sustainability

Is your ESG data trustworthy?

05/17/2022 - by Kyra Whitten

In the previous installment of our Building a sustainable business blog series, we discussed various best practices for gathering data.

 

Once the hard work of data collection is done, you’re eager to put it to use, evaluating your organization’s ESG performance and reporting this progress to stakeholders.

 

But before you take that step, you want some assurances the data that has come from all corners of the organization is sound and trustworthy. In this post, I’ll share some data validation approaches, drawing on our experiences.

 

Ensuring data integrity

Any evaluation of an organization’s ESG performance will depend on the accuracy of the data. Given the rising scrutiny on sustainability reporting, it is important to build trust in this data as any questionable information can draw unwanted scrutiny and reputation loss. Moreover, there is every indication that not far from today, certain governments will mandate publicly traded companies to disclose their sustainability metrics. In March, for instance, the SEC announced it was considering a proposal to mandate climate-risk disclosures by public companies.

 

The need for assurance of sustainability data crosses stakeholder groups. Customers need it to validate their supply chains, investors want to make sure there isn’t greenwashing in their portfolios, and reporting bodies are requiring more and more assurance. To address this growing requirement, now is the time to double down on bolstering our systems and mechanisms to validate the accuracy of our ESG data. The good news is there is more than one way to achieve assurance for your organization’s sustainability practices. Let’s go through them.

 

Internal audits

At Flex, our data validation mechanisms involve multiple layers, and our first line of accuracy checks is carried out via internal review processes which we instituted eight years ago.

 

We assign an internal reviewer to each of our three regions: the Americas, Asia, and Europe, Middle East included. Whenever monthly data sets are submitted by our 100+ sites, these auditors verify them against their data sources. For instance, some of our ESG data are derived from invoices; each site sources its water consumption data from its water bill. In turn, our auditors will review the accuracy of this line item based on an invoice copy. As issues come up, each auditor works closely with the collaborators at their assigned sites to resolve them including making necessary adjustments. Beyond reviewing for data entry error, internal auditors also look to uncover inconsistencies and irregularities. If we see unseasonal spikes in electricity consumption, we will investigate and explain the anomaly.

 

The next accuracy filter comes at the end of each quarter when we analyze the data using a dashboard of trendlines and graphs. These visualizations help us surface and seek explanations for any irregularities not detected during the monthly audits.

 

The next checkpoint is our annual audit performed ahead of the publication of our yearly sustainability report. During this final screening, we collate the data in multiple ways and confirm they add up even as they are sliced and diced. For instance, we ask our sites to classify the monthly volume of waste generated as landfill, recyclables, and hazardous waste. During the annual audit, we perform cross-checks by reviewing the breakdown of the annual recycled waste by material, such as glass, cardboard, and aluminum. We expect agreement between the sum of recyclable waste by material and the sum of recyclable waste by volume over the last 12 months.

 

Our risk management team, which is part of our finance organization, also runs an analysis of our data through the lens of risk assessment. There is no regularity to how many times this audit occurs – and that is a good thing as it means we must always be on our toes and ready to open our books.

 

We are at the ready because we employ a proactive, continuous process to track key performance indicators which in turn helps us spot anomalies as we monitor progress towards our targets. Additionally, these ongoing checks instill greater confidence in the data as we keep tabs on our progress. As a result, we avoid the scramble of resolving unanticipated inconsistencies when we’re up against deadlines or receive audit notices from our CFO office.

 

Auditing our suppliers

As we ensure the business practices of our vendors align to our sustainability goals, we also employ a process to audit them.

 

As mentioned in this previous post, we require suppliers to complete a Supplier Assessment Questionnaire (SAQ) and Flex’s requirements, a social and environmental assessment based on principles covered in the Responsible Business Alliance (RBA) Code of Conduct. Part of our vendor assessment process involves auditing the suppliers’ responses to the questionnaire which includes a complementary internal risk assessment. At the conclusion of these steps, we determine whether a further, physical audit is required; if so, we follow up with our suppliers through emails, phone calls and onsite visits, as required. We are currently implementing a tool to support robust screenings of our suppliers and manage their information. The end goal is to gain greater visibility of the suppliers’ statuses, scores, certifications, assessments, and procurement details.

 

As of March 2021, Flex has trained and certified 58 social and environmental supplier auditors internally, up nearly 12% from 2019.

 

Third-party audits

As is practice for many companies, Flex engages the services of an external assurance vendor that is qualified in verifying the accuracy of various aspects of our sustainability reporting; indeed, there is data that cannot be easily or readily verified, such as the number of employees volunteering in our community programs.

 

As seen on the last page of our 2021 sustainability report, you will see that an auditor provides a stamp of assurance, in the same vein that accounting auditors sign off on published financial results. Our auditor validates certain qualitative and quantitative data by selecting about 30 of our sites, interviewing operations leaders, health and safety staff and other subject matter experts.

 

Must you obtain assurance? Here are a few considerations:

  • While ESG auditing can offer basic assurance, it is still in its early days absent a uniform global, mandatory standard.
  • Certain rankings and claims require certifications and validations from recognized third parties. For instance, the RBA provides a widely accepted audit framework for sustainability in our industry of electronics manufacturing. A key RBA program is the Validated Assessment Program (VAP), which relies on preapproved outside auditors to verify compliance standards.
  • While an auditor’s signoff is not mandated by any jurisdiction today, survey the standard practices in your industry and jurisdiction. A recent study found that of the 1,269 largest companies across 22 countries reporting ESG data, about half secured some level of assurance, a trend that is most pervasive among U.S. and European-based companies. When comparing industries, basic materials and telecom businesses obtained assurances at the highest rates of 65 and 62 percent, respectively.
  • If you’re not wedded to the auditing practices in your jurisdiction and industry, the complexity of your data should be weighed. Flex shares detailed data wherever possible; for example, we break down scope 1, 2 and 3 emissions. The more granular the data, the more potential for error which must be managed – and this is where validation by a third party can be valuable.

 

There are many resources that can help you get started. Organizations such as the Responsible Business Alliance and International Organization for Standardization can help. External audit firms that your company uses for their risk and financial audits such as EY, Deloitte, and others are also a good place to start. Talk to your Enterprise Risk Management team or your team members responsible for external reporting in Finance. Remember to start small and build your assurance program over time.

 

Ultimately, your stakeholders will appreciate the data you have collected, and the richer the better. Whether internal or external, audits are critical to instilling confidence in the reliability of your ESG information.

 

Be sure to explore related posts in Kyra Whitten’s blog series Building a sustainable business.

Written by

Kyra Whitten

Vice President, Sustainability, and President, Flex Foundation

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