Audit Committees and Sustainability Oversight

The audit committee, working in collaboration with the board’s corporate social responsibility committee, should be expected to play an important role in overseeing the company’s sustainability policy, commitments, procedures and reporting.  Some of the specific duties and responsibilities of the committee in this area include:

• Monitoring compliance with sustainability policy, commitments and regulations; ensure internal audit procedures are in place to assess cross-company compliance with sustainability commitments, policies and management systems; review results of internal audits of compliance with sustainability policies, commitments and regulations
• Reviewing integrity of the organization’s sustainability information systems and reporting processes, both internal and external; ensure the company has implemented adequate systems, controls and processes to support the compilation of key sustainability performance metrics appropriate for reliably tracking performance, setting targets, benchmarking, compensating executives and external reporting
• Ensuring sustainability information is consistent across corporate websites, social media and voluntary reports and that provided in government filings, financial statements, investor presentations and other corporate disclosures
• Ensuring a process is in place for timely, accurate, consistent and complete external sustainability reporting
• Monitoring developments, trends and best practices in sustainability accounting and reporting
• Ensuring sustainability is sufficiently addressed in the annual budget and business plan
• Ensuring tax policies and planning are fair and equitable and do not attract reputational risk
• Ensuring public policy positions of the company and the trade associations of which it is a member are consistent with the company’s sustainability commitments

Commentators such as Castka et al. have argued that the audit committee is an important element of a company’s efforts to develop an effective corporate social responsibility and corporate governance (“CSR/CG”) management system.  A description of a CSR/CG management system suggested by Castka et al. that was intended to be compatible with other management system standards, particularly ISO 9001 and ISO 14001, called on organizations to establish an audit committee and determine arrangements and criteria for audit committee membership that were best suited for the relevant circumstances of the organization (taking into account size, sector, risk profile, etc.).  Members of such a committee should be independent non-executive directors, and the committee shall have adequate resources, authority and experience to monitor the performance of the CSR/CG management system and the integrity of the internal audit function. According to Castka et al., the role of the audit committee should be to act independently from executive directors to monitor the CSR/CG management system; monitor and review the effectiveness of the internal audit function and fulfilment of the audit plan and make recommendations to the board/management in order to improve its performance; and propose an external audit body/auditor and monitor and review the independence, objectivity and effectiveness of external audits.
Castka et al. recommended that organizations establish and maintain the audit plan, audit criteria and frequency, and methods of audit for the CSR/CG management system and that internal audits be conducted at planned intervals to determine whether the CSR/CG management system conforms to industry standards and that the requirements established for the system have been properly implemented and maintained.  The audit committee should lead the organization’s effort to continuously improve the credibility of the CSR/CG management system by third-party verification or external audit including verification of the organization’s annual reports. The extent to which independent audit is carried out should be determined by the board and monitored by the audit committee and should be based on the results of identification of stakeholder expectations, risk assessments and the monitoring of objectives, targets and indicators of CSR/CG performance.
Sources for this article included The Essential Role of the Corporate Secretary to Enhance Board Sustainability Oversight: A Best Practices Guide (United Nations Global Compact, September 2016); and P. Castka, C. Bamber and J. Sharp, Implementing Effective Corporate Social Responsibility and Corporate Governance: A Framework (British Standards Institution and the High Performance Organization Ltd., 2005), 18.  For fuller discussion of the management system proposed by Castka et al., see “Sustainability Governance and Management: A Guide for Sustainable Entrepreneurs” in “Corporate Social Responsibility: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).
This article is adapted from material in Sustainability and Corporate Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.
Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedIn, Twitter and Facebook.