and policies to support employee well-being, health, safety, work-life balance, and professional development.
Human Rights Compliance Audit
This audit evaluates the organization's adherence to human rights principles, ensuring that its activities do not infringe upon the rights of individuals or communities.
Labour Practices Audit
This audit assesses the organization's compliance with labour laws and regulations, including fair wages, working hours, and appropriate labour conditions.
Supplier and Vendor Social Responsibility Audit
This audit reviews the social responsibility practices of the organization's suppliers and vendors to ensure ethical and responsible sourcing.
Community Engagement and Impact Audit
This audit examines the organization's efforts to engage with and positively impact the communities in which it operates.
Social Impact Assessment Audit
This audit assesses the organization's activities and projects to measure their social impact and alignment with social responsibility targets.
Corporate Social Responsibility (CSR) Reporting Audit
This audit evaluates the accuracy and transparency of the organization's CSR reporting, ensuring that social targets and achievements are adequately disclosed.
Philanthropic Initiatives Audit
This audit reviews the organization's charitable and philanthropic activities to ensure they align with its social responsibility goals.
Supplier Diversity Audit
This audit assesses the organization's efforts to promote supplier diversity and engage with minority-owned, women-owned, or small businesses.
Social Accountability and Ethical Practices Audit
This audit examines the organization's commitment to ethical business practices and social accountability throughout its operations.
Social Performance Metrics and Reporting Audit
This audit ensures the organization has appropriate metrics and systems to monitor and report on its social performance.
Employee Training and Awareness Audit
This audit assesses the training and awareness programs provided to employees regarding social responsibility and the organization's social targets.
Social Governance and Oversight Audit
This audit evaluates the effectiveness of the organization's governance structure and oversight processes related to social responsibility.
Impact Measurement and Evaluation Audit
This audit reviews the organization's methods for measuring and evaluating the impact of its social programs and initiatives.

Governance

Corporate Governance Audit
This audit assesses the overall governance framework, including the roles and responsibilities of the board of directors, management, and committees, and the effectiveness of the oversight provided.
Compliance Audit
This audit reviews the organization's compliance with laws, regulations, and internal policies relevant to its operations.
Code of Conduct and Ethics Audit
This audit examines the organization's code of conduct and ethics policies to ensure they are communicated effectively and followed by employees and stakeholders.
Risk Management Audit
This audit assesses the organization's risk management processes and the effectiveness of risk identification, assessment, and mitigation strategies.
Internal Control Audit
This audit reviews the organization's internal control environment to ensure appropriate controls are in place to mitigate operational, financial, and compliance risks.
Financial Reporting and Accounting Audit
This audit evaluates the accuracy and reliability of the organization's financial reporting and accounting practices.
Board Independence and Composition Audit
This audit assesses the independence and composition of the board of directors to ensure effective oversight and avoid conflicts of interest.
Executive Compensation Audit
This audit examines the organization's executive compensation policies to ensure alignment with the company's performance and shareholder interests.
Whistleblower Program Audit
This audit reviews the organization's whistleblower program to ensure that it provides a confidential and effective means for reporting concerns.
Succession Planning and Talent Management Audit
This audit evaluates the organization's succession planning and talent management strategies to ensure leadership continuity and employee development.
Cybersecurity Governance Audit
This audit evaluates the organization's cybersecurity governance practices and the board's oversight of cybersecurity risks.
IT Governance Audit
This audit assesses the alignment of IT strategies and initiatives with the organization's overall objectives and the effectiveness of IT oversight.
Data Governance Audit
This audit reviews the organization's data governance practices to ensure proper management, security, and compliance with data-related policies.
Governance Training and Awareness Audit
This audit assesses the training and awareness programs provided to employees and stakeholders regarding governance principles and practices.

Risk Trends in 2024 and Beyond

View all the risk areas featured in this year’s report. 
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