A massive flow of investor funds are pouring into sustainable investments, with projections indicating that environmental, social, and governance (ESG) assets could reach $50 trillion by 2025.
But what's that got to do with internal controls and auditing professionals? As it happens, quite a lot. In this VOQUZ Labs article, we answer this question and share insights into how the future of internal controls - automation - will significantly assist ESG management.
Before we dive into the innovative automated side of the equation, let's look at the broader picture.
Internal controls processes are becoming crucial in ESG programs, especially regarding data accuracy and compliance. And according to a 2023 report from Deloitte, the time is now for large companies to scale their internal controls environment for ESG.
Many of you will have already noticed that your employers are embracing ESG policies, not only because it's essential for ethical businesses, but it also stands as a wise financial decision. And it doesn't stop there. ESG regulations, such as proposed rules from the US Securities and Exchange Commission (SEC) in the US, are evolving rapidly.
And guess what? The C-suite is increasingly challenging internal controls teams to align its processes with the broader ESG business goals. It's an emerging arena that still needs to develop standardized strategies.
Organizations are increasingly exposed to compliance requirements. Adopting innovative ways to assess and manage risk and enhance performance is critical. That’s where data analytics and continuous monitoring are helping to simplify and improve the internal control system, increase operational efficiencies, reduce costs, and detect fraud and errors earlier. Internal controls become a way for organizations to create value.
The first primary way that automated internal control systems can assist ESG management is this: Compliance with existing regulations and with the wave of new legislations that will come into force.
Although the period we live in is primarily unregulated in terms of ESG, that's not to say there aren't many laws - in fact, there are numerous. For an overview of current ESG laws across the world, this PDF document is insightful.
The European Union (EU) is leading the way with regulations such as:
Looking to the future, the regulatory ESG climate is poised to expand fast. The most relevant and influential shift in the goalposts will likely come from the US. In 2023, the US Securities and Exchange Commission (SEC) has been highly vocal in stating its proposed rule changes regarding ESG investing.
Although it was a surprise when ESG did not appear in the SEC's compliance priorities for 2024 list (read the press release here), complacency should not be allowed to bed in. Why? Because the long-term trend is ESG regulation.
Even proposed SEC changes (before any legislation even becomes law) is creating urgency in large corporations in all corners of the world to get their ESG house in order.
Returning to automated internal controls. It already is playing a major role in helping companies comply with the growing ESG regulatory climate. That's because benefits such as the following assist companies in their compliance objectives:
Let's now look at how these benefits also assist in other areas of ESG management.
Here is a tremendous advantage to running an automated internal controls system, such as remQ (operating as a SAP add-on): It empowers organizations with real-time insights into their ESG management data within their ERM frameworks.
But what does this mean in tangible terms? Let's look at some practical scenarios and explain them.
Immediate Issue Detection: Real-time internal controls systems continuously monitor data related to ESG performance, such as:
And what happens when deviations are detected from predefined ESG standards? Alerts are sent to internal controls and ESG teams.
Proactive Decision-Making: These alerts, also known as red flags, are sent out in almost real-time and empower internal controls and ESG managers to take corrective measures. The result? Far improved ESG outcomes compared to businesses still relying on antiquated manual internal control processes.
Data Accuracy and Consistency: Real-time internal controls systems continuously check and verify data, ensuring that ESG data is accurate and consistent. This process is crucial for transparent and reliable reporting - a fundamental aspect of ESG management that's growing in importance.
Enhanced ESG Transparency: Real-time internal controls systems provide organizations with improved ESG transparency. Why is this critical? Because this transparency allows businesses to build trust, attract ESG-focused investors, and align with the growing demands of the ESG landscape.
To summarize this section, the bottom line is this: There is no getting away from the increasing ESG regulations that will be rubber-stamped sooner rather than later. Businesses that embrace automated internal controls systems - starting right now - will gain a competitive advantage through having access to superior ESG management data.
Our White Paper explains how using robust controls and automation, organizations can better manage fraud risks, comply with regulations, improve operational efficiency, and save substantial costs.
ESG is no longer a buzzy acronym with little substance in the business world. Environmental, social, and governance practices are now tangible forces driving companies toward ethical and sustainable practices.
Numerous laws and regulations worldwide are already in place, with many more in the pipeline. Similar to how companies are punished for anti-money laundering (AML) and sanctions compliance violations - if we stare into our metaphorical crystal ball - it's easy to imagine how stronger ESG penalties for non-compliance will increasingly feature prominently in how companies approach risk.
As we revealed in this article, automated internal controls is a crucial way businesses can get on top of ESG management in the years ahead.
If your business uses SAP ERP or S/4HANA, you have an opportunity to embrace internal controls automation so that your organization is prepared for everything 2024 throws at you, including enhanced ESG demands.
VOQUZ Labs remQ Business Inspector software operates as a SAP add-on with a library of 100+ pre-built shipped controls ready to run. We would be delighted to answer any questions you have - contact us.
Paul is a RegTech content writer & strategist with extensive experience in digital marketing and journalism. His work has appeared in the Guardian newspaper. He also holds a degree in International Relations, where he studied global sanctions compliance and cross-border finance.
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