A Framework for Internal Control over Sustainability Reporting (ICSR)

• December 22, 2023
• Jennifer Clement

by Srikanth Iyengar, Director, CLA

In response to the global emphasis on sustainability reporting, the Committee of Sponsoring Organizations (COSO) released guidance on Internal Control Over Sustainability Reporting (ICSR) on March 30, 2023. This framework, crucially applicable considering the Comprehensive Sustainability Reporting Directive (CSRD) in Europe and evolving climate-focused reporting requirements in certain US states, emphasizes the integration of sustainability goals into organizational strategies.

This article is a first in a series and offers key considerations regarding a Control Environment.

The introduction of the ICSR framework reflects the success of COSO frameworks in shaping Internal Control over Financial Reporting (ICFR). Organizations are encouraged to establish robust processes and controls for sustainability reporting due to regulatory changes and an increasing focus on sustainability.

Five Control Environment components to consider include:

1. Set the tone at the top. 

ICSR involves forward-looking goals aligned with long-term business objectives.  Fine-tune mission and vision statements for clarity and direction. Mission statements describe the present state, while vision statements outline the desired future state of the organization.

2. Establish board-level expertise and oversight.

ICSR involves forward-looking goals aligned with long-term business objectives. The board should confirm sustainability is integral to the business model and long-term strategy. Get the audit committee involved with overseeing processes related to environmental, social, and governance (ESG) issues.  Advocates for board and audit committee members with relevant competence in sustainability can be useful for driving strategic decision-making.

3. Implement succession planning. 

Weave in a strategic process centered on human capital to identify critical positions and groom individuals for leadership roles.  Clarity on long-term goals and required competencies is essential for successful succession planning.  Effective communication with identified individuals fosters motivation and active participation in their growth and development.

4. Establish policies and practices. 

Craft policies around key sustainability elements like employee wellness, corporate governance, resource usage, and waste disposal.  Also consider the role of future business plans, industry changes, and company-specific operations is crucial in policy development.  Comprehensive policies and practices integrate sustainability into operations, promoting long-term success.

5. Establish performance measures, incentives, and rewards. 

Identify relevant sustainability goals and defining quantifiable metrics.  Break down goals into milestones and associating compensation or rewards with achievements to motivate employees. Align performance measures with sustainability goals to foster a culture of accountability and drive progress.

Up Next…Risk Management.

The next article will explore the Risk Management COSO component. This framework provides a structured approach for organizations to navigate the evolving landscape of sustainability reporting, to assist with adherence to regulatory requirements while promoting long-term success and accountability.

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