The following is a guest article by UHY Managing Director Jack Reagan. The views expressed in this article are solely those of the author.

For financial professionals, navigating complex regulatory and compliance frameworks is nothing new. However, when faced with the rapidly evolving ESG regulatory landscape, CFOs and finance teams often find it most challenging—from balancing fragmented guidance issued at the state level in the U.S. to comprehensively assessing the ever-emerging array of international aspirational standards, the ESG compliance environment can daunt even the most seasoned finance practitioners.

But meeting fragmented requirements is far more difficult than it appears on the surface. As ESG regulations mature, organizations are increasingly realizing that only by validating the rigor and thoroughness of their internal audit capabilities can they ensure these external expectations are met.

With this in mind, CFOs and finance teams need to carefully answer several key questions when conducting internal audits to pave the way for long-term ESG reporting success.

1. What is our current ESG strategy and risk landscape?

To ensure organizational alignment and establish a clear baseline, organizations need to collectively clarify where ESG risks precisely lie, assess overall exposure, and fully understand the ESG challenges they face and the achievements they have made to date.

Auditors must work closely with internal and external stakeholders to understand macro trends in the broader external ecosystem that may affect the ESG risk landscape—such as changes in partner networks that could impact Scope 3 emissions, or regulatory adjustments within international jurisdictions. At the same time, auditors need to conduct in-depth materiality assessments to identify priority ESG areas (whether environment-related or not), ensuring that significant issues are appropriately addressed. This will help organizations further align their ESG roadmaps, identify collaboration and growth opportunities, and address various risks in the most appropriate and effective manner.

2. What are our organization's ESG governance expectations and culture?

Faced with a complex array of rules and priorities, a common mistake financial professionals make is rushing to address what seems most urgent at the moment. However, to develop a coherent ESG reporting approach, one must first accurately understand how the organization views ESG compliance, what expectations it faces, and ultimately what infrastructure exists to help the organization achieve its goals.

Institutions should refer to frameworks issued by organizations such as the ISSB, which can provide guidance for modeling a company's own governance structure to streamline reporting requirements and establish efficient governance workflows. For example, because the ISSB requires in-depth disclosure of the processes, controls, and procedures an organization has in place for ESG oversight—including the roles and responsibilities of boards, committees, and individuals involved in oversight—auditors must collaborate with C-Suite members, investors, and other stakeholders to establish a comprehensive reporting structure.

Building on this cultural foundation, auditors can work with key stakeholders to begin integrating governance structures and developing plans that help achieve governance objectives. This process will include, but is not limited to:

  • Defining the organization's mandatory or voluntary requirements related to ESG;
  • Mapping the operational structure, risk owners for ESG-related risks, reporting lines, and end-to-end enterprise risk management (ERM) and strategic planning processes to identify areas where oversight and collaboration can be improved;
  • Creating opportunities for organization-wide collaboration and increasing executive-level support.

This may seem self-evident, but by first identifying these foundational elements and facts, auditors can build a launchpad that enables the organization to achieve results in a transparent and accountable manner.

3. What does our risk mitigation strategy look like?

Given the highly interconnected nature of today's business world, auditors are likely to find numerous risk vectors. Adding to the complexity, as companies naturally evolve, new risk vectors are bound to emerge continuously, making a thoughtful and methodical approach to risk mitigation essential for auditors.

Effectively addressing risks requires a comprehensive approach that weighs multiple factors. First, based on the materiality assessment at hand, organizations need to weigh a range of risk-specific factors, including: Which stakeholders are directly impacted by a given risk? What is the organization's tolerance for that risk? What is the cost of remediating the risk? Where does the risk sit in the organization's overall risk "food chain"?

With these insights in hand, auditors need to build a business case for why a particular risk should be addressed and what remediation entails, then seek the necessary support from decision-makers. These response plans need to be repeatedly stress-tested to predict how remediation measures will affect the ESG risk profile of directly affected stakeholders and the broader organization, before ultimately being implemented.

ESG compliance is one of the most formidable tasks finance teams continually face. Unfortunately, for many financial professionals, as multinational companies approach the second phase of CSRD and other new regulations, this situation will only become more complex. However, by keeping the above priority areas in mind, finance teams can ensure their audit work is as efficient as possible and lay the groundwork for smoother compliance in the years ahead.